End to the days of double-think

Nicholas Dobson reports

The sleeping spell over local authority trading once cast by the Audit Commission has now been dispelled by an unlikely prince. The Department of the Environment (DoE), which oversees local authorities, has given a cautious green light in the debate over municipal trading and the Local Authorities (Goods and Services) Act 1970.

On 7 December last year the DoE wrote to local authority associations to pass on its views "following our recent re-examination of the issues".

The 'iron curtain' had been drawn after a technical release by the Audit Commission to local authority external auditors. The release painted a stark picture of strait-jacketed powers and double-think. For example, authorities could make a profit from their activities but only if they didn't intend to.

The inspiration behind the release, titled 23/90, was a counsel's opinion taken to the commission. The technical release indicated that:

the 1970 Act gives no additional power to take on staff to carry out any agreement allowed by the Act in the absence of specific enabling legislation;

providing goods or services to the private sector or to private individuals is beyond local authority powers since "no reliance can be placed on the 1970 Act or on section 111 (1) of the Local Government Act 1972 as providing enabling powers". Section 111 gives authorities power to do "anything" which facilitates or is conducive or incidental to the discharge of their functions.

However, many local authority lawyers considered this approach was excessively narrow, in particular:

the Act gives statutory authority for certain trading activities with defined or designated "public bodies", within certain conditions. Integral to this must be the power to do what is necessary to give effect to these provisions, including engaging staff for the purpose. There can be no justification for placing extra statutory shackles on this discretion;

the 1970 Act is specifically not an exhaustive code of local authority trading powers. Section 2 (1) provides that nothing in section 1 (which confers the powers) "shall be construed as derogating from any powers exercisable by any public body apart from that section".

The 1970 Act was presumably to provide for effective and efficient deployment of resources across the public sector. The Audit Commission approach in 23/90 generally undermines this.

As for the recent DoE letter, this starts by sensibly pointing out that "it is not for the department to advise on interpretation of the law – this remains a matter for each local authority and ultimately for the courts". It then charts the restrictions and limitations of the 1970 Act regime, possibly as a sop to those concerned about extensions to municipal trading. For example, the DoE "remains of the view that the scope for local authorities to engage in trading activities is severely limited" and the 1970 Act "heavily circumscribes the nature of local authorities' trading activities".

While the letter points out that authorities can trade only with public bodies referred to or designated under the 1970 Act, this can only refer to trading activities carried out under that Act. The DoE letter also notes the 1970 Act does not permit local authorities to construct any buildings or works and refers to the limits imposed by the Compulsory Competitive Tendering (CCT) regime.

It points out that "these provisions…ensure local authorities are obliged to take note of reasonableness and value for money considerations when undertaking trading activities".

But after all the disclaimers and notes of caution, the bottom line position does push the boat out a bit. "However, within the above constraints – and within such other limitations, including the normal requirements of administrative law, it is the department's view that local authorities have powers to trade for profit and to take on staff for the purposes of those trading activities. In the department's view, the 1970 Act does not, therefore, limit trading simply to the deployment by a local authority of such surplus capacity as it has within the workforce which it retains for other purposes."

If the message is not perhaps earth-shattering it does at least give official endorsement to the reasonable interpretation of 1970 Act powers long taken by many local authority lawyers.

But the DoE's letter is not a licence for unbridled trading. Authorities were set up primarily to execute their own functions. And so while activities under the 1970 Act need not be limited to spare the capacity, they should not be unreasonable in nature in relation to the operations carried out for domestic authority functions.

The 1970 Act is not the be all and end all of municipal trading. There are other statutory provisions which can enable commercial activity. For example, there are broad catering powers under the Civil Restaurants Act 1947 and wide leisure powers under section 19 of the Local Government (Miscellaneous Provisions) Act 1976. Also, section 111 of the 1972 Local Government Act, when connected with a substantive statutory function, can arguably confer limited trading powers under certain circumstances where there is genuine organisational spare capacity.

So while authorities still have to watch their backs in the area of municipal trading, and identify suitable powers when venturing beyond the 1970 Act, the DoE's letter has at least tempered the climate. It ends by telling us that the Audit Commission "also plans to issue further detailed guidance early next year".

With Tony Childs no longer at the helm of the commission's legal policy the nature of the guidance is open to speculation, but it will probably not paint a more liberal picture than the new DoE exhibit.