Commercialisation in the public and voluntary sectors

Are businesses and public sector organisations inherently different entities,
with clearly distinguishable aims?

Most of us can remember a time when the answer to this question would have been an unequivocal 'yes'. Today, the picture seems far less clear.

Public and voluntary sector organisations are operating very differently to how they once did. In recent years, there have been some eye-catching examples of what might be described as 'commercialisation' within the public sector - from a school setting up a trading company to own its trademarks, to the Met Police launching its own range of merchandise. However, some of the shifts in the way public sector organisations are operating have been more fundamental.

An obvious example is local authorities' burgeoning interest in commercial property. Councils in England spent £4 billion on land and buildings in 2017/18, much of it on commercial developments. It is not just local authorities, though. Organisations of all shapes and sizes across the public and voluntary sectors are now adopting a more commercial mindset.

UK councils spent

£324.6m

on shopping malls in the first
half of 2018

Source: BNP Paribas Real Estate

In 2017/18, housing
associations began building

6,526

homes for market sale, more than the
number destined for social rent (4,173)

Source: National Housing Federation

What are we here for?

How commercialisation is reshaping the public and voluntary sectors

Zurich Municipal has produced a whitepaper, 'What are we here for? How commercialisation is reshaping the public and voluntary sectors', which explores this trend in greater detail. Our whitepaper details the findings of a survey we conducted with members of ALARM (Association of Local Authority Risk Managers), CIPFA (Chartered Institute of Public Finance and Accountancy) and SOLACE (Society of Local Authority Chief Executives).

 

This survey, which was completed by organisations including district, county and unitary local authorities, as well as charities, housing associations and education institutions, sheds light on how and why organisations are commercialising, and what impact their commercial activity has had on their organisations and the communities they serve.

 

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Defining commercialisation

Commercialisation refers to a way of thinking, behaving and performing, that allows organisations to make the most of market opportunities, in order to squeeze maximum value from every pound.

Most areas of commercial activity undertaken by public and voluntary sector organisations fall within the following categories:

  • Generating income by charging for existing services
  • Outsourcing
  • Embarking on new commercial ventures, such as setting up a trading company or diversifying into non-core services

 

89%

of public and voluntary sector
organisations are involved in
commercially-driven activities

Source: 2018 Zurich Municipal commercialisation survey

In 2017/18, all but two of the 123
higher education institutions in England
charged the maximum tuition fee of

£9,250

Source: House of Commons Library, June 2018

What are the risks?

Each of these categories of commercial activity carries its own set of risks. Of the three, charging for an existing service, within current operating models, is the least risky, but it is not without risk.

If you are considering introducing fees or charges, it is important to consider the financial, political and social/ethical challenges you might face, such as:

  • What happens if the expected revenue or savings do not materialise?
  • Will it become harder for those who rely on a service to access it?
  • Will there be any political fallout? Will our organisation's reputation suffer?

All of these risks also apply to outsourcing, but outsourcing carries an inherently higher degree of risk, because it becomes harder to control how a service is delivered.

The high-profile collapse of Carillion highlighted the financial and governance risks associated with public sector outsourcing. It is important to ensure you have effective procurement and contract management processes, including exit strategies.

There are also social risks to consider if your organisation is outsourcing, for example:

  • How can you ensure your third-party suppliers continue to deliver services in a way that meets the needs of all service users, including the most vulnerable?
  • How can you ensure you are not putting too much emphasis on price when procuring?
  • Could there be any societal implications - e.g. loss of local employment or apprenticeship opportunities - if you choose one supplier over another?

One social enterprise was forced to shed

2/3

of its workforce after losing a single
local authority contract

Source: Zurich Municipal Social Enterprise CEO Report

87%

of public and voluntary sector
organisations are commercialising
primarily to close their funding gap

Source: 2018 Zurich Municipal commercialisation survey

Commercial ventures offer the greatest potential rewards, but also the highest degree of risk.

To take the example of local authorities investing in commercial property, one area they are particularly focusing on is shopping centres. Since 2009, local authorities have invested more than £1 billion in this sector. Such activity can carry significant financial risks, given the precarious state of Britain's high streets. A recent report detailed how more than 200 shopping centres are in danger of falling into administration.

Whenever entering into any commercial venture, you must think carefully about whether or not you have the right skills and expertise to succeed, particularly given that you may be competing against private sector businesses with more experience in this area.

This is also where having a clear understanding of your organisational risk appetite - the level of risk you are willing to accept in order to pursue an opportunity - is so important.

Insurance considerations

Commercial activities may expose your organisation to new liabilities, and lead to new insurance requirements.

An example of this would be if your organisation was setting up a stand-alone commercial entity to provide professional services. There are a number of insurance covers, such as Directors' and Officers' (D&O), Professional Indemnity (PI) and Business Interruption (BI), that would need to be put in place as soon as the status and activities of your entity had been established, in order to ensure you had the best cover for your specific needs.

Depending on the legal status of the entity, and the types of service being provided, there might also be a need for different types of policy wording.

At Zurich Municipal, we are always looking at how we can tailor our products and services to respond to our customers' changing needs. This includes: employing more underwriters with commercial expertise; developing new insurance policy wordings to meet more commercial requirements for covers, such as Directors', Trustees' and Officers' Liability, and Contractors' All Risks; working with our Commercial arm to bring relevant products and expertise to Zurich Municipal customers; and tailoring existing covers so they better meet our customers' needs.

An example of this is our approach to PI insurance. Within the public sector, PI cover has traditionally only been available on a 'negligence' basis, meaning it will only provide cover for claims alleging negligence. However, we have been able to provide cover on a Civil Liability basis, so that it can respond to changes in legislation and meet the minimum levels of cover specified by professional bodies such as the Royal Institution for Chartered Surveyors or the Law Society.

 

We're here to support you on commercial risk

In our recent commercialisation survey, just two-fifths (39%) of organisations felt they had sufficient risk and insurance expertise to manage commercial risk.

This is where we can help. We have significant expertise in managing commercial risk, with experts across almost every sector. If you are considering a new area of commercial activity, talk to us as about your plans as early as possible, so we can discuss your insurance requirements and help you to develop strategies to manage the risks.

For more information please call us on 0800 232 1901 or email us at info@zurichmunicipal.com

 

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