Are councils clear on commercial risks?

  • The vast majority of local authorities are now engaged in some form of commercial activity
  • Some of this activity carries inherent risks, which must be understood and carefully managed
  • Zurich Municipal’s Head of Public Services, Rod Penman, considers whether councils always have a clear understanding of what they are getting into

Commercial activity is now part of the diet of almost every local authority – from larger metropolitan and unitary authorities with a wealth of entrepreneurial expertise to call upon, to the smaller district councils who are still relatively new to the commercial arena.

When we surveyed members of ALARM (Association of Local Authority Risk Managers), CIPFA (the Chartered Institute of Public Finance and Accountancy) and SOLACE (the Society of Local Authority Chief Executives), nearly nine out of ten respondents said their organisation was involved in commercially driven activities in order to generate income.

You can find out more about that survey’s findings in our latest whitepaper, What are we here for? How commercialisation is reshaping the public and voluntary sectors. 

The risks of commercial property development

However far along local authorities find themselves on this journey, there’s a sobering question each one must ask – what if it all goes wrong?

Some of the commercial activity we’re seeing local authorities enter into is inherently risky, an obvious example being commercial property development. It seems that almost every week, there are stories about the decline of the high street, or the collapse of another retailer. These are the kinds of business that local authorities who are investing in commercial property will rely on for rental income.

Councils investing in commercial property may also find themselves competing against commercial investors with much more experience, which begs the question – will they be left holding the baby if things go wrong?

Think clearly about the risks

From our perspective as a public sector insurer, we’re concerned that local authorities are not always thinking clearly enough – or early enough – about the risks involved in commercialisation. Some appear to be pushing headlong into commercial activity in the hope of making a profit, without appreciating what could go wrong.

Another example of this is when local authorities start to sell their expertise, for example establishing stand-alone entities to provide services like legal advice.

How far could that go? Will we start to see councils competing with solicitors in inherently risky areas such as conveyancing, where they may not necessarily have much in-house expertise, and where they could occur significant liabilities if they get it wrong?

Have they thought about the insurance implications? The cost of a professional negligence policy could potentially wipe out the profits they could make from a particular line of business – and yet often, insurance purchasing decisions come far too late in the day.

The message we want to get across to customers is we are ready to support them on commercialisation, both in terms of risk management support and insurance.

We understand commercial risks, and we can support you from the outset, when you are establishing your policies on commercialisation and making key decisions.

But we can only do this if we are involved in conversations early on. Let us know what your plans are, and we can help you to identify the risks you might face, and support you in developing strategies to mitigate them.

How can Zurich help?

Commercialisation and the provision of public services are now inextricably linked. Within the current financial framework, the drive towards being more commercial brings challenges for public service leaders. What do our decision makers understand commercialism to mean? And what examples are there of innovation as well as risks around a commercial approach? This conference will examine the relationship and attempt to understand both the benefits and the risks of a commercial approach to delivering public services in the 21st century.

Join Zurich Municipal at CIPFA’s Commercialism Conference on 11th June in Westminster. Book here

Zurich has years of experience supporting public sector organisations in their commercial ventures. You can find a wealth of information about commercialisation in our new whitepaper – What are we here for? How commercialisation is reshaping the public and voluntary sectors