The challenges of public sector commercialisation

  • Organisations across the public and voluntary sectors are becoming increasingly commercial in their outlook
  • This commercialisation is being driven by the impact of austerity measures and by changes in the law which have allowed public sector bodies to take more commercial risks
  • We consider the opportunities and challenges of commercialisation

There has been a dramatic shift in the way services are funded across the public and voluntary sectors in recent years.

Local authorities are becoming less reliant on central government grants and by 2020 they will need to be self-sufficient. Transforming into “bold commercial entities” is one of the ways to offset this shift in funding. To do this, local authorities are making more innovative use of their assets and trading services with public and private sector organisations.

The majority of registered providers of social housing have now diversified to offer other services, such as providing social care, running employment training programmes or operating leisure centres.

Charities, too, are changing, with a growing number adopting a social enterprise model, while universities are exploring a wide range of commercial opportunities, including opening campuses overseas.

Public sector bodies need new levels of business acumen

Although commercialisation is to an extent a by-product of austerity measures, it has also been encouraged by central government.

Steve Dignon, Market Underwriter, Zurich Municipal, says: “The Localism Act has enabled local authorities to trade services, such as social care, commercially outside of their boundaries. And more recently, the move to allow local authorities to retain 100% of business rates means they are now responsible for their own economic development.”

All public sector bodies face a range of challenges as they adjust to a more commercial way of operating – from making sure they have the right skillsets to ensuring their social purpose is not diluted.

Dignon says: “There is a wealth of knowledge among public sector bodies about how to deliver services, however in 2017, generating income has never been more at the forefront of any service delivery strategy. There now needs to be a level of business acumen that has never existed before.”

Public sector bodies also have a range of new risks and insurance implications to consider.

Dignon says: “We do have concerns that our customers do not necessarily understand all the exposures and new liabilities they could face – be it financial risks, business resilience, reputational damage or contract management.

“One specific concern is around professional negligence. If, for example, a public sector body starts to bring in additional fee income by creating a new wholly owned company delivering architectural design services, where does the legal liability lie if there is a financial loss resulting from a breach in professional duty – the company or the authority?

“And what would happen if a claim was made against a company owned by a local authority and they had insufficient limits of indemnity – would the authority or other public sector body have to pick up the excess layer? This hasn’t been tested in law because we haven’t had a claim yet.”

Another area of concern is around the financial viability of commercial entities set up by local authorities to deliver services that were previously delivered in-house, such as social care.

Dignon says: “Some of the people being hired to run these entities have very little experience in running a company. If these entities fail, local authorities will no longer have the financial buffer that used to protect them as a public body.”

How Zurich Municipal is evolving to meet changing customer needs

As the challenges facing public and voluntary sector organisations have changed, so too have their insurance needs.

Dignon says: “We have partnered with our public sector customers for over 25 years, but in the last few years the risk landscape has started to change significantly.

“We are being proactive internally to find solutions to the problems and queries our customers have.

“We have now got more underwriters with commercial acumen, we have changed our rating tools, and we have developed new policies, such as Directors, Trustees and Officers’ Liability and Contractors’ All Risks. As our expertise grows, there will be more development in terms of policies and risk management services.

“These are exciting times for the public sector, but they are also challenging times and we need to ensure we are working with our customers to find the right solutions to the challenges they face.”