Income, fees and charges: What does the future hold post COVID-19?

As councils have become increasingly reliant on sources of additional income to support revenue budgets Mo Baines, APSE’s Head of Communications, explores what the future may hold for council commercial strategies.

A number of years ago APSE established its Commercialisation Network, bringing together councils who were developing strategies to address a more commercial approach to services. Reflecting on losses in revenue, in the main due to changes in local government funding, from the point of the global downturn income from fees and charges is no longer additionality but a vital part of council budgets. The National Audit Office (NAO) estimated Government funding for local authorities fell by over 49% in real terms from 2010-11 to 2017-18, equating to a 28.6% real-terms reduction in ‘spending power’. It was therefore inevitable that councils looked to make up the budget shortfalls through income generation.   

Sources of Income

There are many different ways to raise income and as a result of this the impact across different income streams will be affected differently by COVID-19 changes. In summary these are:- 

• Income from assets and investments – This is where councils have invested to generate, for example, rental income from commercial property or invested in other assets, to generate interest payments, or share dividends, with the value of such investments potentially decreasing as a result of the expected post-pandemic economic downturn.
• Income from contractual or service level agreement related work – This income could be from the sale of school meals, hire of a venue or park for a wedding of a festival, or an ongoing maintenance contract for buildings or roads for example. The client may be another council, another public body, a private business or an individual person, for example a local resident. This would also include gym membership fees which are not chargeable given councils are unable to offer access to the leisure facilities during the lockdown.
• Income from fees and charges and selling bespoke services – This will often be related to services such as car parking, but it could also relate to ad-hoc ‘sales’ such as consultancy support on construction or highways contracts to developers, handyperson services, gardening schemes to residents, garden waste charges or other arrangements, or sales of advertising spaces.      

However, Government support for local councils is not the same as Government support for businesses. Whilst business support packages are of course vital, and councils have welcomed these measures to support both local and national economic recovery, in general terms the business loans, and furlough funding, are not designed to support ‘council operated’ businesses. This has led to confusion about the Government funding available to councils, which appears to only support the extra expenditure that councils have incurred in dealing with COVID-19, and not the losses due to the closure of facilities, sales or indeed investment income. 

So where does all of this leave council commercialisation strategies? There is much uncertainty about how this income could be recovered, if at all, but minimising losses is an important first step. However, in some areas of income generation, the ability to minimise losses will be very limited. In the short term there may be very little that can be done to offset seismic shifts in investment markets, and whatever the economic landscape post-COVID the impact of a downturn in construction, hospitality and tourism, and new office developments, may be areas where there is a need to accept a longer-term recovery plan. However, some areas have done very well out of COVID-19. There has been a big boost in retail in supermarkets, so some retail developments may fair less badly then those with offices as the main source of rental, as the anticipated contraction of office space owing to new ways of working may be further embedded in the national psyche.         

Contractual issues 

In other areas it is worth considering how losses could be minimised. For commercial areas involving contractual matters it is important to involve the council’s legal team at the earliest opportunity. It may be possible to minimise liabilities by exploring a number of contractual issues, that may provide some opportunities to both reduce the financial loss and assist the councils own clients who, in many cases, may be local residents, businesses or business ventures that have otherwise provided opportunities for jobs in local economies. The council as the guardian of the local economy will want to ensure that its own actions are ultimately supportive of a good outcome for the local area; including its own finances. It may therefore be worth considering:- 

• Contract Frustration - Is there scope to rely on the English common law doctrine whereby a ‘frustrating event’ means that the parties to the contract are no longer able to carry out their contractual obligations to one another and therefore the contract is in effect terminated. This is a complex matter and thorough legal advice should be sought before relying upon this argument.
• Force Majeure - A further option for consideration would be where a contract includes an express ‘Force Majeure’ clause. The parties to a contract cannot imply that they are subject to a ‘Force Majeure’ provision – it must be evidenced within the contract itself as a specific clause. As with contract frustration above this is dependent on good legal advice so don’t ‘go it alone’ ensure you consult with your council lawyers beforehand! 
• Reviewing or renegotiating a contract - Renegotiation of a contract or other arrangement might be an option if the parties are willing to do so (or it is provided for under the contract) which could allow for changes to be made. For example, amending the dates or the method of delivery to enable the agreed obligations to be fulfilled or set aside or postponed. Again seek legal advice.
• Insurance provisions - Are you insured for any losses? It is worth checking this as a possibility.

What about non-contractual or more ad-hoc income arrangements?

Many councils rely on ad-hoc sales or income from fees and charges. For example, car park fees, facilities hire, cafés or other sales such as licence or franchise arrangements or fees generated from gym membership. Much of this may not be recoverable and this will mean a substantial loss from service budgets. In these scenarios APSE is suggesting that recovery plans and reviews need to be considered now alongside ensuring proper record keeping of the anticipated budget income against the revised figures.

This will be important from a departmental budget angle because income projections are heavily embedded into service budgets. This means that in many cases central resourcing will already have been reduced to align with income predictions pre-COVID-19. Accordingly, whilst good record keeping will not ameliorate the losses, it will at least mean that the changes within budgets are explicable to the council Treasurer. This will also help in the ongoing calls for a fair settlement on the impact of COVID-19 on council budgets. 

What about Teckal companies or non-council funded posts? 

There has been much confusion on whether the Furlough scheme could apply to trading companies or to posts not included within council budgets, but supported by external income such as gym-membership fees or parents who ordinarily purchase school meals.  The scheme states, “In a small number of cases, for example where organisations are not primarily funded by the government and whose staff cannot be redeployed to assist with the coronavirus response, the scheme may be appropriate for some staff.”  So, although the Government wants to discourage reliance upon the Furlough scheme for people generally employed by the council but funded through income elsewhere, there may be some opportunities to recover costs through the use of Furlough. That said, this is a sensitive matter and care should be taken on how the scheme is applied if there is a genuine opportunity to recover funds under the scheme and of course a non-discriminatory approach to any selection process. Some Teckal companies have now adopted this approach.

Conclusion 

The potential loss of income in commercial areas may need different solutions in the short, medium and long term. APSE would suggest that a headline analysis of income losses, by income category, and options for recovery or damage limitation should be undertaken as soon as is reasonably practical. It is also worth considering the need to review and revise income projections as well as ensuring plans are in place to remobilise income generating services, including supply chains and client communications. 

Any APSE member council can make use of the APSE commercialisation network  which is a FREE service to members including online forums during the lockdown period. To join use this link.  Alternatively email Mo Baines on [email protected] 

•   Are you an APSE member? If so join us for the next meeting of the APSE Commercialisation Network for Local Authority Income Generation, Trading, and Charging will take place online on Wednesday 22 May at 11.00 AM ending at 12.30 PM

This network meeting will be a unique opportunity to explore the impact of COVID-19 on local authority fees, charges and other income as well as considering legal issues, including Furlough, in situations where posts are funded outside of the Local Authority ‘purse’.

Book your online place ?? https://lnkd.in/gJeSd4t

APSE issued a briefing on COVID-19 and commercial income losses on 20 April which you can read about here.