Archived decisions

Hampshire Fire and Rescue Authority Item 12...

9 February 2005

Regional Fire Control Governance

Report of the Chief Officer

Contact: Deputy Chief Fire Officer Alan House - 023 8062 6831

1

Summary

1.1

As part of the ongoing ODPM project to establish Regional Control Rooms (RCCs), we have been consulted with regard to the options for governance of the RCC after occupation. We were requested to respond with our views to the Regional Project Board who in turn were required to submit a regional response by 4 February 2005.

1.2

Appendix A of this paper details the options put forward by the ODPM.

1.3

The consultation document concluded with the following recommendation:

"The Government strongly recommends that the Regional Management Boards work together to set up a single RCC governance solution based on a Company Limited by Shares (CLS) or Company Limited by Guarantee (CLG) being established in each region, which might be linked into the framework in which the national procurement entity `FiReBuy' operates."

1.4

Following consideration by CMT of the options for governance arrangements, the response from Hampshire to the Regional Management Board was that we should support the recommendation of the ODPM that the RCC should be established under the governance of a CLS or CLG and not a lead authority.

1.5

The decision to advise the Regional Management Board of this preference was made after taking into account the wider implications of longer term practical operations of a RCC serving 9 separate brigades covering the large geographical area forming the South East Region. Particular consideration was given to the prospect of the ODPM appointing directors to any established CLS or CLG. This could provide a path in the future for greater influence from Central Government whilst diluting the influence of individual fire and rescue authorities. It is also recognised that for any Fire and Rescue Authority (FRA) members appointed to serve as Directors of a company whose sole purpose is the operation of a RCC serving local, regional and national response, there could inevitably be conflicts of interest. Any FRA member serving as a director would, under company law, have a duty to the company itself and not to the FRA, should any conflict arise.

2

European Convention on Human Rights and the Human Rights Act 1998

2.1

The proposals within this report are considered compatible with the provisions of the European Convention on Human Rights, the Human Rights Act 1998, and the Race Relations (Amendment) Act 2000.

Recommendation

1

That the response to the Regional Management Board with regard to the future governance of the South East Regional Control Centre be noted.

Section 100D - Local Government Act 1972 - Background Papers

The following documents disclose the facts or matters on which this report, or an important part of it, is based and has been relied upon to a material extent in the preparation of the report.

None

Note: The list excludes:

(1) Published works

(2) Documents that disclose exempt or confidential information as defined in the Act

1

FiReControl is a national system with certain core national functions delivered regionally by Fire and Rescue Authorities. The government's view is that the best way to organise delivery of the service is through a public national holding company and regional local authority companies represented on and managing the national body. Local FR authorities need to have a clear and accountable role in any new structure.

2

The national body will need to be responsible for the following functions:

- Because the technology is identical in each and nationally procured, renewal and upgrade will need to be considered on a national basis;

- The system as a whole receives national security accreditation

- Staff will be trained to common standards and in new techniques within the framework of IPDS

- National operating protocols will need to be drawn up, and strategic development of the system will take place at national level.

3

The national functions will be discharged in whatever way is most cost-effective and makes best use of existing institutions, and no decisions have been taken on status or location. It is clear, however, that the organisations set up in the regions to run the control centres will need a legal and preferably structural relationship with the national organisation or organisations discharging the national functions. Equally it is clear that the organisational structure chosen to deliver the service must be one which can do so in the most effective manner possible and in a way that is fully accountable to fire and rescue authorities.

4

The government has recently published the draft national Fire and Rescue Service procurement strategy drawn up in conjunction with CFOA and LFEPA. This proposes the establishment of a national procurement organisation provisionally entitled "FiReBuy". In principle, the proposed new organisation could be responsible for some of the ongoing procurement functions associated with FiReControl. It could also take on other functions related to the management of FiReControl as a whole.

5

Equally significant is that the Fire and Rescue Services Act 2004 gives powers to all Fire and Rescue Authorities to enter into agreements with other authorities or any other body capable of entering into a legal contract, for the discharge of its statutory functions. A duty of Best Value remains on that authority in the provision of these services. Thus all authorities must be content that new structures enable them to discharge their Best Value duties. If a Section 29(4) Order to FRAs requiring them to use the new regional arrangements were to be issued, FRAs would be deemed to have discharged their Best Value duties if they comply.

6

The two key regional governance options presented in the original consultation paper issued in December 2003 were a lead authority or a company. This stimulated debate in the service, and some FRAs have said they would act as lead authority to host the regional facility. For stakeholders within the service, the paramount requirement is to achieve a sound structure which will be robust over a number of years, be economical in its operation and ensure key stakeholders remain engaged into the future. It is unlikely that the general public will be overly concerned about the governance structure, as long as the new arrangements enhance service delivery, reduce costs and improve national resilience. It is very important to reach an early decision on the identity of the regional employer so that staff who are affected by the location decisions, expected early next year, know who the new employer will be and work can be set in hand early on such issues as terms and conditions.

Lead Authority Option

7

As described above, the Fire and Rescue Services Act 2004 allows a lead authority to enter into agreements with other authorities for the provision of services. The advantage of this solution is that it makes use of an existing organisation that has legal capacity so there would be no need to set up a new company structure. Local authorities run complex organisations delivering services at all levels and many of them would seamlessly absorb an additional task such as this. There is no exact precedent for using a Lead Authority for the delivery of a major service such as FiReControl. In the past, lead authorities have been used primarily after the break-up of County Councils into unitary authorities, to carry out indivisible functions of the old authority such as pension funds and debts. In the case of the FRS, rather than use a lead authority, the service was provided by the creation of Combined Fire Authorities.

8

If an authority wished to become the lead authority for the region (whether because the control centre was located within its boundaries, because it was the biggest, or because it had relevant experience), the issue arises as to whether some formal assessment would need to be carried out, and by whom, as to the suitability and capacity of the lead authority to discharge this function. If more than one authority wished to act as lead authority in a region, the question would arise of who should arbitrate between the competing claims and what the criteria would be for deciding.

9

Decisions as to which authority would be lead authority could readily be made by the RMB (joint committee) where it has sufficient delegated powers, and would be able to decide itself (as the representative body of the individual fire authorities) on competing claims. Alternatively the RMB could agree that in the event of competing bids, the RMB/authorities would accept the decision of the ODPM.

Financial Considerations

10

The assets and liabilities relating to the RCC lease would rest on the balance sheet of the lead authority, which would also take on the financial risks associated with the delivery of the service. The implications of this are listed below.

Higher Assets & Higher Liabilities: If the centres were structured as being owned by a lead authority then the fair value of the land and buildings would have to be brought into the lead authority's accounts as a fixed asset and a liability. This would have to be set up equal to the discounted value of the lease payments. This would bring over £10 million of extra assets and liabilities onto the lead authority's balance sheet. The lead authority would also need to accept that its liability would not be ring-fenced. The effects would be particularly significant for a county fire and rescue authority.

Impact on borrowing limits: The lead authority's ability to borrow should not be adversely affected by having the RCC on its balance sheet. Under the "prudential" borrowing guidelines in the Local Government Act, there is no particular "right" level of indebtedness, and having a higher level is not an issue so long as the revenues are there to cover costs. Although contributions from other authorities will not cover all the agreed running costs, the lead authority's contribution to these should not be greater because it is the lead authority, and the sum of all authorities' contributions must cover all the costs. In these circumstances the impact on the lead authority's ability to support other borrowing would not be affected. If, as seems likely, the leases are finance leases, they will require credit cover when the leases are entered into. This cover is being planned for within ODPM's DEL and will not therefore be treated as self-financed borrowing.

Distorted Authority Reporting: The total gross costs for the centre would have to be added to the lead authority's cashflow and revenue accounts, although they would be offset by the revenue receipts from non-lead authorities to give the same net revenue and cashflow position.

Increased Financial Risks: The lead authority would be the primary bearer of risk relating to future funding and of any shortfall in cashflow. The TUPE risks for the centre's staff would also lie primarily with the lead authority. Although these risks could be mitigated by contractual undertakings by the other constituent fire authorities in the region, this would not move the primary risk away from the lead authority.

Further, it is somewhat difficult to see how a lead authority can take significant executive responsibility without also accepting the associated consequences if it falls down on delivery. It would be a normal requirement of any commercial outsourcing for the customer organisation to transfer risk of non-delivery to the contractor. The lead authority would stand in broadly the same position as a commercial contractor, and it is difficult to see how the members of the other regional fire and rescue authorities would be complying with their duties to their own authorities if they were prepared to bear a portion of the consequences of non-delivery by the lead authority in such circumstances. To do otherwise would entail a fire and rescue authority accepting greater financial exposure under the lead authority model than under an outsourcing model, when both would amount to substantially the same thing.

The financial exposure of the lead authority could be considerable: it might be offset by insurance, but the lead authority would need to be satisfied that the appropriate cover was available and affordable. A difference in approach would be easier to justify with a company model, since the fire and rescue authorities would have, depending upon the model, a direct or indirect stake in the service provider.

Legal Considerations

11

A lead authority arrangement avoids the possible need for liabilities to be underwritten by fire and rescue authorities (use of a company structure or a limited liability partnership, discussed below, could give rise to concerns on the part of landlords about financial covenant strength). Unless supported by legally binding arrangements between other fire and rescue authorities within the relevant region, the lead authority will take all legal risk relating to the operation of the fire and rescue control centre. Depending upon the nature of these agreements, the lead authority might appear either to be in the subservient position of providing services to the other fire and rescue authorities within the region (which could cause further legal issues to arise), or to be dominant over them because of its scope to act independently. It is likely that a greater number of legally binding operational agreements would be required between authorities within (and also possibly between) regions than with the use of corporate structures, since there would be no vehicles in which responsibilities were pooled.

Political/Policy Considerations

12

The attractions of using an existing, experienced organisation rather than setting up a new one are considerable. However, there would need to be clear agreement within a region on several issues.

Several authorities already seem willing to adopt the role of lead authority. Whether they would wish to take on the lead authority role if the control centre was not located within their boundaries is not clear.

From the point of view of staffing, there are clear advantages in having the lead authority as the employer if the RCC is in its area. However, staff in other areas could feel that they were at a disadvantage in applying for jobs in the new RCC if they do not come from the employing authority area.

There would need to be clearly agreed arrangements for ensuring that all authorities in the region were given an equal say in the management of the centre given their management accountability for running it. There would inevitably be some concerns in the non-lead-authorities that their views were in practice given less weight in decision-making than those of the lead authority; and on the other hand, some concern amongst the members of the lead authority that other authorities were having undue influence over matters in which it was in the lead. There would also need to be agreement on audit arrangements.

13

There will under either option need to be a national structure for operating the network - that is, a linked network of regional operations and a national entity or entities at the centre. In this context it is not clear that a network of lead authorities, or of lead authorities and corporate entities, achieves as fair a balance of responsibilities and accountabilities as would a network of companies, with each company either owning a share of a national entity, or as subsidiaries of a national entity jointly owned by all FRAs. Many authorities may have concerns that relying on a fellow authority will not give them the same assurance that they are delivering their Best Value duties as would a company on whose board they are represented. Some might simply see it as take-over.

Corporate Entity Option

14

The creation of a new entity in which all FRAs have a stake offers an opportunity to keep all services engaged in the future management and development of the RCC, rather than the more reduced involvement which might be the case if lead authorities were put in place. From a political perspective, no one authority is seen to be taking over the function of others.

15

These entities would be local authority companies. Their staff would still be public sector employees.

Financial Considerations

16

A regional corporate entity would be jointly owned and controlled, either directly or through a national entity, by FRAs, which would give each authority in a region significant influence and equal ownership.

17

An entity over which the parent has "significant influence" is defined as an 'associate'. This is usually linked with 20%+ ownership or control, but it is possible for significant influence to exist at lower levels. An authority's share of an associate's net assets is shown as a single line in the group balance sheet as a long-term investment. If an authority was assessed not to have significant influence then an investment would be shown in the authority's own balance sheet and there would be no requirement to prepare group accounts.

18

The "direct ownership" model described above, where the regional entity would be jointly owned by the FRAs within that region, is consistent with treatment of the companies as associates. It should be noted, however, that the precise accounting treatment for each authority would depend on the influence of the authority over the corporate entity.

19

On the local authority group balance sheet, under the Local Government SORP, the share of net assets of corporate bodies where the local authority has significant influence would need to be recognised.

Share of net assets & liabilities: the fair value of the land and buildings would have to be brought into the entity's accounts as a fixed asset and a liability. This would give the individual authorities additional minimal net assets (probably less than £1 million) and no liabilities on their balance sheet. The local authorities would only account for their interest in the corporate body as an investment in their individual balance sheets.

No impact on the borrowing limits: the Prudential Code does not apply to borrowing by local authority companies, although in the event of a national limit being imposed, such borrowing would normally have to be accommodated within it. However, as already mentioned, the capital cover required to deliver the RCC accommodation will be met within ODPM's DEL.

Limited Financial Risks: the corporate body, if correctly structured, would not transfer any risks to the authorities and the TUPE liabilities would lie with the corporate body. Potential risk exposure would arise, but the risks could be spread across all the authorities and the impact on individual authorities would be reduced.

VAT: a company would almost certainly have to charge VAT for the supplies it makes to FRAs. However, they should be able to recover this under the provisions of section 33 of the VAT Act. A lead authority would be able to recover VAT incurred via section 33 arrangements. They may have to charge VAT to the other authorities they serve but these in turn should be able to recover VAT under section 33.

Legal Considerations

20

The chosen body would need either to be constituted; or to have in place, supporting arrangements such that all the RCC stakeholder entities (i.e. ODPM and the fire and rescue authorities) have sufficient influence in relation to relevant aspects of local operational delivery. This reflects the fact that each regional control centre will be part of a linked national network, needing to follow certain national procedures and protocols.

Possible Types of Entity:

Company limited by shares (CLS): separate legal entity, with liability of shareholders limited to share capital subscribed. Members provide working capital by subscribing for shares, or by loans. Statutory restrictions apply to the return of capital to shareholders and distribution of assets.

Company limited by guarantee (CLG): separate legal entity, with the liability of members limited to the amount they have guaranteed to contribute on winding up (typically £1). There is no share subscription - generally reliant on loan finance or grants at the outset. It is easier to facilitate changes in membership than with a CLS because share subscription is not required for new members and issues of transfers of shares, or purchase and cancellation of shares, on a member leaving will not apply. A CLG that has a not-for-profit clause in its memorandum or articles or which has omitted the word "Limited" from its name will not be permitted to make distributions. Otherwise, statutory restrictions apply to the return of capital to shareholders and distribution of assets.

Unlimited Company (UL): separate legal entity. The liability of shareholders to contribute to its assets is unlimited (therefore liability would not be ring-fenced, unless the shareholders themselves are limited companies).

21

A company director appointed by a fire and rescue authority could potentially face conflict of interest issues between the duties owed to the fire and rescue authority and those owed to the company. However, this is unlikely to be a significant operational risk given the purpose of the FiReControl project and the possibility of giving particular rights to shareholders (who do not owe duties to the company).

22

They are all regulated by memorandum and articles of association and companies' legislation, and are required to prepare audited accounts (subject to statutory exemptions in certain cases). Additionally, CLSs and CLGs are required to make filings (including accounts) with the Registrar of Companies. ULs may be required to file accounts with the Registrar of Companies where it is a subsidiary undertaking of an undertaking, which is limited, or a member of a group containing a limited company. It is understood that the fire and rescue authorities would constitute "undertakings" for these purposes and therefore filings would be required (section 254 Companies Act 1985).

23

There are certain administrative obligations and costs that the setting up of a CLS or a CLG would entail. It would not be essential for each region to adopt the same format of company, but costs and complexities could be minimised by taking a common approach nationally to the form of the corporate structures. ODPM could, in association with the Fire Lawyers' Network, issue guidance on the process and detail, but central guidance on the basic structure would not necessarily eliminate all regional autonomy on operational matters.

24

It is possible (though not inevitable - much would depend upon the detailed funding arrangements) that, for CLSs and CLGs, the landlord for the regional control centre would seek guarantees from fire and rescue authorities in respect of obligations on the tenant under the lease (primarily the obligation to pay rent). The scope of these guarantees could be tightly confined. This would not be necessary if the landlord were an unlimited company. Thus, in contrast to CLSs and CLGs, fire and rescue authorities would need to accept that their liabilities would not be ring-fenced.

25

With any of the above company options, the Regional Management Board members could become the board members of the company. This would ensure that the arrangements which RMBs have already agreed for the sharing of political responsibilities would neatly transfer to the new company. It would avoid the possible concern about lead authority dominance which would arise under the lead authority option.

Limited liability partnership (LLP): This is a separate legal entity. Members' liability is limited to the extent of their capital share in the LLP (unless, broadly, they themselves are the cause of any negligence; this, however, seems unlikely to be a key concern in the current context). The accounting and filing requirements are broadly the same as those of a company. They are regulated by private agreement between the members, have freedom of contribution and withdrawal of capital and are tax transparent. LLPs must be operated with "a view to profit" and therefore, unlikely to be a viable option.

Partnership: these are not corporate bodies and therefore unable to contract in a way that ring-fences liability. The partners are liable jointly and severally and are regulated by agreements between the partners. There are no accounts filing requirements. However, they must be operated with "a view of profit" and therefore unlikely to be viable in any event.

26

Disputes can in principle arise between parties who are members of a company as between authorities of which one is the lead authority acting on the others' behalf. However, the formal structures of a company offer a way of resolving these disputes that is a tested framework in the way that a partnership of authorities bound by a legal agreement is not.

27

An example of a CLG which operates in a way which provides a possible model for FiReControl governance is the Consumer Direct call centre set up by the Department for Trade and Industry (DTI) in the South West region. All the relevant local authorities are members of the company. The company acts as the central employer for the staff from the local authorities.

National/Regional Interface

28

Should different regions opt for different governance solutions, there could be implications for the proposed national body (FiReBuy) which could own elements of the IT infrastructure and co-ordinate national system usage - see paragraph 50 above. While it would be possible to link different types of company within a national arrangement, the complexities in tying up companies and lead authorities into a clear and efficient arrangement would make it difficult to achieve a coherent national legal structure. The more complex the structure, the greater the likelihood of political difficulties, extra costs and inefficiencies.

29

As regards IT and infrastructure, the assets and liabilities relating to the RCCs' IT & infrastructure could rest on the balance sheet of FiReBuy at national level. The implications for regional entities or local authorities would be limited to any charge made for services (see section 2 for roles and responsibilities).

Summary

30

A lead authority approach would make it possible for certain aspects of the operation and management of a regional control centre to be delivered efficiently and with minimum set-up costs. It would, however, expose the lead authority to considerable legal risk in so doing, since the lead authority would be primarily liable for all of the staffing and property related matters.

31

It would also not deliver a coherent approach to managing FiReControl facilitated by direct engagement of stakeholders. For example, were the management of FiReControl's technical infrastructure to be moved outside the Office of the Deputy Prime Minister, there could be no direct relationship between that body and the lead authority other than a contractual one. Any contractual arrangements put in place would be unlikely to be as effective as ownership-based arrangements: first, because it would be difficult to agree realistic but effective processes for ensuring contract compliance; and second, because of the sensitivities surrounding the operation of those processes, including the possibility of any legal action for breach of contract. Additionally, adopting a single model for all regions would be beneficial for the structure and efficiency of any national entity required to co-ordinate common functions.

32

By contrast, a corporate structure in each region (either a CLS or a CLG) for holding the assets and liabilities relating to RCCs could form part of a larger whole. The structure of that larger body would give the opportunity to manage the whole of the FiReControl system coherently. A CLS or CLG structure with equal ownership and equal influence by the authorities in a region would also facilitate genuine pooling of responsibility for the RCC as well as ring-fencing liability. The options of an unlimited company, LLP and partnership have been discounted for the reasons identified in paragraphs 64-92 above. With the exception of the side issue about lease guarantees, this solution offers most of the advantages of a lead authority (in terms of a single legal entity holding responsibilities), whilst offering greater flexibility to pool responsibility within the region.

33

Experience has shown that mixing local authority and company structures, and their different legal requirements, inevitably creates problems for Authorities and a lucrative hunting ground for auditors and tax consultants. ODPM believes that a single corporate entity solution would function most effectively within a national structure. This view is not endorsed by the LGA.

34

If an RMB does not choose a corporate entity solution, then we ask that it responds to the consultation with unanimous agreement on the identity of a Lead Authority. This would involve deciding either on a lead authority irrespective of the eventual location of the RCC, or that the lead authority will be whichever authority is host to the RCC.

35

If Members agree that a corporate entity solution is the best way forward, the FFWG believes that they should receive (centrally funded) training delivered by local government, from a local government perspective, to enable them to understand and discharge their responsibilities as board members.