Arm's Length Entities

In New Zealand council controlled organisation is a generic term for companies, trusts and other entities outside the formal legal body of a council but in respect of which one or more councils exercise the right to appoint 50% or more of the members of any governing body, or control 50% or more of the votes at any general meeting. They come in two varieties, a council controlled trading organisation (CCTO) which means a CCO "that operates a trading undertaking for the purpose of making a profit" (Local Government Act 2002), and all other CCOs.

The basic rationale for using a CCO is the benefit from being able to apply commercial disciplines to the management of council assets and/or the delivery of council services, coupled with the greater flexibility comes from operating outside the formal accountability and other compliance requirements for core local government. It also offers the opportunity of tapping into the skills of people who want to put something back into the governance of their community but who are not themselves elected members - to put this another way, it offers the opportunity of expanding the pool of people contributing to community governance.

Different jurisdictions vary quite widely in their approach to the use of arm's-length organisations. New Zealand has a well-developed statutory framework not just for the establishment of arm's-length entities, but for their ongoing governance and management with an emphasis on ensuring continuing accountability to the elected council itself. In contrast, most Australian states, where they allow the formation of arm's-length entities, focus purely on the conditions for the establishment - normally ministerial approval - with little or no attention to ongoing governance and accountability. England has no specific provision but relies instead on the well-being power in the Local Government Act 2000 which allows a local authority to do anything they consider is likely to promote economic, social or environmental well-being.

The use of CCOs can be very controversial. The decision by the New Zealand government that the majority of the future service delivery activity of the Auckland Council should be through CCOs has raised fears of loss of democratic control and influence, and the potential of privatisation of public assets. Government has since taken decisions, including legislative change, to address these fears but this episode is a sanitary case study of the need for real care and skill in ensuring that CCO initiatives do not undermine the reality or appearance of democratic accountability.

When and how to use CCOs and other arm's-length entities is a careful judgement call based on the assessment of the strengths and weaknesses of different structures in specific contexts. It requires a very good understanding of organisational design, corporate governance and the balance between commercial and democratic accountability. There is very real scope for improving local government performance through the effective use of CCOs. Doing so will benefit from measures including improving the legal framework for CCO activity, corporate governance training, and the development of specialist skills for monitoring CCO performance and ensuring effective accountability.

These needs are common to local government jurisdictions in England, Australia and New Zealand. MDL is currently engaged in cross-country discussions with the objective of developing a joint approach to the legal framework, and improving the governance and other resources, for supporting CCO activity. To learn more, contact us.