Councils Face Mounting Budget Pressures – How Will This Affect Public Procurement? 

On 5 September, Birmingham City Council Procurement issued a Section 114 (S114) notice, freezing spending and effectively declaring bankruptcy. This marks the sixth local authority to issue a S114 notice since 2018, when Northampton shire County Council declared bankruptcy twice in six months – leading to increased concerns over budgets and project planning of local government. Notably, Woking Borough Council gave notice of insolvency in June of this year, having accrued £1.2 billion worth of debt against a £16 million annual budget following high-risk investments.

With over 14 years’ experience in tender and bid writing and supporting businesses with over 7,000 PQQ, SQ and ITT submissions bidding into nearly every local authority in the UK, Executive Compass detail which councils are at risk and how public sector tenders could be impacted.

Which councils are at risk? 

Forecasts of the overall financial health of local government bodies is sobering. In August 2023, reports indicated that around 30% of UK municipal authorities were considering issuing S114 notices, with those serving poorest areas the most represented. 

That same month, five members of the Special Interest Group of Municipal Authorities (SIGOMA), an LGA special interest group, anonymously declared they were considering issuing the S114 notices within the 2023/24 financial year. A further nine members of SIGOMA have concerns over insolvency by 2024/25, in addition to 12 other councils outside the interest group. This includes Guildford Borough Council, which is currently facing a £300 million debt that is currently expected to balloon even further.

SIGOMA’s current financial concerns are troubling, given the composition of its members. Representing 47 urban authorities, SIGOMA members have 14 million constituents and receive around 25% of nationwide council funding. Furthermore, 89% of SIGOMA authorities are in the bottom 50^th percentile of the most deprived councils, according to the Ministry of Housing, Councils and Local Government’s Deprivation Ranking. 

These authorities are also more likely to have a diverse resident base, where members from ethnic minority groups experience disparities in health outcomes and overall earnings. This will further impact the current government’s ‘Levelling Up’ strategy, whose objectives include reducing regional inequalities.  

Local authority procurement spend 

Many businesses rely heavily on councils and other local authorities as clients and a steady source of income. One of many reasons why public sector contracts are so valued is their perceived financial stability – however, recent (and looming) bankruptcies are unlikely to instil confidence in prospective suppliers. 

Small- and medium-sized businesses in particular are likely to be impacted by any S114 notices. As noted by the LGA, local authorities consistently outperform central government bodies in meeting procurement spend targets with SMEs. 

In total, local government bodies spent a total of £21.7 billion procuring goods and services with SMEs during the 2022 calendar year. This comprised 35% of councils’ procurement spend going directly to SMEs, in comparison to just 26.5% from central government authorities such as the Ministry of Defence and Ministry of Justice. 46% of local government spend was allocated to businesses local to the area, according to data from Tussell. 

Impacts to public sector bidding

For Birmingham and Woking alike, all new spending was halted with immediate effect, with the exception of services ‘protecting vulnerable people’ and statutory services such as educational services and waste collection. This aligns with restrictions to spending imposed by other authorities with active S114 notices, including Croydon, Thurrock and Slough. 

With Northamptonshire, the central government initially allowed the council to draw upon the county’s capital reserves to continue operations – a fund which is typically allocated for major construction and refurbishment projects. Predictably, this led to a decrease in contract opportunities for affected industries, including construction, hard and soft facilities management and professional services. Diverted funding did not effectively address the debt load, and Northamptonshire County Council was dissolved in 2021, with two unitary councils replacing it. 

What should bidders do to prepare? 

Businesses, SMEs in particular, have already experienced turbulent economic conditions over the past few years.

Ultimately, businesses have little influence over how councils and authorities manage their finances.

• Monitor your authority’s financial health: Several warning signs will typically occur before a council will issue a S114 notice. For example, Coventry City Council has addressed an open letter to the Department of Housing, Levelling Up and Communities requesting additional help and explaining how they were on the brink of insolvency. Elsewhere, Guildford Borough Council has had four Section 151 officers – in practice, the council’s CFO – over the past two calendar years. These are typical signs of a local authority experiencing extreme financial stress.  
• Look into bidding for tenders from housing associations: Although housing associations often use commercial investments to fund their non-profit activities, updated regulations from 2018 mean they are significantly less likely to go insolvent. Many housing associations tender for the same works and services as local authorities, including minor construction works and adaptations, grounds maintenance, security services and cleaning. 
• Search for framework agreements with multiple buyers: Many councils and local authorities work in partnership with procurement agencies, such as Pagabo, Procure Plus and NEPO, to manage the tender and evaluation process on their behalf. Such framework agreements typically unite multiple authorities, mitigating reliance on a single authority for suppliers.

Keeping a close eye on local news, diversifying your client base and bidding for frameworks which service multiple authorities will support your long-term business stability. Although some authorities are struggling financially, careful planning and a strong ‘bid/no-bid’ strategy will ensure opportunities for growth.