Joint ventures between the public and private sectors have been in vogue for a number of years for many different purposes.

The Local Authorities (Companies) O rder 1995 (SI 95/849), which came into force on 1 April 1995, will cause difficulties for public and private sector alike as they strive to understand the implications for their respective organisations of their involvement in such joint undertakings.Regulated companies (as defined in the new order) after 1 July 1995 must state on all business letters, notices or other documents the fact that the company is local authority influenced or controlled and name the relevant authorities.

Propriety controls and disclosure of information obligations apply immediately.

The order includes provisions requiring certain of the public sector capital finance controls to be applied as if such companies were part of the authority itself.

Subject to the order, these apply to controlled or influenced companies unless the company ceases to be controlled or influenced by 31 March 1996.

The new provisions together with the Companies Act 1985 and accounting standards FRS 2 and FRS 5 need to be examined to ascertain whether the accounts of a joint venture should be consolidated as a subsidiary or quasi-subsidiary undertaking.

This will have an effect on the 'parent' undertaking's balance sheet and accounts.Partnership arrangements between the two sectors have existed for many years covering activities from large scale commercial property developments to the management of local concerns such as a theatre trust or sports facilities.

Many of these joint venture arrangements have been set up through a company, with representatives from each sector contributing assets such as land, finance and expertise according to their degree of involvement in the venture, expectations of receiving a return and amount of risk involved.It has also been a consistently stated objective of the government over the last 15 years to encourage the involvement of the private sector in such ventures, to trigger private investment in new projects and taking the financial burden (and risk) away from the public sector.The City Challenge initiatives were prime examples of this approach.

Local authorities were encouraged to establish links with the private and community sectors in return for a chance to bid in competition with other cities for cash from central government.

Most authorities established carefully structured companies to reflect the involvement of the three sectors and to satisfy the Department of the Environment's requirements.

A more recent example is the DTI's 'business link' initiative which encourages local authorities to set up 'one-stop shops' through joint arrangements with the local business community for economic development purposes.Companies involved in such initiatives have, for the past six years, relied on legislation dealing with companies (such as the Companies Act 1985), and pt V of the Local Government and Housing Act 1989 which deals with local authorities' involvement with companies.

Local authorities and their private sector partners have had to operate in an unsatisfactory legislative limbo relying on draft regulations, issued in 1989 but never brought into force.One of the main aims of the government's private finance initiative is to encourage partnership between the public and private sectors.

The government proposes to regulate the participation by local authorities in companies, broadly in line with the proposals made in a consultation document of 1989 concentrating mainly on the categories of 'controlled' and 'influenced' companies described and defined in pt V of the Local Government and Housing Act 1989.New draft regulations were iss ued for 'consultation' explaining that the proposals involved a division of influenced companies into two further sub-groups, namely private sector and public sector influenced companies.

To fall within the private sector category, the company needs to be a genuine non-recourse entity set up on normal commercial principles, under the effective control of the private sector.

Public sector influenced companies and controlled companies (or 'regulated companies') will have to be made subject to the local authority capital finance regime and to propriety controls designed to mirror controls on the activities of councillors carrying out council business.Under pt V an influenced company is defined as a company in which associated persons connected with the authority hold between 20 and 50% of the voting power (either at board or member level) and there is a 'business relationship' between the authority and the company with more than 50% of its turnover or total assets from payments, grants or loans from the authority or the company is using council land at less than market valueOne of the main problems with the business relationship test is that it is possible for the company accidentally to drift in and out of the influenced category from time to time with consequent knock-on effects for the company, the authority and the other partners.

The only sure way of keeping out of the influenced category is to keep the authority's representative interests below the 20% threshold.

Instead of addressing this anomaly the new proposals ignore it and introduce further uncertainty into an already confusing and complex matrix.

Before entering into a joint venture with a local authority potential partners will have to ascertain which side of the public/private sector divide the company stands for accounting and other purposes.In March 1995 a further (amended) draft of the regulations including an 'explanatory guide' was circulated.

According to the guide if the company is either controlled or influenced or is 'treated as' influenced the authority will have to decide whether it exercises or has the right to exercise a 'dominant influence' over the company.

The guide further elucidated on the concept of 'dominant influence' (not to be confused with local authority influence).According to the guide 'normal' private sector practices are to be applied in determining whether the conditions for dominant influence are fulfilled using the tests of control contained in the Companies Act 1985 (as amended by s.258 and sched 10A to the Companies Act 1989) and as that concept is given practical expression in accounting standards FRS 2 and FRS 5.Thus, not content with linking definitions contained in no less than three statutes (the Companies Acts 1985 and 1989 and pt V of the Local Government and Housing Act 1989) and introducing a new set of regulations specifically for local authority companies, the regulations then proceed to require examination of two of the most convoluted accounting standards ever devised to ascertain whether a company is or is not, in simple terms, part of the private sector or part of the public sector for accounting and other purposes.No distinction is drawn in the regulations between the many different types of joint venture so that the local theatre company managed as a public/private joint venture for years is as much entangled in the regime as is the large scale commercial development joint venture.

This legislation is an unnecessary, cumbersome, bureaucratic nightmare of assistance to neither sector.Although the flow chart ma y assist for finding a route into the labyrinth (This flow chart cannot be reproduced on the database.

Please see the original), lawyers alone will be unlikely to be in a position to advise their clients on the full implications of this legislation without assistance from accountants and an audit (including, in some cases, a valuation) of the extent of the local authority's involvement.In a recent paper 'Deregulating local government: the first steps' issued by the Department of the Environment, the new regime for local authority companies is heralded as an example of action already taken by the government to remove unnecessary, bureaucratic requirements faced by local government.

The Local Authorities (Companies) Order - an example of deregulation? Surely some mistake?