At the same time, the largest wave of Local Government Reorganisation (LGR) in a generation is now underway, with two-tier areas transitioning to new unitary authorities by 2028. This reform aims to eliminate duplication, consolidate leadership structures and improve service delivery. However, it also requires councils to harmonise services, integrate corporate entities and rationalise inherited risks during a period of heightened financial pressure. As elections are postponed in some areas to free up capacity for reorganisation, the expectation is clear: councils must enter the new structure with stable, well governed Alternative Delivery Models (including Local Authority Trading Companies or LATCOs) rather than unresolved issues.
Against this backdrop, councils cannot assume that longstanding ADMs will remain viable without challenges being actively addressed. Many were established in an environment of low interest rates, modest construction inflation and optimistic growth assumptions. Those conditions no longer apply. What Local Authorities need now is a clear view of the practical steps available to safeguard financial sustainability, protect the public purse and maintain delivery of priority services – whilst also building on the successes that have been achieved.
This article focuses on the practical options for addressing the most common causes of distress across LATCOs, drawing on our experiences of working in the sector. The emphasis is on what officers and members can do now to reset structures, strengthen governance and protect value. It is important that these items are addressed before the completion of LGR and the new form of authority has a stable position from which to build.
Common causes of distress and options to address them
Our experience shows that emerging distress rarely resolves itself. LATCOs and other ADMs face a set of recurring, predictable risks. Each can be managed through targeted, commercially informed actions.
1. Inappropriate or unsustainable financing structures
Many LATCOs have financing arrangements that no longer reflect commercial reality, whether due to leverage levels, misaligned repayment profiles or overreliance on council loans.
Options to address
- Reprofile loan terms to reflect actual cashflow cycles
- Identify and restructure unrealistic repayment structures
- Explore alternative financing routes such as PPPs or green bonds, ensuring alignment with Prudential Code requirements
These measures are essential to stabilising companies that are fundamentally viable but have inappropriate capital structures.
2. Singular focus on operational delivery over financial performance
LATCOs created for regeneration, housing, energy or service delivery outcomes often continue to be focused on delivery targets even when financial metrics are deteriorating.
Options to address
- Integrate financial KPIs into performance dashboards and reporting cycles
- Commission regular, independent financial reviews when risks escalate
- Rescope or rephase operational delivery to preserve financial sustainability
Delivery and finance must move in tandem. One cannot succeed at the expense of the other.
3. Governance and oversight weaknesses
Weak governance is one of the most consistent findings across public reports into Local Authority failure. LATCO boards often lack the commercial experience required to challenge complex financial and operational risks.
Options to address
- Clarify roles, responsibilities and reserved matters
- Refresh boards to ensure appropriate commercial, financial and sector expertise and consider the preservation of independent representation
- Implement proportionate covenant monitoring and enhanced reporting disciplines
- Ensure timely, complete and high-quality information is available to both the company board and shareholders.
- Effective governance is not a formality. It is the primary defence against financial deterioration.
4. Returns not commensurate with risk
In many cases, councils are absorbing private sector levels of risk without receiving the returns normally required to justify them. It is key that councils remember that LATCOs are stand-alone commercial vehicles and so need to have a risk and reward profile that aligns to these types of structure.
Options to address
- Re-benchmark expected returns against comparable private market investments
- Adjust pricing for risk, especially in vulnerable sectors such as housing, energy or development which are exposed to volatility
- Diversify the investment portfolio to avoid excessive concentration in single sectors or delivery models.
Where risks and returns cannot be aligned, strategic exit or restructuring should be considered.
5. Weak forecasting, scenario modelling, and stress testing
Forecasting weaknesses are a common thread in failing entities, with common issues including overoptimism, infrequent reforecasting and limited scenario planning.
Options to address
- Conduct multi-scenario modelling (best, base and downside cases)
- Apply sensitivity analysis to interest rates, build costs, demand and asset valuations
- Link reforecasting exercises to key project milestones and significant external events
Robust forecasting gives statutory officers the clarity needed to intervene early.
6. Fraud and misuse of public funds
While not universal, fraud risk increases with scale, complexity, financial distress and weak oversight.
Options to address
- Strengthen due diligence at the point of investment.
- Conduct periodic deep-dives into project documentation and invoices.
- Maintain strong procurement controls and conflict of interest procedures.
- Train officers and company staff in fraud recognition and escalation.
Preventing fraud is dramatically less costly than recovering losses after the fact.
Early warning indicators that require immediate attention
Across the sector, several red flags appear consistently before failure occurs:
- Repeated covenant waivers or emergency funding requests
- Overly complex group structures with the absence of a clear rationale for that structure
- Late or incomplete board papers
- Overreliance on one individual for critical information
- Delivery targets being met while cashflow deteriorates
- Forecasts revised downwards multiple times
- Unusual invoicing patterns or gaps in documentation
- Lack of adequate internal audit and counter-fraud arrangements
These indicators should trigger immediate review, not deferral.
Conclusion: protecting the public purse through practical, early action
The financial environment facing Local Authorities in 2026 leaves little room for passive stewardship of commercial investments. Yet most LATCO challenges are not new – they are familiar, diagnosable and addressable through practical steps that strengthen financial resilience, improve governance and realign risk and return.
Local Authorities cannot afford to treat LATCO challenges as legacy issues to be tolerated as they navigate through LGR. The choices made now on financing, governance, risk and commercial discipline will determine whether Councils enter the next spending cycle with control or with compounding liabilities. The organisations that act early, intervene confidently and reset failing structures will protect their financial resilience. Those that delay will inherit outcomes, not shape them.
Our team supports stakeholders across the sector in diagnosing risk, reshaping underperforming LATCOs and implementing practical restructuring measures. We are experienced in identifying the root causes of distress and designing interventions that safeguard both financial sustainability and the public purse.
