Shared Services Post Brent-v-RMC Supreme Court Judgment

1. Shared Services Post Brent-v-RMC Supreme Court Judgment Guardian Public Procurement Show 14th June 2011 Commercial expertise driving value and efficiency in local public services

2. Who are Local Partnerships? Jointly owned by HM Treasury & LGA Uniquely placed to act as a bridge between central and local government Focus on achieving servicetransformation and efficiencies e.g. asset management reviews, skills development, training in contract management and project management. It comprises of public sector and commercial expertise Entrenched Public Sector Mission Advisory Board Board of Directors Operating Principles: Delivers long term value by strengthening client side capability Freely share our intellectual capital Non-profit maximising 2

3. Our current activities include 1.Carbon reduction programme Waste (WIDP, WAG) Support to Superfast Broadband UK New Models of Service Delivery (Mutuals) Social Investment Place based investment and regeneration Local Infrastructure support to deliver major capital projects Assurance (Gateway reviews) Compliance (support on EU and UK legislative requirements) 3

4. Outline • Brent-v-RMC (2011) – the facts • The Teckal Exemption • The Supreme Court’s decision • The implications for local authority shared service initiatives • The remaining issues

5. LB Brent and 9 other LBCs (incl Harrow LBC) to set up a mutual insurance company (‘LAML’ – London Assurance Mutual Ltd) Brent initially went out to competition for insurance suppliers but abandoned the competition when agreement reached to pursue LAML route with other LBCs Risk Management Partners challenged on 2 grounds – 1) no vires to set up LAML and 2) awarding service contracts to LAML amounted to a breach of 2006 PCRs Scope of dispute had narrowed by Supreme Court stage Vires issue resolved by new powers expressly permitting mutual insurance arrangements under a 2009 Act. Brent and RMP settled their differences Harrow pursued an appeal against the CA ruling below arguing local authorities would effectively be prohibited from using the new powers if they had to go out to competitive tender first because of EU law. 1. Brent-v-RMC (2011) – the facts

6. Under Public Procurement Law there is no general exception simply because a contractual counterparty is itself also a Contracting Authority The case of Teckal SrL v Comune Di Viano (1999) established the Directive only applied to contracts between a public authority and an entity which was formally distinct from it and independent of it in regard to decision making. In other words – The procurement rules do not apply to ‘in-house’ arrangements such as awarding work to an internal department or DSO which is effectively part of the authority; Under Teckal, there are two limbs to the ‘in-house’ test: a contracting authority must exercise “over the person concerned a control which is similar to that which it exercises over its own departments and, at the same time, that person carries out the essential part of its activitieswith the controlling authority or authorities” Intended to cover in-house services or services provided by a “captive” subsidiary/entity 2. The Teckal Exemption

7. 2. Post Teckal case law developments • Did the Teckal Exemption apply to the Brent scenario where LAML was controlled by several LBCs? • After examining the case law post Teckal (including Carbotermo, Parking Brixen, Stadt halle, commission-v-Germany etc) the Supreme Court unanimously decided • The Teckal exemption did apply to these facts. • The Supreme Court upheld Harrow’s appeal: • The PCR 2006 did not apply where a local authority (like Harrow) intends to enter into a contract of insurance with a body like LAML (a wholly public sector owned and controlled entity).

8. 3. The Supreme Court confirmed: • For the Teckal exemption to apply it is sufficient that the co-operating authorities together exercise collective control over the party to whom contracts are awarded. • Individual control by one authority is not necessary. • No private interest can be involved in the company or undertaking to which the contracts are awarded (as otherwise the control test is not satisfied). • The public authorities don’t have to follow any particular legal form to take advantage of Teckal (so no need for a company) • Public bodies must be acting in the public interest and not be contriving to circumvent public procurement rules.

9. 3. Quotations from the Lords of Appeal: • Per Lord Hope ‘…There is now a much clearer focus on the purpose of community rules on public procurement so as not to inhibit public authorities from co-operating with other public authorities for the purposes of carrying out some of their public service tasks…’ (Para 52 • Per Lord Rodger: ‘In short, not only are local authorities free to use their own resources to perform the services which they exist to provide, but they may also co-operate with other local authorities to ensure that collectively they have the necessary resources to do so.’ (Para 73) • Per Lord Rodger: ‘..The second Teckal criteria is therefore designed to ensure the Directive always applies unless in substance the body concerned only trades with the local authority or authorities – unless, in short, it is not market orientated.’ (Para 85)

10. 4. The implications for LA ‘shared service’ initiatives • Brent based on its particular facts? • Brent is a UK Supreme Court case not ECJ however … • The Law lords demonstrated firm grasp of the issues facing the authorities and recognised the value of inter-authority working. • The gist of the judgment appears to be that if authorities are genuinely engaged in co-operating with each other to secure a service from their own resources in a way that is not ‘market orientated’ the courts will be slow to require a competitive process to be followed; • For Teckal ‘control’ test there must be power for the authorities participating to give directions on strategic matters and important issues of policy

11. 4. The Chandler case and ‘market orientation’. • In Chandler-v-Secretary of State for DCSF (2009) court of appeal, the issue was whether UCL were offering services ‘on the market’ for the purposes of the definition in the directive of ‘service provider’ and whether the arrangements between UCL and the secretary of state were contracts ‘for pecuniary interest’ within the definition of ‘public contracts’ in the directive. held • Drawing on the earlier case of ECJ in Commission -v- Italy that a contract merely for re-imbursement of costs and no remuneration or other benefit was not ‘for pecuniary interest’. Philanthropic arrangements were not within the directive or regulations. • The words ‘on the market’ in the definition of service supplier in the public contracts regulations (regulation 8) required the participants in the market to be intending to make a profit from contracting to provide services offered by them. For there to be a ‘market’ there had to be several people offering to provide similar services. The requirement for the offer by the service provider to be ‘on the market’ had not been met in this case. • It is generally unlikely that arrangements for the provision of services for nil consideration or on cost recovery basis only will be of cross-border interest. Only where there is a sufficient prospect of cross-border interest will the arrangements be subjected under the procurement regime to competitive tendering or an advertising process. • Note - it is a UK case based on particular facts but more relevant post brent?

12. 5. Some issues for discussion • Market orientation – what does this mean? Public administrative function, cost recovery, market for services strictly limited to participating authorities? • How much weight does the Brent Supreme Court judgment (and Chandler) have outside UK? • Greater risk of challenge nowadays than before? • Remedies Regulations • Fewer contracting opportunities? • Less risk/cost to challenge? • Multiple authority control – might be more difficult if there are diverse public bodies owning and controlling an entity all with specific rights or obligations. • Is there any limit on how many public bodies can participate? Does it get harder to demonstrate ‘control’ the more public bodies are involved?

13. Rob Hann Director Legal Services 0776 890 6391 rob.hann@local.gov.uk www.localpartnerships.gov.uk Local Partnerships  Local Government House Smith Square London SW1P 3HZ Contact details