Mutuals, procurement and carve-outs

Will proposed amendments to EU directives solve the procurement issue for mutuals? Mark Johnson analyses the key changes.

One of the key commercial challenges for public service mutuals is the impact of the EU procurement rules. A fledgling mutual may struggle to compete in an open competitive bid process, especially against larger well-resourced outsourcing companies; yet the current EU procurement rules require, as a minimum, that contracts for the type of services which mutuals may deliver to be exposed to some degree of advertising if they are Part B services or below the value thresholds with likely cross-border interest, and in some cases even a full competitive tender process.

The EU Commission began the process of reviewing the Procurement Directives in 2011, ostensibly to modernise the rules and make them more flexible. During the course of negotiations, the UK Government proposed the insertion of special provisions with their mutualisation agenda in mind. These have now found their way into Article 76a of the new Directive, which is in the final stages of passing into law. Once adopted, the UK’s Cabinet Office is expected to draft implementing Regulations in 2014 to replace the Public Contracts Regulations 2006. The Government and many commentators have heralded the arrival of Clause 76a as the solution to the procurement problem. But is it really going to be the panacea which some people think?

Article 76a says that Members States “may reserve the right for organisations to participate in procedures for the award of public contracts exclusively for [specified types of] services”. Note that it does not allow the authority to make a direct award to the public service mutual; merely to restrict participation in the bid process to the types of organisation which meet the criteria set out below.

The types of services covered by this special regime are very specifically and tightly defined by reference to CPV (Common Procurement Vocabulary) codes. They include administrative educational services, administrative health services, administrative housing services, supply of domestic help personnel, supply of nursing services, supply of medical personnel, pre-school education services, higher education services, e-learning services, adult education at university level, training facilities, tutorial services, a wide range of health and social services [1], community care and primary care, libraries, archives and museums, sporting services, services provided by social membership organisations, and services provided by youth associations.

Notably, there is no mention of fire police and rescue services, provision of staff pensions administration, probation services or community protection – all of which are priority areas for the Government’s mutualisation programme.

What is the scope of the carve-out?

Article 76(a) allows the procuring authority to specify that only certain types of organisations with a social mission can participate in the award procedure. To be an eligible organisation all of the following criteria must be satisfied:

• The objective of the organisation must be pursuit of a public service mission. (In practice this will be ascertained by looking at the objects clause of the constitution).
• Profits must be reinvested to achieve the organisation’s objective. If profits are distributed, this should be based on participation in the organisation’s business. (Perhaps along the lines of cooperative principles, where dividends are paid to members based on the volume of trade they put through the organisation).
• The management and ownership structures should be based on employee ownership or must require the active participation of employees, users or stakeholders. (In practice this requirement is quite loosely defined – there is no materiality test, for example).
• The organisation has not been awarded a contract for the same services by that authority within the past three years.

The maximum duration of such contracts will be three years and "the call for competition must make specific reference to Article 76a of the new Directive".

It may well be laudable to reserve the right to bid for the contract only to community-focused organisations. However, these criteria are quite restrictive and may unwittingly rule out certain key players, reduce the diversity of suppliers and restrict competition. Most charities and social landlords, who may make eminently suitable bidders, will most probably not satisfy these criteria and yet the pursuit of an innovative and value for money solution may favour their participation in the bid process.

In addition, certain private sector organisations, such as the larger outsourcers, may well feel that they have been deprived of a bidding opportunity if the procedure is used to exclude them. Expect those who are excluded by the use of the Article 76a procedure to narrow the field of bidders to be ready to challenge. Alternatively, will this procedure create ‘Trojan horse bidders’ who outwardly satisfy the criteria, but are really just fronts to win more bids? No doubt mindful of the potential distortion of competition, the Commission is required to assess the effects of this special regime after three years and report back.

It remains to be seen how and if the UK Government decides to implement this special regime when it publishes the UK implementing regulations for the Directive. In practice, the Cabinet Office will have very little wiggle room in drafting the regime into the Regulations, since the criteria are mandatory. To recap, the regime still does not allow authorities to make a direct award of the contract to a fledgling mutual on a preferred supplier basis. There still has to be some form of competitive award process. Of course, an authority may set evaluation criteria which favour those who deliver social value, however, the general principles of the EU treaty, such as transparency, equal treatment, and non-discrimination towards bidders will still apply. It will not be easy to just award a contract to the fledgling mutual, without considering other potential bidders and objectively justifying the outcome.

Mark Johnson is Head of Public Services at law firm TPP Law-Geldards. He can be contacted by This email address is being protected from spambots. You need JavaScript enabled to view it..