| SPOTLIGHT |
The government is enthusiastically championing the establishment of employee-owned mutuals to deliver public services. Jack Hayward and Anthony Butler consider the procurement issues.
Back in August 2010 the Cabinet Office announced a pilot scheme to look at the feasibility of delivering services via ‘John Lewis’-style employee owned mutual organisations. Initially there were 12 pilot schemes ranging from The London Partnership creating a “reducing multiple disadvantage”’ community interest company from a group of Department of Health, local authority, primary care trust and NHS staff through to teaching and administrative staff planning to set up a trust to run Newton Rigg Agricultural College in Cumbria.
On 17 November the government set out its ‘Rights to Provide’ across public services. In a speech Cabinet Office Minister Francis Maude stated that employers will be expected to accept suitable proposals from front line staff who want to take over and run their services as mutual organisations.
Prisons, Sure Start Children's Centres, hospitals and the civil service are just some of the services in which staff could soon take power from Whitehall managers and have the freedom to do things “better”. Apparently the evidence shows that when employees have a stake in their organisation absenteeism plummets and productivity soars by as much as 19%. The people who use services will be able to complain direct to those responsible for their delivery, not a distant official.
But from a procurement regulation perspective what is the status of these organisations? Are these organisations contracting bodies for the purposes of the PPR? The general definition of the public sector bodies as defined in Article 1(9) of the public sector directive (PSD 2004/18) covers four distinct categories: State; local and regional authorities; “bodies governed by public law”; and associations formed by the above.
A “body governed by public law” is further defined in detail in Article 1(9) to cover a body which meets all of the following three conditions:
As we know from the case of R v HM Treasury ex parte University of Cambridge Case C-380/98,[2000] ECR I 8035, money paid by the government in return for contracted services does not count as public funding.
So if an organisation is to escape the definition of a body governed by public law then it will have to establish a totally separate entity. This raises a whole host of questions ranging from capital funding to how to deal with the pension rights (and costs) of staff who transfer across.
In his speech Francis Maude gives some insight into this when he refers to the Nottingham and Burton Treatment Centres which have joined the Pathfinder programme referred to above. In that case 900 NHS staff were seconded and given the opportunity to become co-owners of Circle Healthcare, an employee-owned social enterprise constituting the largest partnership of clinicians in Europe without losing their NHS employment rights or status.
However the Circle example does not fall into the stand alone mutual model as its staff are still employed by the NHS. Could it not be argued that this is a body which falls within the ambit of Article 1(9)?
It transpires that Circle is 49.9% owned by the staff and 50.1% owned by Circle Investments plc which is described as a investment vehicle owned by ‘blue chip’ City investors. Presumably notwithstanding the fact that the employees are technically employed by the NHS this arrangement takes Circle outside Article 1(9).
Another issue that could be considered where employees are seconded is the question of State Aid. How are these seconded staff paid for by Circle? When or if Circle bids for work are the costs of these staff properly recognised in the bid costing? If not, then competitors may feel sufficiently aggrieved to issue a challenge on procurement and complain to the Commission regarding potentially unlawful State Aid.
The use of the term ‘John Lewis’ suggests a co-operative type of mutual organisation with actual employee ownership and participation. Within the NHS this has already happened to a very small extent – for example, Central Surrey Health (CSH) provides community nursing and therapy services and is owned by its 780 staff. On transferring to CSH all staff were presented with a single share worth a penny in the company. The Cabinet Office Minister referred to CSH in his speech at the Conservative Party conference in October 2010 and so this could be viewed as a potential blueprint.
From a governance perspective CSH is constituted as a not-for-profit, limited liability company under contract to provide community nursing and therapy services on behalf of the NHS Surrey and other partners such as Surrey County Council. The contract is similar to those held by GP surgeries (a specialist medical services contract).
In effect therefore although CSH is constituted as a separate employee owned entity, it nevertheless receives its funding from the State by way of a contract. Does this therefore make it an organisation covered by the PCR? The author asked CSH directly to confirm their status with regard to the Procurement Regulations, but acknowledged that they had taken legal advice on the point.
On the basis that they are in a purely contractual relationship with the NHS, then presumably the principle in Cambridge would apply. However it should be noted that irrespective of the procurement status of the mutual entity itself, the award of any contract to the entity which falls within the PCR would have to be procured.
The Minister acknowledged this in his speech when he said: “Where public procurement processes allow and savings are properly agreed, staff forming a mutual will be awarded a contract to continue providing services rather than going through the full tender process.”
So when would the full procurement process not be applicable? Below threshold procurements perhaps? If so, this would be very limiting in terms of the value of the services or goods to be provided – between £101,000 and £157,000 depending on the procuring entity – or maybe Part B services.
All the examples given by Maude such as Sure Start would fall within the Part B provisions (the main driver for Part B is that the contract will not be of cross border interest).
However what about Part B services such as Legal? If a public authority (or group of public authorities) were to directly award its legal services requirement to a mutual made up of its former legal staff, it is hard to believe that such an award would not be challenged by private practice firms on the basis that the award infringed basic EU Treaty principles of fairness and transparency.
In conclusion the government has recognised that Procurement Regulation are an issue with mutuals but a great deal more detailed guidance needs to be issued before public bodies can approach such contractual relationships with confidence.
Jack Hayward is a consultant procurement solicitor and Anthony Butler is a procurement lawyer at Torbay Council. Jack can be contacted on 01803 208385 or by email at This email address is being protected from spambots. You need JavaScript enabled to view it..
