The power of three

The 'third sector' is being promoted as an important partner for the delivery of public services. Chris Knuckey looks at the implications for local authorities.

The government has for some time promoted the involvement of the third sector in delivering public services.  This policy first manifested itself in the creation of ‘The Compact on Relations between Government and the Voluntary and Community Sector in England’ in 1998, an agreement between government and the third sector “to improve their relationship for mutual advantage and community gain”.

More recently, in June 2009, a Cabinet Committee was established to “consider the blockages faced by third sector organisations to securing and delivering specific public service contracts and agree actions for the removal of these blockages.”

The need for such a committee suggests that, more than ten years on from the Compact, the public sector is not making as much use of the benefits that third sector involvement in public service delivery can provide as the government would like. One reason for this may be that public sector commissioners are unsure of how to deal with the different obstacles that a partnership with the third sector can give rise to in contrast to providing the service in-house or through a private sector contractor. However, these obstacles are not insurmountable and can be resolved with due diligence and planning.

The major issues

The issues fall into two categories, legal and practical. The legal issues will be most relevant when dealing with a registered charity. The practical issues will apply when dealing with any third sector organisation and will normally need more consideration.

The major legal issue will be whether the third sector organisation’s own constitution will allow it to actually deliver the services required. This will be most relevant where the organisation is a charity, which is required to:

• Act in furtherance of its objects and within its powers.
• Ensure the charity is independent.
• Act only in the interests of its charity and its beneficiaries.

At its simplest, this will mean the services to be provided must fall within the objects and powers of the charity. However, in many cases the manner of service delivery may be equally as important as content of the services. Local authorities may not be able to simply require a charity to take on a service “as is”. Charities are also restricted from using their own funds to provide services where a public body has a statutory duty to provide them. Local authorities should not therefore expect the third sector to subsidise service delivery, not only may this be illegal but it could impact significantly on the general public’s attitude to funding the third sector.

It is rare for third sector organisations to have the same financial standing as the type of private sector organisation that provides outsourced services. This can give rise to two major problems.

Firstly, the third sector may struggle to meet requirements set out in standard tender documentation used by local authorities. The government has issued guidance on the subject and the key is to make sure that requirements for minimum turnovers, accounts and so on are considered and included in tender document on a case-by-case basis. They must be relevant to the project (and, where third sector involvement is being promoted, deliverable by third sector organisations) and not just included as they sit in a precedent document.

Secondly, the usual types of contractual breach clauses are also unlikely to be appropriate. If a third sector organisation does not meet agreed service delivery standards, requiring significant damages is impractical because:

• the provider is unlikely to be able to pay; and
• suing a third sector organisation dependent on public sector contributions is never likely to be politically acceptable.

Therefore, a different model of relationship based on partnership in both service delivery and addressing service defaults must be developed.

Some local authorities have gone beyond contracting with the third sector and become involved in, or set up, third sector entities. Where local authority officers or members become trustees or directors of such organisations they may be exposing themselves to personal liability for decisions made in this role and local authorities should consider using the powers they have to provide appropriate indemnity protection for such liability. There are likely to be conflicts of interest for any member or officer involved in the management of the third sector organisation. With regard to charities in particular it is important to remember that the organisation must remain independent. Clear guidance should be given to such members or officers on this subject.

What should a local authority do?

There is no reason why all of these issues, and any other that may arise, cannot be addressed by local authorities. In particular, local authorities should do their due diligence and check the third sector organisation will be able to deliver the required services and plan for third sector involvement from the start and use appropriate tender documentation.

Chris Knuckey is an editor at PLC Public Sector, the online legal know-how service designed specifically for lawyers working in the public sector.

www.practicallaw.com