Procurement lawyers warn on misconceptions over shared services

The use of shared services may be set to increase markedly but the relevant procurement case law is “complex and sometimes contradictory” and there are a number of misconceptions about how procurement rules apply to these arrangements, leading lawyers have warned.

In a paper on the issue, a working group of the Procurement Lawyers Association said: “Shared service models have been successfully used by local authorities for many years and their use is anticipated to increase following the United Kingdom’s coalition government’s Comprehensive Spending Review and the need for public bodies to achieve efficiency savings.

“Procuring a service provider can sometimes be a lengthy, uncertain and expensive process so understandably, contracting authorities are keen to take advantage of what is now commonly known as the Teckal or ‘in-house’ exemption.”

The PLA paper was written to distil the case law in relation to whether public authorities can contract with one another and the extent and the extent to which they can involve the private sector without the need to conduct a formal EU procurement process.

The decisions by the ECJ and domestic courts in this area are “complex and sometimes contradictory”, the working group wrote. The paper analyses the legal position for a number of factual scenarios in the light of this legal background.

The paper also seeks to address eight of the most common misconceptions about the application of the procurement rules to shared services.

In a series of statements, the working group said the correct position was as follows:

• UK government policy does not overrule European law and cannot be used to justify circumvention of EU procurement rules
• Structuring organisations or transactions deliberately to circumvent the provisions of the Directive is likely to be in breach of EU Treaty obligations. “The courts apply a purposive approach and look at transactions holistically to see whether there has been any breach,” the paper said, point to cases such as Hamburg Waste and Commission v Italy (Italian Lottery) as examples
• Challenges brought on the basis of alleged breaches of EU procurement rules are now becoming more frequent in the UK. Examples include Indigo Services (UK) Limited v The Colchester Institute Corporation and Henry Bros (Magherafelt) Ltd v Department of Education for Northern Ireland.
• The introduction of the Remedies Directive means compliance is “even more important as the sanctions for breach are potentially more onerous”. The paper highlighted as an example how a contract may be rendered ineffective and financial penalties imposed on contracting authorities
• A contracting authority's contract with another contracting authority is not automatically exempt and the exemptions must be applied on a case-by-case basis.
• Contracts between contracting authorities and the not-for-profit sector are not automatically exempt from the Regulations. The judgment of the Court of Appeal in R (Chandler) v Secretary of State for Children, Schools and Families “may not be good authority to justify awarding contracts to not-for-profit bodies on a cost reimbursable basis without conducting a more detailed assessment based on the case law cited in this paper”
• Any set of circumstances justifying an exemption must be monitored on an ongoing basis. “Restructuring or changes in funding or new business activities can mean that an organisation will lose the benefit of an exemption”
• An entity which falls within the Teckal exemption will constitute a "body governed by public law", under regulation 3(1)(w), which if it wishes to let contracts, means that it has to comply with the Regulations when awarding contracts for the procurement of works, supplies or services.

The paper, which was focused on procurement issues only, added that it remains to be seen what effect the Localism Bill will have on procurement and in particular with regard to vires following the general power of competence contained in the draft legislation.

For more information on the PLA, which brings together procurement lawyers working within the field of EC procurement law including public sector lawyers, click here.

A copy of the paper can be downloaded here.

Philip Hoult