With a trend away from outsourcing and once again towards shared service models, Lucy Doran looks at the impact of two recent EU cases on these arrangements.
Public sector shared services has been a well-established concept for many years and ticks a number of boxes – strengthening bonds, sharing expertise and resources and they can be arranged relatively quickly and cheaply. This last point has been aided by the fact that such arrangements can be structured so that they do not fall within the procurement rules.
With outsourcing to the private sector becoming less frequent in local government, shared services is a popular option and once again public sector bodies are looking at a range of different shared service structures to satisfy their requirements.
In this context, it is timely that this summer has seen two judgments on shared services arrangements. Previous cases and guidance established the following basic principles:
- The character of the agreement needs to be that of real co-operation aimed at the joint performance of a common task;
- There are mutual rights and obligations;
- The arrangement involves only contracting authorities;
- The arrangement should not involve financial transfers between the partners other than those corresponding to the reimbursement of actual costs; and
- The arrangement should not be driven by the need to offer activities on the open market, hence the 20% threshold.
This was the position until May and June 2020 when the judgments of Stadt Koln (C-796/18) and Remondis (C – 429/19) were delivered. Although the Stadt Koln judgement confirmed a number of the points outlined above, it is the Remondis judgement that focused in particular on the requirement for collaboration.
The case involved the award of a contract for the treatment of waste in a mechanical biological treatment plant. A publically owned entity (the association) was entrusted with the performance of disposing of the waste of three parent bodies. The association did not have a treatment plant that could fully deal with the waste so entrusted some of this waste through agreement with another separate contracting authority, the district of Neuwied.
The ECJ was asked whether cooperation exists if a contracting authority responsible for waste disposal performs a disposal task not entirely by itself, but rather, commissions another contracting authority to carry out one of the necessary operations in return for consideration.
The ECJ held that the concept of "cooperation" was at the very heart of the exclusion. It was held that the joint participation of all the parties to the cooperation agreement is essential and that this condition cannot be satisfied where the sole contribution of certain contracting parties goes no further than a simple reimbursement of costs.
The Court reasoned that the existence of cooperation between entities belonging to the public sector is based on a strategy which is common to the partners to that cooperation and requires the contracting authorities to combine their efforts to provide public services. In contrast, the sole purpose of the arrangements between the association and Neuwied appears to be the acquiring of a service in return for payment of a fee.
Although at first glance, the Remondis judgement does not appear to add anything new to what we should already know from previous judgments and guidance, it does shine a large spotlight on the "cooperative" element of some arrangements. As we are reminded, the fact that both parties are contracting authorities does not mean that the procurement rules automatically fall away.
Where does this then leave shared service structures in the UK? In our view, the law has not changed, collaboration was always a key element of the exemption but perhaps some contracting authorities have in the past taken a more lenient interpretation of what "collaboration" really means.
To ensure that a shared services model can fully benefit from the exemption, we recommend that the parties spend time upfront in demonstrating a well-considered strategy leading up to the arrangements and mutual responsibilities and obligations within the contracts.
A successful shared service arrangement should be underpinned by these elements in any respect. If outsourcing to the private sector is not working for a public sector body, why would outsourcing the same services to another public sector body be any more successful? Careful planning and consideration should lead to a shared service model which genuinely transforms services for all parties as well as satisfying the exemption.