28 April 2006
Whatever government reform you look at, you'll find joint working is part of it. But councils planning to join up to share services need to ensure that by doing so they don't trigger EU procurement laws
Government policy has recently been pointing unswervingly towards joint working. It is a vital part of Best Value and continuous improvement; the Gershon efficiency targets; Comprehensive Performance Assessments; community leadership; and Local Area Agreements among others.
But one particular sticking point is emerging, and that is the legal structure of the relationship. Councils working together have three basic models to choose from: 'collaborative', 'contractual' and 'corporate'.
The collaborative model is well known. It often involves a loose administrative arrangement, or can be a joint committee under the Local Government Act 1972. This model can trigger European Union public procurement rules — ie, requiring the service to be put out to tender — if the arrangement is deemed to be 'contractual'.
The second way is indeed contractual and as such is automatically covered by the EU rules.
However, it is the third way, the corporate model, that is currently attracting attention. Many councils prefer this approach because it can 'ring-fence' legal liability as well as offer an ongoing relationship, ie, it is not tied to a single project. In some instances, the Office of the Deputy Prime Minister is recommending it, for example, in the reorganisation of fire control centres.
The EU rules can also apply here, and there are some grey areas. As an example, five local authorities join together and establish a company to provide services to all of them, in place of their current arrangements. Legally, they are awarding a contract to a different legal entity — even though it is only a structure for working jointly, rather than a true private sector provider.
In these circumstances, there is an exemption from EU procurement law provided by the Teckal case. This puts the joint company on the same legal footing as a direct services organisation when two conditions are met.
First, the authorities must exercise the same level of control over the company as that exercised over an in-house DSO. Secondly, the company must carry out the essential part of its activities for those authorities. However, any exemption is by nature a special provision and under EU law therefore has to be restrictively construed.
A number of subsequent cases from the European Court of Justice have clarified the full extent of the Teckal exemption — and it would appear that over time it has been narrowed.
One case (Stadt Halle) considered whether such a company could have any private sector involvement. This issue is regularly raised as many joint ventures include private sector partners. The case suggested that the Teckal exemption would not apply as such a company could not thereafter be said to be an in-house organisation such as a DSO.
Another restriction was raised in the Parking Brixen case. There, it was stressed that the company in question undertook the essential part of its work for its own host authority or authorities. This means that if the company is intending to trade more widely in the short or even long term, then the Teckal exemption might not be available.
Doubts have also arisen about whether the exemption covers a company established by a larger group of authorities, even if specifically for the purposes of joint working.
Here, the argument is that it might be difficult for the host authorities to exercise the same level of control as over a DSO, particularly if numerous local authorities are involved (for example, ten authorities all with a 10% stake in such a company).
Could it then be said that each authority had the same control over the company as it would have over a DSO providing services to it directly?
This is an unfortunate twist in the Teckal saga. Nobody would deny that companies set up to trade widely or involving private sector partners should properly fall outside the exemption. On the other hand, the sort of instance that was in mind when the exemption was first expounded must be a company established exclusively by local authorities solely to provide more efficient services to each and all of them.
It seems likely that further case law will be forthcoming in relation to this as the European Commission seeks to clarify the law. In the meantime, we believe that a safe passage can be steered through these difficulties, although local authorities will need to look very carefully at the structure and establishment of corporate entities that they create for this purpose.
Stephen Cirell is head of local government and Professor John Bennett is a consultant solicitor with Eversheds. They are authors of Best Value law and practice and Charging and trading in local government. John Bennett is also co-author of EU public procurement law and practice
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