05 August 2005
Local authorities are vulnerable to a legal challenge that their outsourced services breach new European Union rules designed to avoid the overpayment of contractors, Public Finance has learnt.
The new rules – issued on July 15 – are based on a 2003 European Court of Justice judgment and list four tests that contracts for services such as school facilities, home care services and waste collection must satisfy if they are to avoid being classified as illegal 'state aid'.
A Department of Trade and Industry official said the European Commission 'has taken a view that almost all compensation [payment] awarded before the judgement is unlikely to meet the tests'.
Most significant among the four tests are edicts that contractors cannot earn more than 'reasonable profits'; must be 'well run' and cannot be reimbursed for expenses not detailed in the initial contract.
The commission defines 'reasonable profit' as 'the average rate for the sector concerned in recent years'.
The Local Government International Bureau's public and policy affairs officer Dominic Rowles said that authorities would be most at risk of a legal challenge from rival contractors who could prove that their competitors were given unfair subsidies. This could be demonstrated by either above-average profits or low rates of productivity.
Although the four rules are new, the commission's objection to anti-competitive state aid is not. Rowles said that the rules were actually 'good news for local authorities' as they clarified the circumstances under which they could contract services that might not be viable on the open market.
Rowles said: 'If you can get a service for £x then you shouldn't get it for £x plus ten, unless it's a better deal for the public or for staff. Authorities must take the most economically advantageous offers.'
The DTI said that it was in the process of drafting compliance guidance on the rules, which would be published shortly.
PFaug2005
