A New Frontier

The headlines after the Comprehensive Spending Review focused on the depth of cuts to local government and other sectors. Look beyond the figures and you will see nascent plans for a massive shake-up in how public services are procured and delivered, writes Mark Johnson.

Buried in the fine print of the Spending Review published on 20 October is an interesting chapter entitled Sharing Responsibility. It begins: “The Spending Review builds on measures to provide new opportunities, new rights and new resources to enable all parts of society to play a larger role in providing services and strengthening community life.” It goes on to signal a radical shift in thinking towards the method of delivering local services, all in tune with the Big Society agenda and localism. There are four key strands of note:

"The Government believes that while it should continue to fund important services, it does not have to be the default provider.. This stifles competition and innovation and crowds out civil society"

Here we have a clear signal that there will be more contracting out of services. Up to now there have been some ‘no go’ areas in service delivery, such as delivering core teaching services in education or direct delivery of social work and child protection. It seems likely that these final barriers will be dismantled. This will raise complex questions about the ability of authorities to contract out functions for which they hold statutory duties.

"Government will pay and tender for more services by results… The use of simple tariffs and more innovative payment mechanisms will be explored in new areas, including community health services, processing services, prisons and probation and children’s centres"

There is already a precedent for this type of approach in welfare to work contracts and prisoner rehabilitation. My firm is currently advising on the current round of work programme contracts which put 88% of the contract payment at risk on performance. At Peterborough prison, a programme to reduce re-offending has recently been funded by a social impact bond issued by Social Finance which pays a return to investors if the project is successful. For example, a 10% reduction in reoffending leads to a 7.5% return on capital invested.

One of the frequent criticisms of PFI financing was that it failed to transfer real operating risk to service providers. Providers often refused to take on demand and operating risks, believing that the scope of contracts did not give them sufficient influence over outcomes. The new approach should do just that, but it remains to be seen what kind of appetite there will be for this new class of investment amongst project funders.

"Government will look at setting proportions of appropriate services across the public sector that should be delivered by independent providers, such as the voluntary and community sectors and social and private enterprises".

This approach will be explored first in adult social care, early years, community health services, youth services, court and tribunal services, and early interventions for the neediest families. Conservative MP Chris White intends to table a private members bill, the Public Services (Social Enterprise and Social Value) Bill on 19 November which will oblige public authorities to take into account ‘social value’ in their procurement policies.

Social clauses in procurement have been a hot chestnut for some time. A strict quota system could be at odds with EU law. To be compatible with EU procurement rules, social clauses must be used with care. Case law of the European Court established that selection criteria involving social considerations may be used to determine the most economically advantageous tender only where they provide an economic advantage for the contracting authority which is linked to the product or service which is the subject matter of the contract.

Likewise, it is possible for contracting authorities to lay down special conditions relating to the performance of a contract, provided that these are compatible with EU law (for example, must not discriminate directly or indirectly against national or non-national bidders), they are clearly indicated in the contract notice or tender documents, and only where they are relevant to the performance of the individual contract in question. They should be capable of being met by whoever wins the tender from the time at which the contract starts and they must not be a disguised form of selection or award criteria.

“Government will extend specific rights to communities, citizens and employees to run and own services. These include giving communities due notice and the right to buy or run public assets and services that might otherwise close or face significant reductions; Government will also develop a new right for public sector workers to form employee-owned cooperatives and mutuals to take over the services they deliver which is being taken forward across departments; and giving parents, teachers or community groups the right to bid to start new schools” (through the Free Schools initiative).

These have become known as the ‘right to bid’ and the ‘right to request’ respectively. The right to request has been available to frontline staff in NHS primary care for the past two years, and the right to bid is building on the previous administration’s programme of community asset transfers.

From my firm’s work with the right to request in health, we have found that take up from front-line staff to create new mutuals and social enterprises has been limited. Practical issues have presented obstacles, such as lack of senior leadership for the initiative, a shortage of working capital to launch aspiring new enterprises, and opposition from unions who label it as a form of privatisation amid fears that employee terms and conditions will be weakened. It will be interesting to see if local government can crack these issues against the backdrop of the now pressing economic imperative. In relation to start-up funding, the CSR announced a Transition Fund of £100m to provide short term support for third sector organisations wishing to provide public services and in the longer term the new Big Society Bank will be established, funded from dormant bank accounts.

We are promised a White Paper in January 2011 setting out more detail on these initiatives, but reading the runes, it does seem that we are entering a new frontier in public service delivery and an ever-shrinking role for the state. This has major implications for local authority service commissioners and procurement teams and is likely to throw up a host of complex legal issues around procurement, local authority powers and state aid, just for starters.

Mark Johnson is managing director of specialist public services law firm TPP Law. Mark will be speaking on this topic at this year’s ACSeS conference on 17 November.