Sharing the load

April 7, 2011

In a three-part series of articles, Rob Hann has so far examined whether local authorities can charge for discretionary services, and the use of commercial trading powers under Section 95 of the Local Government Act 2003. This final article analyses some difficult issues around ‘shared service’ initiatives undertaken by local authorities acting together and with other public bodies.

What is meant by the term "shared services"? It is not a statutory term but merely a descriptive phrase which has developed to describe joint undertakings between two or more public bodies. There are many different types of shared services arrangements. Some involve the sharing of back office functions such as payroll or revenues and benefits. Some are aimed at managing functions or assets undertaken by two or more authorities exercising similar functions such as leisure services or car parks. Other initiatives are designed to ring-fence an activity through a special purpose company established by the participating authorities in order to deliver a service back to those members.

Often sharing services in this way are a means of pooling resources, making efficiencies, making better use of scarce resources, reducing costs, improving services for the benefit of the users or a combination of these objectives. The parties may plan for the joint enterprise to become financially self-sufficient or to break even by recovering costs but such enterprises are rarely (if at all) established for the purposes of making profit per se, although the parties may hope to produce a trading surplus from better use of applied resources which in turn would be ploughed back into the business.

In such arrangements, an additional complication can arise under EU procurement law where one authority is intending to supply a service to another for some form of consideration. Does that service supply need to be subjected to competitive tender under EU procurement law? The recent Supreme Court case of Brent London Borough Council and others (Harrow London Borough Council) v Risk Management Partners Limited (‘Brent’) [2011] UKSC 7 is of great assistance with this issue (see below).

First though, how do such ‘shared services’ initiatives compare and contrast to commercial trading activities? Is Section 95 LGA 2003 the right power to be utilising for shared service initiatives given the fact that if these powers are used the authority must establish a separate trading entity via a company vehicle? Where two or more authorities combine or ‘pool’ resources to deliver a better output for all and to make savings – can such an arrangement properly be described as ‘commercial trading’ within section 95?

Setting up a company and all the accompanying governance arrangements may not always be cost effective or appropriate depending on the nature of the shared service initiative under consideration. For many collaborative public sector initiatives, setting up a company will be a time-consuming and expensive business and may not lead to the efficiencies required.

There is one other very important distinguishing feature with shared service arrangements, in that the enterprise will be exclusively comprised of public bodies who will not be seeking to sell services or goods to the general public (or any other party such as a private sector entity). In this way the market is contained, easily identified and limited in range and (potentially) risk. The trading partners will all be likely to be sharing the risk and rewards of the venture. Another way of putting it is that the enterprise is established to facilitate better public sector administration. This aspect is very relevant when the EU procurement issues are examined (below).

A further factor potentially limiting the use of Section 95 (commercial trading) is the restriction on its use if there are other powers which facilitate similar ends.

The Local Authorities (Goods and Services) Act 1970 remains on the statute books and is available for those public bodies fortunate enough to come within its confines (i.e. designated ‘public bodies’). This is an admirably simple and very short Statute (3 pages). It allows local authorities to enter into contracts and agreements with other local authorities and public bodies (as defined or designated under statutory instrument) to undertake a range of functions.

Arrangements under the 1970 Act may include, for example, collaborating to deliver professional services which could, in turn, encompass joint legal service provision (which appears all the rage in local government at present).

It may be worth recalling that, in the case of R v YPO and British Educational Suppliers Association (1997) the Court of Appeal held the 1970 Act empowered local authorities to trade with other public bodies for profit (not merely cost recovery) using these powers and that they could purchase supplies necessary for trading operations, as well as undertake speculative trading within this environment.

Crucially, the 1970 Act powers do not require ‘trading’ to be carried out through a company but permit such arrangements to be formalised simply by way of ‘agreement’. Another option, not involving a company would be to establish the shared services enterprise through a public administrative arrangement such as a joint committee under section 101 of the Local Government Act 1972.

Jumping straight into forming a company, with all the additional baggage that brings in terms of company law, directors duties, potential conflict etc and extra expense, may not be the most appropriate initial step and, accordingly, the 2003 powers may not always be the best fit for a shared services enterprise.

If a company were considered appropriate at some later stage to assist the development of the inter-authority trading venture, the powers to promote economic, social and environmental wellbeing contained at section 2 of the Local Government Act 2000 might assist – but only if the conditions for the use of those powers are followed.

The Court of Appeal in Brent (in 2009) demonstrated that it is not the wellbeing of the council those powers are aimed at but rather the authority has to identify wellbeing for the residents or users of the service. Under the relevant legislation a “community strategy” is needed which could identify such wellbeing. The community strategy could also form part of the authority’s business (and powers) case to set up an inter-authority shared services trading vehicle.

Now add to this heady mix of UK law, some EU law in the form of the procurement regime. Chaos really could have reigned supreme were it not for the Supreme Court itself which, following Brent, has done more to clear away the cobwebs for shared services initiatives than the latest ‘Dyson’ vacuum.

The EU procurement rules, implemented in the UK by the Public Contracts Regulations 2006, require a procurement process to be followed for the award of certain public works, supplies and services contracts. There is no exception from the rules simply because public bodies wish to supply services to each other.

The EU case of Teckal SrL v Commune di Viano & Azienda Gas Case C-107/98 ([1999] ECR-I-8121) does provide an exemption from the application of the procurement rules where:

the contracting authority exercises a control over the goods, services or works provider which is similar to that which it exercises over its own departments (the “control test”); and
at the same time, the provider carries out the essential part of its activities with the controlling contracting authority or authorities (the “function test”).

In Brent the Supreme Court held (overturning the Court of Appeal Judgment on this issue) that insurance contracts could be placed with a shared services company jointly owned and controlled by a group of local authorities and that, following the Teckal case, those contracts did not need to be tendered via OJEU.

Lord Rodgers (at paras 70 and 71 et sec), in one of two leading judgments of the Supreme Court (the other being Lord Hope) clearly outlined what many local authorities were seeking to do when they sought to develop shared service arrangements: “In practice, a local authority which can afford, say, to run its own architects department is unlikely to see any real advantage in simply establishing that department as a separate entity with which it can then enter into contracts to meet its requirements for architectural services. Such an arrangement would probably not, for example, save costs. But local authorities and other public bodies may well be able to make considerable savings by co-operating to obtain the services and products which they require.

"For instance, a single local authority might not have enough work to make it economically worthwhile to have its own architects department; but between them, two authorities might well have enough work to make such a department viable. The possibility of local authorities co-operating in the provision of services has long been recognised; section 101(5) of the Local Government Act 1972 makes provision for two or more local authorities to discharge any of their functions jointly. So, for example, two or more local authorities may arrange for trading standards services to be provided jointly.

“Equally two or more authorities may co-operate to obtain the architectural services which they require. One possible way of doing this would be for the authorities to co-operate to establish and finance a body which was separate from them but whose employees could design buildings for them. Each of the authorities could then contract with the body for the design services that it required.”

The learned Law Lord then went on to outline how he considered the arrangements in this case fitted the Teckal exemption since the local authorities concerned were not to be regarded as contracting with an outside body when that body delivered insurance services to the owners of that company.

The Brent judgment is a welcome boost in times of austerity such as these, for local authorities contemplating collaboration as a method of driving down costs through economies of scale, without the need to incur the time or expense of a procurement process, in circumstances where it is not appropriate to run one.

In future, following Brent, perhaps we will start to see the establishment of regionally based Teckal compliant trading hubs to facilitate more efficient public administration by the authorities which own and operate them.

The summary chart of charging, trading and shared services powers contained at www.lacaponline.com has been developed by the author as a quick guide or summary to the key issues outlined in these three articles. With careful thought and some advance planning, charging, commercial trading and/or shared services arrangements that are properly constituted may become an increasing feature of the public sector landscape for some time to come. Equally, to set up these arrangements without due care, appropriate advice or adequate attention to the statutory detail could prove problematic for all concerned.

The new general competence power (when in force) may assist with some of these issues but unfortunately it will also be subject to many of the limitations set out in existing legislation governing charging and trading. There is also no sign of the government adding to the list of public bodies under the 1970 Act despite the change and churn that is going on at present with many existing public bodies.

Rob Hann is Director, Legal Services at Local Partnerships. He is also author and editor of Local Authority Companies and Partnerships (‘LACAP’ – see www.lacaponline.com) and the Local Authority Charging, Trading and Shared Services Handbook (coming soon).

The chart summarising the legislation governing charging, commercial trading and shared services will be included in the Handbook.

Together with Edward Craft of Wedlake Bell and Stephen Matthew of Nabarros, Rob will be jointly presenting a workshop at the Local Government Weekend School for lawyers on 15 April 2011.