In this article Rob Hann, Sharpe Pritchard’s Head of Local Government, takes a look at what isn’t covered in the recent Green Paper on Transforming the UK’s Public Procurement rules, namely the exception contained in regulation 12 of the Public Contracts Regulations 2015 (PCR 2015), commonly referred to as the Teckal exemption and asks whether Teckal is ‘fit for purpose’ in a post Brexit, post pandemic environment?
The Green Paper on Transforming Public Procurement (‘the Green Paper’) followed hot on the heels of the UK’s exit from the European Union. It contains a smorgasbord of radical reforms and interesting ideas aimed at speeding up the procurement process, simplifying rules and placing value for money at the heart of the new regime.
But big changes of the kind contemplated will take significant time to implement - anything from 12 months to two years. The message meanwhile seems to be ‘business as usual’. Carry on using the PCR 2015 subject to a few essential ‘tweaks’ e.g. where to advertise and where to lodge a procurement challenge.
However, clients want to know not only what comes within the procurement rules but also, what is excluded from them? The Green Paper contains no mention of the narrow exemptions from the procurement rules currently found in Regulation 12 PCR 2015, (still commonly referred to by the names of the cases that spawned these exemptions – namely the “Teckal” and “Hamburg” exceptions). A follow up article will explore the Hamburg exception.
This may simply be because there is no intention to make any changes to them given the long, winding road it took to establish and consolidate these case law made exceptions into mainstream EU legislation. If correct, this is disappointing and an opportunity missed to examine the impact and fitness for purpose of the Teckal and Hamburg governance structures, in a post-Covid, post-Brexit environment.
As lockdown measures are gradually lifted, local authorities across the UK will be intimately involved in helping local economies to recover and regenerate following the most catastrophic impact on business and communities in living history. They will need to be fleet of foot, commercially aware and alive to new ways of working to secure additional sources of inward investment and funding. New alliances need to be forged - not only by and between public bodies - but also across the public, private and third sector divides.
Unfortunately, fear of falling foul of the procurement rules have driven local authorities down very specific and insular paths when they have sought ways to break out of the confines of traditional local authority direct service delivery.
There are no records which state definitively how many wholly owned Teckal companies have been set up by local government in the UK, but the numbers must, by now, run into hundreds. Teckal companies have become the ‘go to’ first choice for local authorities seeking to explore the boundaries of trading, whilst simultaneously delivering a major service back to their ‘parent’ LA owner(s). Whilst this approach undoubtedly has merit, it also has limitations and complexities, some of which are only now becoming apparent as income streams dry up, available LA subsidy shrinks, and alternative investment sources (such as from the private sector) are banned (assuming Teckal compliance remains a priority).
Many well-intentioned, innovative public-to-public, pan-local government and cross agency initiatives have floundered on Teckal/Hamburg rocks. Brexit could have provided the opportunity to chart a new route through dangerous (procurement challenge) waters. The UK Government could have sought to better define when and how public bodies can link up with each other to drive down costs, to deliver better public services or by joining up and collaborating across traditional service or sector boundaries (using companies or not). If a teckal company is owned by several local authorities, for example, compliance problems and complexity increases.
If there is no Government intention to revisit these exceptions, then how do local authorities adapt permitted structures to meet concerns around LA owned companies which only now are beginning to surface?
Specifically, the emphasis placed on control and ownership to secure Teckal exempt status, coupled with the fact that many of these companies are managed by senior officers and/or councillors who are either employed by or have other roles and responsibilities within the LA, creates the potential for conflicts of interests.
Fundamentally, at the heart of the Teckal compliance rules there lies a conflict: To achieve Teckal exempt status, the company must effectively be a department of the parent LA. But to comply with Company law statutory duties, directors of companies must act bona fide for the benefit of the company they serve. If a director of a Teckal company is also (say) an employee of that company’s owner, conflicts between such roles arise and, in some cases, can lead to major problems with decision-making, corporate governance and personal or professional conflicts of interest.
Corporate governance issues in the context of local authority owned companies have hit the headlines recently (although not necessarily in the context of Teckal companies) see (https://localgovernmentlawyer.co.uk/governance/396-governance-news/44598-lack-of-adequate-governance-arrangements-and-institutional-blindness-led-to-council-energy-company-losing-over-34-million-report-finds).
In response to a report into the failure of the Robin Hood Energy company (a wholly-owned LA company), the secretary of state for the environment Robert Jenrick MP raised the spectre of new legislation governing LA interests in companies. However, this is a notoriously difficult area to regulate, as successive Governments over many years have discovered.
Instead, better guidance and targeted help to local authorities around some of the real dilemmas faced by them when they seek to use of wholly owned companies might be more effective.
Here are some suggestions:
• Be aware of and download the Lawyers in Local Government’s (‘LLG’) Code of Practice for LA companies. This is an excellent piece of work containing real, practical help for anyone involved in this area.
• There is a need for a comprehensive national or regional training programme perhaps sponsored by BEIS and DCLG aimed specifically at upskilling a cadre of serving and experienced LA officers in the skills of managing companies.
• To avoid conflicts of interest with officers/members of a parent authority wearing different hats as directors of controlled companies’ LA’s could consider making company boards more independent and ‘arms-length’ from their controlling authority. ‘One approach could include appointing some directors from other local authorities who have no direct connection to the parent authority, perhaps on a reciprocal basis?
• Alternatively, injecting new skills and experience and an independent mindset onto the boards of LA owned companies might be achieved - again with a bit of help from the central bodies - by creating a recruitment platform where such LA directorships/non-executive director opportunities could be advertised? This might appeal to recently retired local authority officers who have significant skills to offer; or it could appeal to the many entrepreneurs with commercial skills who may be out of work following the pandemic and who would have experience to bring to the boards of such LA companies?
With careful attention to detail around powers to appoint and remove directors and the Teckal tests, the exemption should not be affected by these alternative arrangements (although it would need careful planning, drafting and legal advice).
If, as suspected, there are no changes to the exceptions planned or proposed, the public sector seems destined to be stuck in the Teckal groove for years to come. That leaves working within the rules to fit the Teckal template whilst seeking ways to modify management structures so that more appropriate corporate governance arrangements for wholly owned companies can be put in place.
Rob Hann is Head of Local Government at Solicitors Sharpe Pritchard and author of the Guide to Local Authority Companies and Partnerships 2020. He can be contacted through the new local government lawyer sponsored platform Sharpe Edge here. In a follow up article, Rob will explore public to public partnerships forged using the Hamburg exception.
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