Tackling Teckal – does the new Procurement Bill adequately deal with the Teckal exemption?

Peter Collins and Sophie Pilcher take a look at whether the new Procurement Bill adequately deals with the Teckal exemption

The Procurement Bill 2022 (the Bill) has been published and aims to reform the UK’s public procurement regime following its exit from the European Union (EU), to create a simpler and more transparent system, not based on transposed EU Directives. When you look at the Bill, there are lots of concepts that remain the same. However, when you start looking beneath the surface, there are a number of significant changes to consider. This article examines Schedule 2 of the Bill and focuses on certain omitted exemptions.

The Current Regime

The current public procurement regime, under the Public Contracts Regulations 2015 (SI 2015/102) (PCR 2015), applies the Teckal exemption where a contracting authority contracts with a legally distinct entity – usually this will be a company that the authority has set up, either on its own or in concert with others – to provide services. The conditions for the exemption are that:

• The service provider carries out the principal part of its activities with the authority.
• The authority exercises the same kind of control over the service provider as it does over its own departments.
• There is no private sector ownership of the service provider nor any intention that there should be any.

Where these conditions are met, the arrangement will not be treated as a contract for the purposes of the PCR 2015, rather it will be deemed to be an in-house administrative arrangement. In other words, the PCR 2015 will not apply to that arrangement.

This language has changed under the Bill.

The Procurement Bill 2022

The definition of ‘public contract’ in the Bill is similar to that contained in the PCR. That is framework agreements, concession contracts and contracts for the supply of goods, services or works for pecuniary interests with an estimated value above the relevant threshold and which are not an exempted contract. The contracts which are exempt are set out in Schedule 2 to the Bill – here you will find many familiar exemptions. You will also find the provisions in relation to the in-house exemption, which was previously found in Regulation 12 of the PCR and still widely referred to as the Teckal exemption.

The main exceptions under the Bill are:

• Vertical arrangements – arrangements between a contracting authority and a controlled entity with more than 80% of activities carried out by controlled entity for or on behalf of the contracting authority.
• Horizontal arrangement – arrangements between authorities with the aim of achieving common objectives within their public functions and solely in the public interest. No more than 20% of the activities covered can be carried out other than for the purposes of the authorities’ public functions.

Those familiar with such concepts will see that the Teckal or in-house exemption is now called ‘vertical arrangements’ and the public sector co-operation exemption (often referred to as the Hamburg exemption) is now called ‘horizontal arrangements’ but are these concepts really as similar as they initially appear?

Vertical Exemption and Implications for Public Sector Companies

Under the PCR 2015 and firmed up in the Risk Management Partners v LB Brent case, the Teckal exemption applies to shared services. A key point raised in the Brent judgment was an authority does not have to hold all of the share capital in the proposed service provider. It can do this together with other public authorities. In such circumstances, it is not necessary to show that it alone has the power of decisive influence over both strategic objectives and significant decisions of the company, but that the authorities together exercise this control. It means that a group of local authorities can get together and set up a company – an ordinary private law company limited by shares – to run, for example, their municipal car parks, or leisure centers. Provided that the shares are all owned by the authorities and that the board of directors is controlled by them, it is likely that the company will qualify for the exemption. That means that those authorities can contract with it to provide the services in question without going through a public procurement exercise.

However, the Bill as drafted, does not seemingly allow multi-authority-controlled vehicles (as was previously provided for in Regulation 12(4) of the PCR and case law).

In other words, within the Bill, local authorities which set up ‘single’ entities on their own will continue to benefit from the vertical exemption, meaning they can award contracts to an entity without going through a full procurement process. However, contracts that councils award to joint entities, controlled by multiple local authorities, appear no longer to be exempt and will potentially be subject to a full procurement process. This would undermine the purpose and benefits of councils operating joint entities.

This is a surprising omission from the Bill and one without any real logic. Given the hundreds of shared-services vehicles throughout local government, the need to ensure that these arrangements are not prohibited will potentially require some amendment to the Bill. Given the speed at which those drafting the Bill were required to operate, it is entirely possible that these provisions simply got left out in error.

Next Steps

The Bill is not expected to be implemented until 2023 at the earliest, but the Government has promised a six-month transition period to allow for an appropriate transition to the new regime.

Meanwhile, the key message to public authorities is to keep a close eye on these aspects of the Bill, as key commercial decisions will need to be made. We will keep readers updated on changes to the Bill as it makes its way through its remaining stages.

Peter Collins is a Partner and Sophie Pilcher is a Solicitor at Sharpe Pritchard LLP

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