Magazine article Public Finance

The Weakest Link

Magazine article Public Finance

The Weakest Link

Article excerpt

Government policy has recently been pointing unswervingly towards joint working. It is a vital part of Best Value and continuous improvement; the Gershon efficiency targets; Comprehensive Performance Assessments; community leadership; and Local Area Agreements among others.

But one particular sticking point is emerging, and that is the legal structure of the relationship. Councils working together have three basic models to choose from: 'collaborative', 'contractual' and 'corporate'.

The collaborative model is well known. It often involves a loose administrative arrangement, or can be a joint committee under the Local Government Act 1972. This model can trigger European Union public procurement rules - ie, requiring the service to be put out to tender - if the arrangement is deemed to be 'contractual'.

The second way is indeed contractual and as such is automatically covered by the EU rules.

However, it is the third way, the corporate model, that is currently attracting attention. Many councils prefer this approach because it can 'ring-fence' legal liability as well as offer an ongoing relationship, ie, it is not tied to a single project. In some instances, the Office of the Deputy Prime Minister is recommending it, for example, in the reorganisation of fire control centres.

The EU rules can also apply here, and there are some grey areas. As an example, five local authorities join together and establish a company to provide services to all of them, in place of their current arrangements. Legally, they are awarding a contract to a different legal entity - even though it is only a structure for working jointly, rather than a true private sector provider.

In these circumstances, there is an exemption from EU procurement law provided by the Teckal case. This puts the joint company on the same legal footing as a direct services organisation when two conditions are met.

First, the authorities must exercise the same level of control over the company as that exercised over an in-house DSO. Secondly, the company must carry out the essential part of its activities for those authorities. However, any exemption is by nature a special provision and under EU law therefore has to be restrictively construed.

A number of subsequent cases from the European Court of Justice have clarified the full extent of the Teckal exemption - and it would appear that over time it has been narrowed.

One case (Stadt Halle) considered whether such a company could have any private sector involvement. …

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