Don’t forget procurement!

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By David Hansom, partner and head of Veale Wasbrough Vizards’ specialist public sector team

An unintended consequence of the Big Society agenda is that public procurement issues can arise where least expected. David Hansom looks at some of the circumstances that public sector bodies should be alive to in setting up new arrangements.

The Government’s agenda around the Big Society and localism is bringing major reorganisation of structures to deliver services. Much of the initiative is determined to localise service provision, and free up institutions from ‘top down’ control. Examples of these arrangements include the creation of academy trusts, which are independent from local authority control, and, in social care, the hive down of service provision to social enterprises, mutuals and community interest companies.

The thing that all of these new structures have in common is that they are funded for the most part by the public sector. A combination of block grant, European assistance and/or government loans mean that these bodies will generally be ‘contracting authorities’ for the purposes of the EU procurement regulations.

This means that alongside the new independence from centralised control, there are new responsibilities for these bodies. The contracts awarded by these organisations need procurement compliance. But there can also be issues in setting up these organisations through contracts awarded to them.

There are two recent examples of where procurement issues can arise in circumstances which may have caught policy makers unaware. The first is in relation to the hive down of services to new entities to deliver public services. This is currently popular in the health sector, and generally involves the direct award of (frequently) a Part B services contract to the new entity. Eagle-eyed professional purchasers will have noted that this means the EU rules will bite – and there should be a procurement to choose the best bidder.

This seems to be part of the argument advanced in a judicial review action by a concerned service user who challenged NHS Gloucestershire’s plans to transfer 3000 staff and services to a new community interest company. The proceedings have this week resulted in the NHS stopping the entire process and restarting with a procurement. Not only does this create uncertainty for staff and service users, and legal costs for the public body, it also threatens to call into question the validity of the whole policy.

How the Government will respond remains to be seen, but regular readers of this blog will be aware that in the July 2011 consultation launched by the European Commission, the UK Government sought a moratorium on the application of public procurement to permit contracts for the provision of services to “be awarded directly to employee led organisations/mutuals for a period of, for instance, three years, with a view to opening up public service markets“. This seems a recognition of the current tensions, but the short answer under the current rules is either to accept the risk or run a procurement process.

Secondly, it is relatively common for contracts to be ‘novated’ to the new organisation on start-up. Common areas include IT, photocopier and printing contracts. Not only can these contracts leave a big headache for organisations where costs are higher than expected, but in procurement terms, the novation can amount to an illegal direct award of a public contract where the organisation is not entitled to call off from the original arrangement.

Getting it wrong can have serious consequences because of the Remedies Directive, in terms of automatic suspension claims, damages and fines. Whilst the doomsday remedy of contract cancellation does not generally apply to Part B services contracts, as we have seen, judicial review or complaints to the European Commission have a wider scope and are proving effective tools to derail processes.

As with much in public procurement, pragmatically, this is about risk management. Not every project will be challenged and structuring carefully can reduce risk. Robust procurement policies and early advice on procurement issues and risks will help organisations avoid falling into the same traps.

David Hansom is a partner and head of Veale Wasbrough Vizards’ specialist public sector team. For more information or advice on this or any other procurement issue, he can be contacted on 0207 665 0808 or dhansom@vwv.co.uk. Website: www.vwv.co.uk