Regulation: London Authorities Mutual Limited (LAML): Spoiling the shared services party?

Public bodies' use of shared service vehicles to pool services, rationalise costs and improve efficiency is increasingly fashionable. In public procurement policy terms, these arrangements should not trigger the need for a competitive tender process. If public bodies can keep certain services in-house, they should be able to cooperate in doing so without offering the service up to the market.

However, public sector shared service vehicles often have wider aspirations and seek to enter the vast public sector markets in competition, and sometimes in cooperation, with private contractors and service providers. The more they do so, the more difficult it is to argue that the services in question are being kept within the family of government.

Brent LBC v RMP

This issue was at the heart of Brent LBC v Risk Management Partners (the LAML case) in which the Court of Appeal handed down its judgment on 9 June 2009, upholding RMP's claim for damages for breach of the procurement rules.

Brent argued that the public procurement regulations did not apply in this case, seeking to rely on the Teckal "in-house" exemption. Teckal carves out from the regulations, agreements which can be considered "in-house" administrative arrangements. For the Teckal exemption to be successful, two conditions must be satisfied. Firstly, the contracting authority must exercise a degree of control over the other party, similar to that which it exercises over its own departments (the "control condition"). Secondly, the party awarded the contract must carry out the essential part of its activities for the contracting authority (the "activity condition").

The Court of Appeal accepted that the activity condition was satisfied in this case, as even though LAML's articles of association permitted it to provide third party services, it was not intended to do anything other than provide services to its members.

However, the court found that the significant degree of operational independence enjoyed by LAML meant that the control condition was not satisfied and therefore the Teckal exception did not apply.

Commission v Germany

The European Court of Justice (ECJ) handed down its judgment in the case of Commission v Germany on the same day. In this case, the City of Hamburg waste disposal services (Hamburg RDS) facility, contracted with four other neighbouring local authorities (Landkreise) to provide waste disposal capacity for a 20-year period. Hamburg RDS contracted with a third party to build and operate the waste treatment plant.

The Commission challenged the Federal Republic of Germany over the contract between Hamburg RDS and the Landkreise, arguing that a call for tender should have been issued. The Teckal exemption conditions were not fulfilled, since none of the Landkreise exercised any power over the management of Hamburg RDS.

The ECJ confirmed that authorities may carry out public interest tasks in cooperation with other public authorities and the procurement rules do not prescribe any particular legal vehicle through which this cooperation must be carried out. The contract enabled the construction and operation of the waste facility for their mutual use on a shared capacity basis. In the circumstances, it held that there was no reason to consider whether the Teckal exemption criteria were fulfilled.

Following LAML (and subject to the pending appeal to the Supreme Court), it may now be more difficult to justify multiple body pooled service arrangements in the absence of a tender process, even where there is no element of private participation. Public bodies may be wise to choose a structure which ensures that the operational independence of the shared services vehicles is constrained by the direct influence of member bodies.

Nevertheless, UK public bodies, alarmed by LAML, may take some comfort from Commission v Germany. Provided the pooled functions are limited to non-commercial public services, no private stakes are involved and the appointment of any private provider for the services in question is subject to competitive tender, then there should be flexibility as to the cooperation structure used.

A more detailed analysis is available here.

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