Shared Services – Collaboration is key
Public Sector shared services has been a well established concept for many years now and ticks a number of boxes for those involved – tightening existing bonds between organisations, providing an opportunity to share expertise and resources and they can be arranged relatively quickly and cheaply.
This last point has been aided by the fact that such arrangements can be structured in such a way that they do not fall within the Public Contracts Regulations 2015 (PCR).
With outsourcing to the private sector becoming less frequent in local government, shared services is a popular option and once again public sector bodies are looking at a range of different shared service structures to satisfy their requirements.
In this context, it is timely that this Summer has seen two European judgements on shared services arrangements. This has been a slightly surprising development as it has been a number of years since the judgements of Hamburg Waste (C-480/06) and Piepenbrock (C-386/11) - the main cases which have underpinned the structure of shared service arrangements. Up until recently, we have been guided by the following basic principles:
- The character of the agreement needs to be that of real co-operation aimed at the joint performance of a common task, as opposed to a normal public contract – this should not just be one contracting authority remunerating the other for performance of services (a unilateral assignment of a task);
- There are mutual rights and obligations between the parties;
- The arrangement involves only contracting authorities and there is no private sector participation;
- As the arrangement is intended to pursue objectives in the public interest, it should not involve financial transfers between the partners other than those corresponding to the reimbursement of actual costs of the works/services/supplies (e.g. employee costs). One partner should not be profiting from the other through these arrangements;
- The arrangement should not be driven by the need to offer activities on the open market (e.g. to other public sector bodies) - hence the 20% threshold on such activities.
This was the position until May and June 2020 when the judgements of Stadt Koln (C-796/18) and Remondis (C – 429/19) were delivered. Although the Stadt Koln judgement confirmed a number of the points outlined above, it is the Remondis judgement that focused in particular on one of these tests - the requirement for collaboration.
The Remondis case involved the award of a contract for the treatment of waste in a mechanical biological treatment plant in the Neuwied District. Germany. A publically owned entity which was subject to the procurement rules (the association) was entrusted with the performance of disposing of the waste of the three parent bodies. The treatment of the waste involved a number of technical steps after which only the residual waste remained. The association did not have a treatment plant that could deal with the waste in such a way so entrusted some of this waste through a separate agreement with another separate contracting authority, the district of Neuwied.
The ECJ was asked whether cooperation exists if a contracting authority responsible for waste disposal performs a disposal task not entirely by itself, but rather, commissions another contracting authority that is independent of it and likewise responsible for waste disposal to carry out one of the necessary operations in return for consideration.
The ECJ held that the wording of article 12 (4) places the concept of "cooperation" at the very heart of the exclusion. It was held that the joint participation of all the parties to the cooperation agreement is essential and that this condition cannot be satisfied where the sole contribution of certain contracting parties goes no further than a simple reimbursement of costs.
The Court reasoned that the existence of cooperation between entities belonging to the public sector is based on a strategy which is common to the partners to that cooperation and requires the contracting authorities to combine their efforts to provide public services. In contrast, the sole purpose of the arrangements between the association and Neuwied appears to be the acquiring of a service in return for payment of a fee.
Although at first glance, the Remondis judgement does not appear to add anything new to what we should already know from previous judgements and guidance, it does shine a large spotlight on the "cooperative" element of some arrangements.
As we have been reminded time and time again by the European Courts and the Commission - the fact that both parties are contracting authorities does not mean that the procurement rules automatically fall away. Although it may be tempting to think this presumably doesn't apply to the UK anymore following Brexit, the procurement regulations are here to stay until the Government decides to change this position and even then, this element may remain unchanged as it essentially cuts out private sector involvement.
Where does this then leave shared service structures in the UK? In our view, the law has not changed, collaboration was always a key element of the exemption but perhaps some contracting authorities have in the past taken a more lenient interpretation of what "collaboration" really means.
To ensure that a shared services model can fully benefit from the exemption, we would recommend that the parties spend time and effort upfront in demonstrating a well considered strategy leading up to the arrangements and mutual responsibilities and obligations within the contractual documents.
Putting aside the procurement considerations, a successful public sector shared service arrangement should be underpinned by these elements in any respect. If outsourcing to the private sector is not working for a public sector body, why would outsourcing the same services to another public sector body be any more successful? Careful planning and consideration in the first stages should lead to a shared service model which genuinely transforms services for all parties as well as satisfying the shared services exemption.