A recent ruling of the Supreme Court has clarified an exemption to the public procurement rules (the exemption is known as the “Teckal exemption”, after the European Court of Justice case in which the exemption was first accepted). This is good news for public bodies that are increasingly looking to share service models to achieve economies of scale.
The Supreme Court case, Brent London Borough Council v Risk Management Partners Ltd & (1) London Authorities Mutual Ltd (2) Harrow London Borough Council, clarifies that, per the “Teckal exemption”, where public bodies award contracts to a wholly owned subsidiary company, the public procurement rules will not apply. This exemption is narrowly defined. To identify a separate entity as a wholly owned subsidiary, the following tests must be satisfied:
- the control test: the public authorities must exercise control over the entity similar to the control the public authorities exercise over their own departments; and
- the function test: the entity must only interact with public authorities (it cannot be active on the open market).
In the case before the Supreme Court, several local authorities had jointly established a separate entity. Their aim was to jointly control the separate entity, and each enter into arrangements for mutual insurance with it. The commercial effect of this would be to reduce the cost of their premiums and raise their standards of risk management. Applying the above tests, it was held that:
- the control test is satisfied where the relevant control is exercised by local authorities collectively, in addition to individually; and
- the function test is satisfied so long as the entity does not compete for business on the open market.
This exemption gives public authorities the option of working together to perform services on their behalf, without requiring them to go through a procurement exercise. Do note though that the exemption is narrowly construed and is unlikely to apply if the company that is set up is a means of generating income from other public bodies.