Proactive Procurement

Transcription

1 Proactive Procurement Achieving quality services and implementing policy objectives by procurement from social enterprises Guidance note by Mark Cook and David Alcock of Anthony Collins Solicitors October 2004

2 Further copies of this document are available from the Provide project. Either your details to or write to Provide project, Co-operatives UK, Holyoake House, Hanover Street, Manchester M60 0AS or go to

3 Proactive Procurement 1 Contents EXECUTIVE SUMMARY 3 1 INTRODUCTION 5 2 WHAT IS SOCIAL ENTERPRISE? 6 3 LOCAL AUTHORITY PROCUREMENT REQUIREMENTS - THE FRAMEWORK 10 4 EUROPEAN PROCUREMENT RULES 15 5 STAGES OF PROCUREMENT 16 6 ALTERNATIVES TO COMPETITIVE PROCUREMENT 20 APPENDIX 1 Legal Structures used by Social Enterprises 22 APPENDIX 2 EU Directives - Part B 24 APPENDIX 3 Detailed Case Studies 25 APPENDIX 4 Support Organisations 28 APPENDIX 5 Resources 35

4 Proactive Procurement 2 The assumption in procuring public services that the choice is just between public and private sector providers must be challenged. 1 Fiona Mactaggart MP Parliamentary Under Secretary for Race Equality, Community Policy, and Civil Renewal, Home Office Social enterprises are close to their customers and are not concentrated on maximising profits for their shareholders. They are often well placed to be able to deliver good quality, cost effective public services. 2 Government Strategy for Social Enterprise, July 2002 We need to enable purchasers to rethink the impact of contracts on the community and on their social inclusion objectives, and allow them to move beyond narrow interpretations of service delivery isolated from all other strategic objectives. For local authorities, I believe Best Value - used well and supported by the development of corporate procurement strategies - offers a tremendous opportunity to release the diverse range of skills and services social enterprises have to offer. 3 Stephen Timms MP Minister of State for Energy, e-commerce and Postal Services-DTI Acknowledgements We would like to thank Sipi Hämeenaho of the Provide project for commissioning the work and managing the publication and Provide and Social Enterprise East of England for funding it, Mick Taylor of mutualadvantage for his contribution to Section 2, and Nicky Stevenson of The Guild, Chrissie Pearce of the Care Working Group and John Goodman of Co-operatives UK for reading and commenting on the drafts. Author s note While every effort has been made to ensure that accuracy of the report content at the time of completion October 2004, advice should be taken before action is taken or refrained from in specific cases. Abbreviations used ALMO EU NAPP BME CDA CIC CITB DTA DTI FSA IPS LLP ODPM OGC SME TUPE Arms Length Management Organisation European Union New Approaches to Public Procurement Network Black and Minority Ethnic Co-operative Development Agency Community Interest Company Construction Industry Training Board Development Trusts Association Department of Trade and Industry Financial Services Authority Industrial and Provident Society Limited Liability Partnership Office of the Deputy Prime Minister The Office of Government Commerce Small or Medium size Enterprise Transfer of Undertakings (Protection of Employment) 1 From the foreword to Think Smart... Think Voluntary Sector, Home Office and OGC, 2004, page 2 2 Social Enterprise: a strategy for success, DTI, 2002, page 49 3 Stephen Timms MP, in Public Procurement, March 2003 on the launch of Community Interest Companies

5 Proactive Procurement 3 Executive Summary This guidance has been commissioned by the Provide Project of Co-operatives UK and the Social Enterprise East of England network, through the EQUAL programme. It explores how it is possible for local authorities to meet their policy objectives and to achieve service improvements by procurement from social enterprises. Social enterprises are trading organisations with social objectives. They often have accountability mechanisms to customers, service users, staff or communities. They include co-operatives, social firms and development trusts, and they are now frequently involved in working with public bodies to provide services, including leisure, housing, recycling, education and social care. Their closeness to communities and service users, their entrepreneurial nature and their commitment to social values bring a range of advantages, particularly in the achievement of wider policy objectives or community benefits, including regeneration, community planning, equalities, sustainability, active citizenship, lifelong learning and social inclusion. Current guidance from a variety of government sources, particularly the National Procurement Strategy for Local Government, confirms the commitment at a national level to procurement from social enterprises. Under both UK and EU rules, community benefits can be incorporated into the procurement process. In principle, councils are free to determine what they wish to purchase, as opposed to how: the well-being power enables authorities to take a holistic approach to procurement including the promotion of community benefits; even where a procurement is subject to the EU procurement regime, community benefits can form part of the core requirements of the contract, as long as they are relevant to the subject matter of the contract, comply with equal opportunities, are able to be evaluated, add to the achievement of value for money, and do not disadvantage non-local firms; the inclusion of such benefits will be strengthened by reference to the Community Strategy, Best Value Performance Plan or other strategic policies of the council, as long as those strategies mention the benefits in question; by 2005 local authorities will have to include a request for priced proposals to deliver community benefits relevant to the contract that add value to the Community Plan; and the new EU consolidated procurement directive, to be implemented in the UK by January 2006, clarifies how and when they are relevant to a contract, social and environmental considerations can be included. Whilst authorities cannot give unfair advantage to social enterprises during the procurement process, they can do much to ensure that they have the capacity and opportunity to take part, including: initiatives to develop the supply base through general support to the social enterprise sector, as long as no individual enterprise gains advantage for a specific contract; developing procurement strategies that make a direct link between the Community Plan and other strategic objects and contract specifications, ensuring that community benefits can be fully integrated into the procurement process; consulting with the sector on its capacity, the benefits it can bring, the packaging of contracts and its ability to take part in the process; developing appropriate procurement processes, specifications, thresholds, pre-tender questionnaires and other requirements, which are not excessively onerous, given the size, nature and scale of social enterprises; promoting tender opportunities widely, including through social enterprise sector networks, for example Nearbuyou, ensuring compliance with EU requirements; and developing opportunities for social enterprises to be sub-contractors in the supply chain. To obtain some of the benefits of social enterprise provision councils may also consider alternatives to procurement, which may in particular instances be a better route to best value, including:

6 Proactive Procurement 4 Executive Summary providing grant aid rather than procuring through a service contract; establishing in-house provision with independence and accountability, perhaps as a development route for genuine social enterprise; and establishing a local authority company, using the well-being powers, or clause 96 of the Local Government Act 2003, with key stakeholders on the board of directors. All these routes would appear to avoid the requirements of both the UK and the EU procurement regulations, but may have other disadvantages. This guidance concludes that in the correct circumstances, authorities can do much to support social enterprises, and that procurement can be used to gain for the public sector the community benefits that many social enterprises are able to deliver.

7 Proactive Procurement 5 1 Introduction 1.1 This guidance has been commissioned by the Provide Project of Co-operatives UK and the Social Enterprise East of England network, through the EQUAL programme. 1.2 It aims to consider the opportunities that exist for local authorities to meet their policy objectives and achieve service improvement goals by procurement from social enterprises, and to explain how this can be done in practice within the requirements of the UK and European procurement frameworks. The guidance takes a broad definition of procurement, one that includes the whole process of obtaining a particular product, works, service, community benefit or other benefit, from the identification of needs, through to expiry of contracts. 1.3 It has long been the aim of many public bodies to achieve social aims and maximise the benefits for local communities in the way they buy goods and services. The growth of the social enterprise movement provides the public sector with an excellent opportunity to combine the achievement of quality services and significant benefits for communities. As this guidance shows, this is reinforced by a new acknowledgement at both UK and European levels of the legality of achieving community benefits through procurement. 1.4 Local authorities have, within current legislation, considerable scope for taking proactive action to promote and encourage social enterprise involvement throughout the procurement process. However, local authorities cannot guarantee social enterprises their business. Social enterprises cannot expect local authorities to favour them where there is no clear value for money benefit. 1.5 The guidance examines the possibilities open to local authorities in relation to social enterprise at each stage of the wider procurement process including: developing a supply base; policy and strategy development; contract opportunities; pre-qualification; drawing up tender specification; and awards of contracts and contract management. 1.6 The guidance also shows how procurement can be at the heart of delivering the authority s wider policy objectives including regeneration, economic development and provider diversity. It has emerged from work carried out by the New Approaches to Public Procurement (NAPP) Network and associated work with local authorities and social enterprises. The guidance also builds on the research work carried out by Richard MacFarlane and Mark Cook for the Joseph Rowntree Foundation and published in Achieving community benefits through contracts: Law, policy and practice. 4 4 Published by the Policy Press, November 2002

8 Proactive Procurement 6 2 What is Social Enterprise? THIS SECTION defines social enterprises; and shows how they can assist in meeting policy objectives and deliver community benefits. 2.1 Like other successful businesses, social enterprises have the potential to deliver excellent quality cost effective goods and services to the public sector. However, they can do more than that. Along with other organisations within the voluntary and community sectors, they are part of the social economy, in that they have social objectives, are socially owned, often accountable and frequently do not distribute profits. Along side these principles they have many of the characteristics of the private sector, in that they are entrepreneurial, user or customer focused, and earn their income from trading. They may create a surplus, but this can only be used to further their social objectives. DEFINING SOCIAL ENTERPRISE 2.2 The Department for Trade and Industry defines social enterprise as:...a business with primarily social objectives whose surpluses are principally reinvested for that purpose in the business or in the community, rather than being driven by the need to maximise profits for shareholders and owners. An argument can be made for a narrower definition, including only those organisations that have democratic ownership. These democratic structures deliver accountability to customers, service users, purchasers, staff, employees or communities. 2.3 Social enterprises cannot be defined by their legal form. They may be unincorporated, a company limited by shares or guarantee, or an industrial and provident society. Details of legal structures are provided in Appendix Social enterprises therefore have three defining characteristics: social ownership - independent, neither privately owned, nor owned by public sector bodies; trading as their primary means of income whether from individual transactions, or by contract delivery; and social objectives - a clear purpose that directs their activities and defines how surpluses are invested. In addition they may have a membership or accountability structure based on users, staff or communities or a combination of the three. THE RANGE OF SOCIAL ENTERPRISE 2.5 Within this definition, the range and diversity of social enterprise is extensive. They are diverse in legal structure, size and function, reflecting the needs of communities, members and public policy developments. This diversity reflects their ability to respond to local needs and is a major strength. There are many examples of successful social enterprises, at one end of the scale a community café based within a council facility, a credit union, a nursery, a community recycling scheme, or an employee-owned homecare service could all be social enterprises. In contrast, social enterprises can also be substantial businesses or large-scale service providers, for example a major national provider of notfor-profit leisure services, or one of the largest specialist kerbside collection and recycling organisation in the UK. Somerset Care is a non profit distribution, independent company established by Somerset County Council to take on the management of their residential care, nursing homes and in-house domiciliary care. As a social enterprise it manages 25 care homes throughout Somerset and through a subsidiary has expanded to take responsibility for 19 homes for the elderly and people with learning disabilities on the Isle of Wight.

9 Proactive Procurement 7 2 What is Social Enterprise? 2.6 The main forms of social enterprise in the UK from which public authorities may procure goods or services are: co-operatives; social firms; development trusts; community businesses; community or other types of trusts; and subsidiaries of charities and voluntary organisations. THE BENEFITS OF PROCUREMENT FROM SOCIAL ENTERPRISES 2.7 The benefits that social enterprise may bring to any specific procurement will only be formally recognised at the point of evaluation. However, the essential nature of social enterprise, trading with social objectives, provides the potential to deliver a range of benefits, both for individual services or procurements and for the achievement of broader public goals. Many of these benefits are recognised by government in: Social Enterprise: a strategy for success; The National Procurement Strategy for Local Government, ODPM (2003); and Think Smart Think Voluntary Sector - Good Practice Guidance on the Procurement of Services from the Voluntary and Community Sector, OGC and Home Office. 2.8 There is general recognition that widening the supply market to include social enterprise, along with voluntary and community organisations, black and ethnic minority business and other SMEs can increase procurement effectiveness and the achievement of value for money. 2.9 There are a number of specific benefits that social enterprises may bring to an individual procurement, and these stem from the combination of the entrepreneurialism of the commercial sector, a public sector ethos and close relationships with key stakeholders, staff, service users and communities, which are listed below. Community and users Social enterprises are often organisations that have grown out of communities and retain close links to them. They are often deeply embeded in their communities and can draw on resources, knowledge and sensitivity to community needs and aspirations. They have the potential to draw into active citizenship people from disadvantaged or excluded communities. Independence The structure of social enterprises gives them operational independence. They provide a practical accountability structure in which management can get on with the task of ensuring day-to-day high quality service delivery and innovation. Specialist knowledge and expertise Social enterprises frequently have high levels of specialist knowledge and expertise in specific service areas or niche markets, sometimes developed from a long track record. They may recruit from groups of service users, draw on high level voluntary expertise from committed individuals or have developed from groups of enthusiasts. Some are Oxford, Swindon & Gloucester Co-operative Society is a well established retail consumer co-operative. It has recently diversified by working with the local Neighbourhood Nurseries Initiative to set up a network of child care and education nurseries called Imagine Co-operative Childcare. With both urban and rural locations across its trading area, the co-operative is based on a partnership between parents and children, its employees and local communities, and employers.

10 Proactive Procurement 8 2 What is Social Enterprise? highly effective at validating the skills and experience of front line staff, and using this practical knowledge to enhance services. Profitability Social enterprises can often operate at the margins of profitability, in a way that would be unsustainable for the private sector, drawing on the commitment of communities and stakeholders. They are predominantly non-profit distributional, all surpluses being reinvested in the services or their social objectives. Innovation and efficiency With their independence, sensitivity to communities and customers needs, and high levels of expertise social enterprises are often innovative in delivering new working practices or delivery methods. They may have access to commercial capital to finance improvements. As staff are often stakeholders, they can negotiate flexibilities and changes to working practices outside the scope of other organisations. Sensitivity to customers Social enterprises are close to their customers and often have service users as members, contributing to their strategic development and performance management. They are an excellent vehicle for developing user-led services, and can be highly sensitive and responsive to the changing needs of service users. Stakeholder engagement By engaging stakeholders in the delivery and development of services, social enterprises can fundamentally change the relationship between commissioners and stakeholders and between different groups of stakeholders. Labour market As staff are often members with an ownership stake, social enterprises can have a significant impact on labour market issues. In-house staff may be more likely to accept externalisation, pay rates likely to match those in the public sector, investment made in training and development, recruitment issues addressed, flexible working practices negotiated, quality of work life increased, family friendly employment practices introduced, and staff turnover reduced. Economic impact Because of their location and recruitment strategies, social enterprises tend to keep economic benefits within a community. They train and recruit local staff, they bring individuals disadvantaged in the labour market back into employment who spend wages locally, and they invest surpluses into local communities. Creation of social capital Social enterprises and their members can contribute to ECT Recycling, part of the ECT Group, is a not-for-profit IPS (society for the benefit of the community). It has high levels of expertise in recycling domestic waste. With the largest facility of its type in the UK at Greenford, ECT has contracts to undertake kerbside, or doorstep recycling for a range of councils including Hounslow, Brent, Vale of the White Horse, Lambeth and Avon. Having grown from a local community transport scheme, ECT has developed the capacity to enter the competitive procurement processes, and is able to convince councils of the value for money of its services, and wins tenders against commercial providers in the open market. Greenwich Leisure Limited is a not-for-profit IPS (society for the benefit of the community), which for past 10 years has managed leisure centres in the London Borough of Greenwich for the local authority. It has been highly innovative in programming and service development and has significantly increased capital investment whilst reducing the council s costs by more than 50%. It also runs leisure services for six other London boroughs. GLL delivers a range of community benefits over and above its management contract, working to the authority s wider agendas of education, community safety and health.

11 Proactive Procurement 9 2 What is Social Enterprise? creating and sustaining social capital, by their proactive participation in local community activity and networks, creating and sustaining neighbourhood connections, friendship and work relationships, building trust and tolerance of diversity. Wider policy objectives Because of their social objectives, commitment to communities and sensitivity to stakeholders, social enterprises can often contribute to the achievement of wider social goals providing a practical joined-up contribution. These can include: active citizenship; environmental sustainability; regeneration; anti-poverty; social inclusion; community cohesion; health; and community safety If public authorities are to have the opportunity to consider these benefits in a procurement process, and the supply market genuinely widened, then the legal framework must be clearly understood, appropriate procurement strategies adopted (working within government guidance and the EU rules) and appropriate support offered. These issues are addressed in Sections 3 and Social enterprises themselves must develop the capacity to take part effectively in procurement process. Guidance is available in Public Procurement: a Toolkit for Social Enterprises, DTI October KEY POINTS Social enterprises are organisations that are in social ownership, trade as their primary means of income, and have social objectives. In addition many may have a membership or accountability structure. They may be co-operatives social firms, development trusts, community businesses, community or other types of trusts, and subsidiaries of charities and voluntary organisations. They may provide a series of benefits to procuring bodies, including: close links to communities and users; independence; specialist knowledge and expertise; profitability, innovation and efficiency; sensitivity to customers; stakeholder engagement; labour market; economic impact; creation of social capital; and the achievement of wider policy objectives.

12 Proactive Procurement 10 3 Local Authority Procurement Requirements - the Framework THIS SECTION describes the impact on local government procurement of: the UK government procurement framework; local government powers; the Race Relations Act 1976; EU treaties and directives; state aid rules; and the Competition Act THE POLICY FRAMEWORK FOR PROCUREMENT 3.1 Under the UK procurement guidelines a public body is free to determine what it wishes to purchase as opposed to how, provided that: the purpose is within its statutory powers, its constitution and its agreed policy framework, for example the community strategy; and the requirements are needed, are cost-effective and are affordable. 3.2 The government s procurement policy defines value for money as the optimum combination of whole life costs and quality (or fitness for purpose) to meet the user s requirements. There is consistent support in a range of government publications for taking a wide view of what can be achieved in procurement by effective competition which ensures that the best range of bids are submitted. In setting requirements, departments have considerable scope to decide how they draw up their specifications and can chose to procure to reflect their social policy aims, their own policies and objectives, or those of the government. 3.3 This report uses the term community benefits to mean any social, economic or environmental benefits which a local authority might wish to seek. It is an alternative term to social clauses and is used in the context of procurement to cover a wide range of outcomes. It was originally used in Achieving community benefits through contracts: Law, policy and practice 5.as an expression that was accepted by a range of consultees, including the OGC. 3.4 The inclusion of community benefits must be justified as part of the core purpose of the procurement, rather than them being a secondary element that cannot be formally evaluated. 3.5 In October 2003 the Office of Government Commerce and Department for Environment, Food and Rural Affairs published a Joint Note on Environmental Considerations in Purchasing that includes a section on social issues in procurement. Its reference to opportunities for the consideration of social issues seems to recognise that there is nothing in principle wrong with seeking social and community benefits through procurement as long as they are relevant to the product or service being procured and consideration of these issues is made at the appropriate stages of the procurement process. 3.6 In the same month the Office of the Deputy Prime Minister (ODPM) published the National Procurement Strategy for Local Government. Section 6 is entitled Stimulating markets and achieving community benefits, and includes the following statement: Sheffield City Council asks tenderers to consider how in the delivery of their services they could: assist the creation of attractive neighbourhoods; support the sustainability of communities; strengthen the economy and the supply market; provide education or training; provide recreation; or achieve environmental benefits. See Appendix 3 for an example of Sheffield City Council s tender information. 5 Published by the Policy Press, November 2002

13 Proactive Procurement 11 3 Local Authority Procurement Requirements - the Framework Under the Local Government Act 2000, councils are required to prepare a community plan and have powers to promote economic, social and environmental well-being of their communities. Provided that there is compliance with EC public procurement regulations and Best Value, councils can work with suppliers to realise community benefits of this kind through their procurement activities The National Strategy states that by 2004 all corporate procurement strategies for local government should address: the relationship of procurement to the community plan, workforce issues, diversity and equality and sustainability; and how the council concerned will encourage a diverse and competitive supply market, including small firms, social enterprises, ethnic minority businesses and voluntary and community sector suppliers. 3.8 By 2005 every local authority is required to include in invitations to tender or negotiate for partnership projects a requirement to submit optional, priced proposals for delivery of specified community benefits that are relevant to the contract and add value to the community plan Further guidance on procurement from the voluntary and community sector was published by the OGC and the Home Office in June 2004, and this emphasises the encouragement now given to public procurers to engage with a variety of providers. 8 This guidance seeks to ensure that public bodies recognise and address the barriers facing the voluntary and community sector when trying to participate in the public sector market. It aims to enable them to have the same opportunity to bid for public contracts as other contractors, recognising the particular benefits and opportunities that working with the voluntary and community sector can bring. The same principles apply to working with social enterprise. LOCAL AUTHORITY POWERS 3.10 There are two new pieces of local authority legislation that can be used to support social enterprise and the inclusion of related matters in local authority contracts. Well-being powers 3.11 Section 2 of the Local Government Act 2000, the well-being power, is extremely useful. This gives local authorities the power to do anything they consider necessary to achieve the economic, social or environmental well being of their area, a part of their area or a group of people within their area. This is an explicit power to take action to promote economic and social inclusion, and could be used to justify support for social enterprises where authorities believe this will assist them in achieving these well-being aims. Under Section 4 of the 2000 Act authorities must prepare a Community Strategy that sets out how they proposed to meet these aims. This is an important document, particularly as it can be used to support the inclusion of social considerations or community benefits in contracts that are to be tendered under the full EU procurement regime. However in doing so local authorities must not contravene other legislation, including equal opportunities legislation Section 3 of the Local Government Act 1999 names local authorities as best value authorities and requires them to make arrangements to secure continuous improvement in the way in which their functions are exercised, having regard to a combination of economy, efficiency and effectiveness. The focus for the improvement of services is to depend, in part, on the Community Strategy and Best Value Performance Plans A local authority could decide to include a wide range of policies in its Community Strategy, identifying them as the community benefits that it intends to seek to achieve through its 6 National Procurement Strategy for Local Government, ODPM, 2003, Section 6 7 as 6, page 41 8 Think Smart... Think Voluntary Sector, Home Office and OGC, 2004 Nottingham City Council is taking part in the Sustainable Development Pathfinder Project, which will examine the opportunity to deliver sustainable development through building construction. In principle, the well-being powers, enable the City to achieve both sustainability and workforce objectives through its construction procurement. See Appendix 3 for the full case study.

14 Proactive Procurement 12 3 Local Authority Procurement Requirements - the Framework procurement. This group can include anything that an authority reasonably thinks will lead to economic, social or environmental benefit for the area. Social enterprises should, because of their character and their unique position in the marketplace, be ideally placed to offer some of these benefits As well as adopting policies for promoting community benefits, which social enterprises are well placed to provide, local authorities can promote social enterprises over and above other forms of service provider. If a local authority decides to do this, it must set out the justification, ideally in its Community Strategy. Reasons which can be offered include: the need to broaden the diversity of potential service providers in the market place; community benefits cannot be easily achieved without the promotion of social enterprises; and council staff likely to transfer under the TUPE regulations to a new service provider would welcome the option of being employed by a social enterprise. This approach can be taken as long as what is done gives social enterprises assistance in order to facilitate a level playing field within the public sector market, but not as part of a specific contracting exercise. If a social enterprise is better placed in relation to a contract because of its skills or experience then this should be revealed in its tender. Non-commercial considerations 3.15 Under Section 17 of the Local Government Act 1988 a number of factors are to be treated as noncommercial considerations and are prohibited from being considered in local authority procurement. They are: labour force matters, including the terms and conditions and composition of a contractor s workforce; whether the terms of any sub-contract with individuals treat them as independent contractors or not; any political affiliations or interests of the contractor, or their involvement in any other areas of government policy; contractors sources of financial support; the conduct of contractors in industrial disputes; contractors country of origin; and the use (or non-use) by contractors of technical or professional services provided by the authority under the Building Act Until 13 March 2001 this extensive list of non-commercial considerations was particularly important for labour force matters as it specifically constrained the inclusion of labour force clauses. The Local Government Best Value (Exclusion of Non-commercial Considerations) Order means that local authorities can now include labour force (e.g. training and recruitment) matters in their contract requirements and in their procurement procedures, as long as doing so helps them achieve best value. Their inclusion is strengthened where this approach is explained in the Community Strategy, the Best Value Performance Plan, site development plans, Local Strategic Partnership strategies or other related documents Any non-commercial considerations not listed by Section 17 may be legitimately included as part of the subject matter of a contract. The position is now, therefore, that a local authority for example could include a contract clause requiring the employment of long term unemployed persons, as long as it could show this contributed to best value; could not specify that only contractors benefiting from a Nottingham City Council takes into account amongst other issues the composition and training of contractors workforce when establishing its approved contractors list for construction work. This can be done as long as the City Council considers that in doing so it is facilitating the achievement of best value. See Appendix 3 for the full case study.

15 Proactive Procurement 13 3 Local Authority Procurement Requirements - the Framework social enterprise start-up grant could tender for a particular contract, because source of finance as a criterion is listed as a non-commercial consideration under Section 17; but could specify that the contractor must be able to meet recycling targets in a waste management contract, because this is not covered by Section 17. OTHER LEGAL SUBJECTS OF POSSIBLE RELEVANCE Race relations 3.18 Section 71(1) of the Race Relations Act 1976 (as amended by the Race Relations (Amendment) Act 2000) places a general duty on named public bodies to: eliminate unlawful racial discrimination; and promote equality of opportunity and good relations between persons of different racial groups This applies to a range of public bodies including local authorities. The aim of the general duty is to mainstream the elimination of discrimination and the promotion of equality of opportunity by making these an integral part of the way public functions are carried out. This means that listed bodies should ensure that contractors carrying out functions on their behalf take action to meet the obligations of their client under the new Act. Incorporating equal opportunities requirements in the contract conditions would be one way of achieving this. State aid 3.20 Article 87 (1) of the Treaty of Rome lays down strict rules on the use of state aid, for which there is no definition in the Treaty. Examples of aid might include subsidies, provision of goods or services on preferential terms or disposal of land at less than best consideration. The Article sets out four elements all of which must be satisfied if a measure is to constitute state aid. These are: the aid must be granted by the state or through state resources; the aid must favour certain undertakings or the production of certain goods; the aid must affect trade between member states; and the aid must distort, or have the potential to distort, competition Aid for some social enterprises could fit under the terms of schemes that are exempt under block exemption sales, including a de minimis 9 threshold of up to 100,000 euros (around 65K). The European Commission has the power, in cases of unlawful state aid, both to halt payments and to order repayment of aid already paid, with interest. This would clearly be extremely damaging both to the authority involved and, in particular, to any social enterprise it was supporting This is a complex subject, which requires careful planning. There is guidance on the DTI website at Help and advice is also available from the State Aid Team Branch at the DTI, who can be contacted by telephone on /4452 or by at sapu@dti.gsi.gov.uk. In addition, each Regional Development Agency and Government Office have local State Aid experts who may provide an alternative first port of call for advice on State Aid. Competition Act As with all contracts, authorities should also consider whether any proposed contracts between social enterprises and themselves could breach the Chapter I prohibition contained in the Competition Act 1998, which reflects Article 81 of the EC Treaty, and covers agreements between undertakings that have the object or effect of distorting competition in the United Kingdom, or a part of the United Kingdom. These terms are not defined further but might cover, for example, an arrangement between an authority and a social enterprise, which significantly affected the market for a particular service in the authority s area Detailed guidance can be found on the DTI website at 9 The full expression is de minimis non curat lex. This is a Latin phrase which means the law does not care about very small matters. It can be used to describe a component part of a wider transaction, where it is in itself insignificant or immaterial to the transaction as a whole, and will have no legal relevance or bearing on the end result.

16 Proactive Procurement 14 3 Local Authority Procurement Requirements - the Framework KEY POINTS The well-being power enables local authorities to take a holistic approach to procurement, including the promotion of community benefits, which social enterprises are well placed to offer. Local authorities may promote social enterprises, but have to provide reasoned policies for doing so. Especially in single tender processes, local authorities have to consider state aid and competition law issues when dealing with social enterprise.

17 Proactive Procurement 15 4 European Procurement Rules EU TREATIES 4.1 The European Union Treaties enshrine the fundamental principle of an open market for public sector contracts across the EU. A local authority may not, therefore, reserve contracts specifically for a social enterprise or even for social enterprises generally, as to do so would prevent other organisations from bidding, contrary to the principles of non-discrimination and equal treatment. EU DIRECTIVES 4.2 There are currently three directives dealing with procurement of works, goods and services by local authorities. Each directive has been implemented by UK regulations in the form of statutory instruments that provide the UK interpretation of the directives. EU documentation refers to social considerations rather than community benefits but for ease of reference we have used the same term throughout. 4.3 A particular contract may not be caught by the full EU procurement regime; the full rules only apply over a certain value. For 2004 the threshold figures are: for contracts for the supply of goods, 153,376; for contracts for services, 153,376; and for contracts for works 3,834, Even over these thresholds not all contracts will be subject to the full advertising requirements of the procurement directives. Contracts for social services, health, recreation, education and recycling are not subject to the full regime. These are called Part B services, and the only requirement is the publication of a contract award notice. Only Part A services are caught by the full requirements. A full list of those services coming under Part B is listed in Appendix Even where the full regime does apply, it is becoming clear that community benefits can still be included as part of the subject matter of procurement contracts. Community benefits do not have to provide a monetary benefit or a specific service to the local authority to be a legitimate part of their core requirements; it is sufficient for them to achieve a policy objective. 4.6 Five tests can be identified for the use of community benefits: the requirements should be linked to the procurement (e.g. training requirements for the specific contract can be included, but membership of the CITB could not be included); the requirements must not contravene, or encourage others to contravene, equal opportunities legislation; the requirements must not disadvantage non-local firms in the procurement process (a requirement of the EU Treaties and procurement rules); the required outputs must be capable of comparative evaluation and measurement; and any judgement about value for money must be applied to the whole procurement. 4.7 The final version of the new consolidated procurement directive, due to be implemented in the United Kingdom by January 2006, expressly provides for inclusion of special conditions relating to the performance of a contract, including social and environmental considerations. 10 KEY POINTS Authorities should carefully consider whether a particular procurement falls within the Directives. Community benefits can be incorporated in a procurement process under EU rules. To adopt them as a core action of a procurement requires the satisfaction of the five tests in paragraph 4.6. The new consolidated procurement directive provides explicitly for the inclusion of social considerations in a procurement. 10 See recital (33) and Article 26 of Directive 2004/18/EC of the European Parliament and of the Council on the coordination of procedures for the award of public works contracts, public supply contracts and public service contracts.

18 Proactive Procurement 16 5 Stages of Procurement THIS SECTION examines permissible interventions at each stage of the procurement process including: developing a supply base; policy and strategy development; contract opportunities; pre-qualification; drawing up tender specification; and awards of contracts and contract management. 5.1 Although this report aims to highlight permissible interventions in relation to social enterprises and public procurement, the principles set out below are equally applicable to SMEs, BME businesses and voluntary and community organisations. DEVELOPING A SOCIAL ENTERPRISE SUPPLY BASE 5.2 Supply side efforts are entirely legitimate as long as no individual enterprise gains any advantage in relation to any specific contract. This principle is endorsed, for example by the Audit Commission publication Competitive Procurement: Where the market is weak, authorities are encouraged to see if they can develop the market and help new entrants. This may be especially necessary if small and medium enterprises (SMEs), social enterprises and voluntary sector bodies are to be encouraged to bid for contracts Local authorities can provide general support to existing and new enterprises in their area. There are regional social enterprise organisations in each of the English regions and Scotland and Wales, as well as a range of more local support organisations (Appendix 4). Regional Development Agencies and Business Link are also charged with developing the social enterprise sector in their regions. Local authorities should consider working actively with local social enterprise support organisations to promote opportunities for partnering and bidding for local authority contracts. Authorities can legitimately work with social enterprises generally to help them improve their ability to respond to contract opportunities, provided this is not linked to any particular contract. POLICY AND STRATEGY 5.4 Authorities should take a strategic approach to their procurement as outlined in the National Procurement Strategy for Local Government. Authorities should be building sustainability into all of their procurement, and specifically setting out how they will encourage a diverse supply market, including social enterprises. This approach should include, where appropriate, the seeking of community benefits, within the Best Value Performance Plan and the Community Plan, and the inclusion of specific benefits to be sought within particular contracts. North Tyneside Home Care Associates is a newly established homecare provider. The project was initiated by Care and Share Associates (CASA), an offshoot of a well established home care co-operative. Its development has been facilitated by a partnership of the local social services department, North Tyneside Challenge, North East Social Enterprise Partnership, the council s employment team and CASA. The council took a strategic view that it wished to increase capacity in the independent sector, increase the number of providers and hence choice and competition, and increase the pool of trained home care staff. It offered similar support to other providers. The establishment of the new social enterprise not only allowed the council to achieve its social care strategy, but also delivered employment and regeneration objectives. info@economicpartnerships.com 11 Competitive Procurement - Learning from audit inspection and research, Audit Commission, 2003, page 9

19 Proactive Procurement 17 5 Stages of Procurement 5.5 If authorities are going to seek community benefits as part of the core requirements of a procurement contract, then it is particularly important that the specific policies and their outcomes are included in the Community Strategy. For example, if an authority wishes to promote the employment of people with disabilities through its procurement, then it should ensure that there is specific mention of this objective in the Community Strategy. 5.6 Authorities can consult with social enterprises, as they develop their strategy, to discover the possible benefits that may come from working with them. Social enterprises should decide how they can deliver the community benefits sought. Social audits or social accounting could be useful. CONTRACT OPPORTUNITIES 5.7 It is important that social enterprises are enabled to find contracting opportunities with the public sector. Authorities can use existing social enterprise networks (listed in Appendix 3) and electronic networks (such as Nearbuyou) to publicise such opportunities. 5.8 If contracts are not subject to the EU Directives, authorities can advertise them wherever they wish; even if they are, they can still be advertised locally provided no extra information is given in the advertisement, and the advertisement is placed no earlier than the notice in the Official Journal of the EU. 5.9 Authorities should also consider whether particular contracts can be constructed so as to minimise the procurement requirements. The aggregation of contracts is not always necessary and can mitigate against social enterprises bidding; the consolidation of waste management and recycling services is a good example, particularly as recycling services do not need full tendering under the EU procurement rules. The OGC guide Aggregation is bigger always better? 12 contains helpful guidance. PRE-QUALIFICATION 5.10 It is important that standard pre-qualification procedures do not militate against social enterprises by requiring excessive work to complete, or including requirements that are not necessary for the purpose of the contract. The Home Office/OGC guidance on procurement from the voluntary sector emphasises that contracting authorities should avoid asking for more than two years previous accounts, as this mitigates against new or inexperienced organisations. Where community benefits and their delivery are to form part of the contract requirements, then organisations expressing an interest should be asked to demonstrate their experience or ability to meet these requirements When contractors are asked to consider subcontracting to social enterprises they can be asked to demonstrate their relevant track record. Home Office guidance suggests that you can ask prime suppliers during pre-qualification to demonstrate their track record of achieving value for money through effective use of the supply chain - including for example through sub-contracts or partnerships with VCOs or SMEs. 13 DRAWING UP THE SPECIFICATION 5.12 This is the key stage in enabling participation by social enterprises and in ensuring that contracts actually achieve the local authority s full purpose. As in principle a purchasing body is free to determine what it wishes to buy, it can analyse the additional benefits it may obtain from provision by a social enterprise, and choose to make these part of the service specification. Examples of the types of benefits are described in Section 2. This may increase opportunities for SMEs and BME businesses as well as social enterprises, but it does not reserve the contract for them. It is quite possible that a commercial contractor will be able to demonstrate that they can also meet 12 Aggregation - is bigger always better?, OGC 2004, available at 13 Think Smart... Think Voluntary Sector, Home Office and OGC, 2004, page 21 Social enterprise suppliers and local authority purchasers in England can register with The website provides a searchable online directory of social enterprises and their products and services, and a facility for purchasers to advertise forthcoming tenders. A complex E-Alert system enables suppliers to receive tenders by based on their type of business and geographical area.

20 Proactive Procurement 18 5 Stages of Procurement this part of the specification. The contractor must be selected so as to obtain the best service not on their origin or legal structure The specification should be drafted to include the core requirements of the goods or services and the linked community benefits. The community benefits must relate to the main contract and must not discriminate against potential non-local bidders. All parts of the specification must also be capable of being tested as part of a robust business case to ensure that they are deliverable, measurable,and can be paid for and properly managed The procurement process could therefore ask potential contractors to show how they would engage service users, staff and the community in the operation of the service, and could include this in the evaluation criteria, as long as this aspiration is set out in the Community Strategy or is an approved objective for the service Under the National Procurement Strategy tender invitations can, and by 2005 should, include a requirement for bidders to submit optional, priced proposals for the delivery of specified community benefits, as long as they are relevant to the contract and deliver the Community Plan In preparing specifications, authorities should focus on outcomes, not on methods, in order to leave room for innovation in delivery. They can involve relevant stakeholders in drawing up the contract specification, including appropriate consultation with potential suppliers, as long as this does not favour any particular supplier Authorities should also avoid assigning risks inappropriately under the specification; asking contractors to take on unnecessary risk could militate against social enterprises being able to bid. They could consider holding a risk identification workshop to increase the likelihood of correctly assessing and assigning risks in the best way An example of a specification, as used by Sheffield City Council, together with tender questions to be adapted in the invitation to tender or negotiate is set out in Appendix 3. AWARDS OF CONTRACTS AND CONTRACT MANAGEMENT ISSUES 5.19 At the stage that contracts are evaluated the community benefits should form part of the evaluation criteria, including an appropriate weighting. Criteria should be used that can measure the potential delivery of these benefits. Authorities should make it clear that they will be choosing the most economically advantageous tender and in all cases seeking value for money, rather than simply the lowest price. Along with other potential contractors, if social enterprises are unsuccessful in their tender, then feedback should be given The payment structure under the contract should also take account of the needs of smaller enterprises. Significantly, the OGC/Home Office guidance makes it clear that it is possible in certain circumstances for public sector organisations to make payments in advance. These should be assessed on a case-bycase basis 14. Authorities must ensure that they are even handed in their approach. SMEs may have similar cash flow issues. Finally, authorities should avoid overly onerous reporting requirements for social enterprises, ensuring that what is requested is consistent with the size of the contract and the degree of risk. Sheffield City Council asks potential contractors how they might: work in partnership with social enterprises, integrate social enterprises into their supply chain, support the development of social enterprise, integrate social enterprise into their training programme. See Appendix 3 for an example of Sheffield City Council s tender information. 14 Think Smart... Think Voluntary Sector, Home Office and OGC, 2004, page 25