In or out? EU Procurement Rules and Universities
Many higher education institutions are currently considering whether the European public procurement rules apply to them.
In this collaborative article from Higher Education Procurement Academy and law firm VWV, we explore some of the issues, common misconceptions and practical strategies to help to address this issue.
This article contains general advice and information only. It is not intended to address all of the legal issues and is not a substitute for specific legal advice on any issue or transaction.
The Public Contracts Regulations 2015 ('Regulations') came into force in England and Wales on 26 February 2015 and are the latest iteration of the EU rules applicable to any body governed by public law on how they award contracts to buy supplies, services or works. Historically, this has included the vast majority of higher education institutions in the UK.
Due in part to the administrative burden that some aspects of the new rules impose, especially the so called 'Lord Young' elements which are aimed at opening up more opportunities to SMEs, more and more universities are considering whether they continue to be caught as a 'contracting authority' under the Regulations.
In this document, we will consider:
- What is the definition of a 'contracting authority', and what does this mean specifically for procurement in institutions?
- What is the Cambridge case, and what did it establish?
- What constitutes public and private income, and what are the grey areas?
- Are there benefits of being a contracting authority?
- Are there benefits of not being a contracting authority?
- What are the risks?
- Can I just decide to exempt my university?
- Next steps
What is the definition of a 'contracting authority', and what does this mean specifically for procurement in institutions?
A 'contracting authority' has a broad definition in the Regulations, as follows:
' …the State, regional or local authorities, bodies governed by public law [our emphasis] or associations formed by one or more such authorities or one or more such bodies governed by public law, and includes central government authorities, but does not include Her Majesty in her private capacity'
This, therefore, catches a range of entities which are either funded by the state, or which could show a national preference in their buying which could result in discrimination to non-national suppliers. 'Contracting authorities' are subject to the procurement rules and so must award their contracts in accordance with the EU procurement directive which has effect in England and Wales through the Regulations.
A 'body governed by public law' aims to catch all other types of entity that might apply national preferences, and is defined in the Regulations as:
“…bodies that have all of the following characteristics:—
(a) they are established for the specific purpose of meeting needs in the general interest, not having an industrial or commercial character;
(b) they have legal personality; and
(c) they have any of the following characteristics:—
(i) they are financed, for the most part, by the State, regional or local authorities, or by other bodies governed by public law; (ii) they are subject to management supervision by those authorities or bodies; or (iii) they have an administrative, managerial or supervisory board, more than half of whose members are appointed by the State, regional or local authorities, or by other bodies governed by public law'
It follows that a 'body governed by public law' is a non-commercial body with legal personality that is mainly financed, supervised or appointed by another contracting authority. An entity need only satisfy one of the parts of limb (c) of the test to be caught. Universities are 'contracting authorities' for EU procurement rules principally as they fall within the legal test for a 'body governed by public law'.
Those contracting authorities listed specifically at Schedule 1 to the Regulations are classified as 'central government bodies'. Contracting authorities that are not expressly listed but nonetheless are caught by the definition are classified as 'sub-central government bodies', and this includes higher education institutions.
The starting position is that classification as a 'contracting authority' is a question of fact. Put another way, an institution is either within the procurement rules or outside - depending on whether it is a body governed by public law under the legal test or otherwise within scope. Non-compliance with the procurement rules by a contracting authority would mean that all procurement exercises which do not comply with the rules would be vulnerable to third party investigation and/or legal challenge.
What is the Cambridge case, and what did it establish?
The leading case is C-380/98 R. v HM Treasury ex p. University of Cambridge [2001], which arose out of a legal challenge by University of Cambridge.
In this case, the Court decided that the concept of 'financed by the most part by another contracting authority' meant dependency on central government/student finance/other public sector funding for more than 50% of the institution's income.
The Court also considered that total funding of less than 50% could be sufficient for the EU procurement rules to apply where, for example, one large payment from the state created a 'dependency', but this point has not been tested since the Cambridge case.
Case law has also shown that financing does not need to come directly from a contracting authority to be considered 'financing from another contracting authority'. In this way, indirect state financing is also sufficient. This is relevant in the context of the recent changes to the student financing regime in England and Wales, where loans now follow the student.
What constitutes public and private income and what are the grey areas?
The reason why many universities are considered to be 'bodies governed by public law' is because more than 50% of their funding can be said to come from wider public sector funding. This would clearly include BIS and/or HEFCE / HEFCW grants, together with other Funding Council grants i.e. SFC or DELNI grants as well as Research Council Grants including EU grants (such as Horizon 2020/ERDF), AHRC, BBSRC, EPSRC, ESRC, MRC, NERC and/or STFC.
Private income will include private research funding, partnerships with the private sector, endowments from the private sector, investments and donations and other general funds such as those received from accommodation provision or consultancy.
Historically, student grants were treated as 'public' funding. When tuition fees were introduced, the Government's view was the fee support – now made available through a system of loans - may be private funding rather than public, we assume, on the basis that the loan is applied for and repaid by the student. The Government has never made this logic clear in a definitive statement, backed up by legal advice and much of the confusion arises from a speech given by David Willetts, the then Minister of State for Universities to his 2011 party conference.
There is a growing trend towards a greater share of university funding coming from student fees, which is likely to continue particularly given the abolition of the cap on student numbers and the current debate around the tuition fee cap. One difficult question that has arisen is whether or not student fee loans from Student Finance England are 'public' or 'private' funding. If student loan finance is treated as 'private' sector funding, many institutions could fall outside of the definition of a contracting authority in the future.
EU legislation must be interpreted purposively and leading procurement lawyers agree that it seems realistic that a Court would agree that student tuition fee loan finance is 'public' funding, albeit provided indirectly (via the student). This is on the basis that the funding comes from a public sector company to the university, which is also a 'contracting authority', on terms which are not available in the private sector market.
HEPA/BUFDG are working with VWV and a leading QC to explore this analysis further to assist members in obtaining their own legal opinions for their institutions.
Are there benefits of being classed as a contracting authority?
As a contracting authority, an institution has clear and rock steady procurement Regulations to follow. Although the rules can be detailed, the Regulations mean that there is no case for individuals to claim they don’t want to follow the rules and a clearly set out list of procedures and government guidance can be followed. It helps to demonstrate value for money (and no unlawful state aid) to key stakeholders, and to comply with procurement obligations in EU and other grant arrangements.
Additionally, falling within the Regulations brings other benefits, not least the ability to use public sector frameworks (only open to those classed as a 'contracting authority'), and we will explore this issue further in our next article on this topic. The support available on this and other issues from the community of institutions via the HEPA discussion boards, for example, is invaluable.
Are there benefits of not being a contracting authority?
The main draw for institutions is the freedom to award contracts for goods, works and services without having to comply with the EU procurement rules. The ability to potentially choose the process you wish to follow when procuring goods and services as well as the removal of legal risk of being challenged under the Regulations can appear enticing.
This may be a question of 'be careful what you wish for'. Whether the EU procurement rules apply is not a choice, but simply a question of fact when the law is applied to the particular institution.
The main practical risk is that the law is not clear, and one or more supplier(s) could challenge for failure to award contracts in accordance with the EU rules. This could result in the contract(s) being cancelled up to 6 months after award (on the basis of what is known as an 'illegal direct award') together with damages, fines and the associated bad publicity.
If the institution is wrong on one award, it follows that all of the spend which was awarded without EU procurement compliance during that time could be vulnerable to the same remedies.
The related risk is that the assessment on funding should be made every financial year, and so can change from year to year. An institution which is, for example, 51% funded from 'private' sources this year, could find itself back in the EU rules next year or following a change of government policy. This could be practically unworkable, and create additional risk.
Finally, many EU grant arrangements require recipients to procure related contracts in accordance with all relevant national and EU legislation, which, for higher value spend, can mean that the EU procurement rules apply in any event. Practically, this could lead to a twin track approach needing to be taken by the institution.
Can I just decide to exempt my university from the EU procurement rules?
No. The risk profile and unintended consequences of simply choosing to opt out of the rules could be very significant. You should seek legal advice to test any decision against the Regulations and the case law. Given the current uncertainty over whether student loan finance falls inside or outside the public sector, this analysis should be very much on a case by case basis.
If, following a financial audit and legal advice, your institution is deemed to be outside of the scope of the Regulations, you would need to put in place an appropriate set of procurement rules to ensure that the institution is able to demonstrate value for money in its contracting to Higher Education Funding Council, the Charity Commission and others.
It would be prudent to ensure that your suppliers are fully aware of any change in status. This could be made, for example, through a statement confirming that your institution is exempt on all documents. This could include any advertisements, tender documents and any award notices / contract documentation.
In practice, there are no other formal steps required by the Regulations where an organisation ceases to be a contracting authority. Some institutions publish an annual declaration at the start of its financial year (for example, in the Financial Times, or the London Gazette), to highlight that the institution considers itself to be outside of the EU regime.
If you would like to talk to HEPA or another institution who has either considered the issues or gone through the process, please do contact Emma Keenan via emma@hepa.ac.uk.