Contracting Authority Public Sector In-House Bids

If you are a Contracting Authority should you consider in-house bids?

The first thing to consider is whether if you are allowed to submit a bid. Your in-house team must be a separate entity by forming a company or legal entity that can enter into a contract with the contracting authority. The in-house bid has an unfair advantage because it would be relying on the contracting authorities premises, and assets etc.

An authority could use a tender to help it decide whether if it wanted a make or buy solution. The internal bid would be for the make solution, however, the authority would need to make it clear in the tender instructions that there is an option to abandon the tender process and not award the contract.

Suppliers in the market may not want to enter a bid if there is a chance that the tender could be scrapped. They may also be wary about sharing commercial know-how and view the tender exercise as a fishing exercise for ideas generation rather than genuine desire to award a contract.

This could send the wrong message to the market may be that the authority is not serious about outsourcing its requirement and the contracting authority should take into account their reputation requirements. Next time they may find that they have fewer suppliers bidding. Some suppliers might be put off which means there is a risk that the best solutions are not being put forward

Defending a challenge might be more tricky. Conflict of interest will need to be de-risked.

Are there any advantages?

An in-house team operating as a separate entity know the culture and systems in place at the Authority and may be best placed to deliver a cost effective solution.

In RMP v Brent, the London Borough, together with several similar boroughs, clubbled to together to create a mutual insurance company called London Authorities Mutual Limited (“LAML”), a private company limited by guarantee established and wholly owned by the local authorities concerned. Earlier, Brent had also commenced a procurement process inviting bids from insurance providers, of which RMP was one. When the project to establish LAML became a reality, Brent terminated the procurement process it had been running and entered into a contract directly with LAML with no further competition. RMP brought a claim arguing that this contract should have been opened up to competition.

Brent had also started a procurement process inviting bids from insurance providers. RMP was one of the bidders. They then stopped the procurement process.

A claim was brought by RMP because there was no competition in scrapping the procurement and awarding to the mutual instead. (part-in house) relying on the  exemption in the Teckal case aka the  contracting authority has set up a wholly-owned service provider:

  •  exercises a degree of control similar to that which it would have over one of its own departments (the “control” test); and
  • the service provider carries out the essential part of its business with the owner contracting authority/ies (the “function” test).

The Court of Appeal in 2009 upheld RMPs claim that the Teckal exemption did not apply, on the grounds that the necessary degree of control was not established.

However, the Supreme Court has overturned the decision of the lower courts. The key points were:

  • that there was always the possibility of 75% of the local authorities “directing” the company via the special resolution procedure.
  • the fact that a local authority could not vote in relation to discussion of its own insurance claim did not automatically signify that that local authority did not have the necessary degree of control, in the round and jointly with the other local authority shareholders; and
  • the fact that there were two independent directors was not fatal to the control test either, particularly as this is now a requirement of the FSA.

The purpose of the procurement rules, it said, is to preserve competition and prevent unfair discrimination against bidders. Contracting Authorities can choose to do work in-house if they choose to do so. Genuine cooperation is allowed.