Community benefits in public procurement

3 the Current Legal Situation of Community Benefits in Procurement

3.1 The EU Legal Framework

Much of the legislation governing procurement in the Scotland derives from European Community law, which is based on EC Treaty principles of:

• Equal treatment and non-discrimination: giving everyone the same chance to win the contract irrespective of their nationality or whether they are familiar to the contracting authority or not;
• Transparency: stating requirements and award criteria up front and sticking to them;
• Proportionality: setting requirements with reference to the needs of the contract in question;
• Mutual Recognition: giving equal validity to qualifications and technical standards of other member States, where appropriate.

These principles are intended to remove barriers to trade between the member States and create a free internal market within the EU by facilitating contractors from all over the EU to bid for the same public contracts. These aims are balanced increasingly with other objectives including the protection of the environment, combating social exclusion and deprivation, and consumer protection.

The EU public procurement legal framework consists of:

• certain provisions of the Treaty establishing the European Community, most importantly Articles 28 (free movement of goods), 43 (freedom of establishment) and 49 (freedom to provide services) Article 48 (free movement of workers).of the EC Treaty;
• EU procurement directives which regulate award procedures with regard to contracts above a certain value. These are implemented in Scotland by way of statutory instruments which lay down regulations governing the procurement of works, goods and services. ¹⁷ In particular, Directive 2004/18/ EC, often referred to as the 'Consolidated Directive' because it replaced three separate directives on works, supplies and services, was implemented in Scotland by the Public Contracts (Scotland) Regulations 2006, on the 31st January 2006.

The EU procurement rules operate principally at three levels:

• requirements for the advertising across the European Union of contracts for works, goods and services (this is done by placing a contract notice in the Official Journal of the European Union);
• the encouragement of the use of technical standards and approvals which are of application across the EU or the recognition of technical standards and approvals in force in another member State where these are of a similar standard to those in force in the UK;
• requirements for objective and open criteria for evaluating tenders and selecting contractors.

3.2 Consolidated Directive 2004/18/ EC

As stated in the OGC Note, Social Issues in Purchasing: "the new Directive makes explicit the scope to take social and environmental issues into account at the relevant phases of the procurement process". The Consolidated Directive says much more on the subject of social and environmental considerations than its preceding directives, both in its non-binding but influential recitals and its articles which are now implemented in the Public Contracts (Scotland) Regulations 2006.

Recital 1 of the Consolidated Directive states: " This Directive is based on Court of Justice case-law, in particular case-law on award criteria, which clarifies the possibilities for the contracting authorities to meet the needs of the public concerned, including in the environmental and/or social area, provided that such criteria are linked to the subject-matter of the contract, donot confer an unrestricted freedom of choice on the contracting authority, are expressly mentioned and comply with [Treaty Obligations]". Case law relating to use of Social Clauses is contained in Appendix 6.

There are recitals which support other environmental and social issues, such as sheltered workshops, environmental requirements and the involvement of small and medium-sized undertakings in the public contracts procurement market. These areas are addressed in separate policy guidance. Specifically in the context of this report, Recital 33 states:

"Contract performance conditions are compatible with this Directive provided that they are not directly or indirectly discriminatory and are indicated in the contract notice or in the contract documents. They may, in particular, be intended to favour on-site vocational training, the employment of people experiencing particular difficulty in achieving integration, the fight against unemployment or the protection of the environment. For instance, mention may be made, amongst other things, of the requirements - applicable during performance of the contract - to recruit long-term job-seekers or to implement training measures for the unemployed or young persons, to comply in substance with the provisions of the basic International Labour Organisation ( ILO) Conventions, assuming that such provisions have not been implemented innational law, and to recruit more handicapped persons than are required under national legislation."

In Recital 46 there is the following acknowledgement:

"In order to guarantee equal treatment, the criteria for the award of the contract should enable tenders to be compared and assessed objectively. If these conditions are fulfilled, economic and qualitative criteria for the award of the contract, such as meeting environmental requirements, may enable the contracting authority to meet the needs of the public concerned, as expressed in the specifications of the contract. Under the same conditions, a contracting authority may use criteria aiming to meet social requirements, in response in particular to the needs - defined in the specifications of the contract - of particularly disadvantaged groups of people to which those receiving/using the works, supplies or services which are the object of the contract belong."

Article 26 of the Consolidated Directive has this express provision:

"Contracting authorities may lay down special conditions relating to the performance of a contract, provided that these are compatible with Community law and are indicated in the contract notice or in the specifications. The conditions governing the performance of a contract may, in particular, concern social and environmental considerations."

This is translated in the Public Contracts (Scotland) Regulations 2006 by regulation 39 which states:

1) A contracting authority may stipulate conditions relating to the performance of a public contract, provided that those conditions are compatible with Community law and are indicated in -
a) the contract notice and the contract documents; or
b) the contract documents.
2) The conditions referred to in paragraph (1) may, in particular, include social and environmental considerations."

This section implements the European framework and Purchasers should refer to the the guidance available, such as the Scottish Procurement Directorate's "Social Issues in Public Procurement", in applying it to their own procurement practices.

3.3 Legal Parameters for Public Bodies

The extent to which public bodies and contracting authorities can include social requirements into their contracts depends on:

• whether or not they have the legal powers to do so (or whether or not there are any limitations on their powers which inhibit them from so doing);
• whether there are sufficient policy grounds for them to do so.

Contracting authorities such as local authorities and Non Departmental Public Bodies ( NDPBs) have their powers for the most part set out in statute. In considering whether a contracting authority is able to promote social policy initiatives through public procurement, the following issues have to be addressed:

• does the contracting authority, at first sight, have the necessary legal powers, express or implied, to pursue such matters in the cause of the exercise of its functions?
• are there any express or implied prohibitions which prevent the exercise of such powers?
• are there any conditions set out in legislation to be satisfied if such matters are to be pursued lawfully?
• has the contracting authority followed the appropriate procedures, in particular any procedures that it has adopted itself?
• has the contracting authority taken into account all the matters it should take into account (the "Wednesbury" principle) ¹⁸ ?

Local authorities are subject to a statutory framework that is worth considering in a little more detail given their purchasing strengths.

3.3.1 Local Authorities in Scotland

Local authorities may use only those powers conferred upon them by statute, and may use those powers only for the purposes contemplated by the statute.

Under Part 3 of the Local Government in Scotland Act 2003 a local authority has an express power to do anything that it considers likely to achieve the well-being of the whole or any part of its area and/or all or some of the persons within that area.

This power does not enable a council to do anything that it is unable to do by virtue of other enactments. This includes section 17(5) of the Local Government Act 1988 that requires the Council to avoid the inclusion of non-commercial considerations within its contract documentation and includes in the list of 'non-commercial considerations':

The terms and conditions of employment by contractors of their workers or the … arrangements for the …training… of or other opportunities afforded to their workforces.
LGA 1988 S.17(5)(a)

However, section 7 of the Local Government in Scotland Act 2003 sets aside the above constraint in the following circumstances:

• where the local authority reasonably seeks to ensure that the contractor…… will comply with the contractor's obligations under the contract; and
• where the local authority reasonably seeks to ensure that the contractor …… will perform the contractor's obligations …… in a way that will not prevent the authority from securing best value nor hinder it in doingso.

It is therefore suggested that a council is free to include matters related to the recruitment and training of the contractor's workforce where these workforce matters are a contract condition and do not hinder the authority from achieving 'best value'. In addition such provisions must be consistent with national and EU procurement law, in particular the EC principle of equal treatment.

Under Part I of the Local Government in Scotland Act 2003 a council has a duty to make arrangements which secure best value, defined as "continuous improvement in the performance of the authority's functions". This includes a requirement for councils to " maintain an appropriate balance among:

(a) the quality of its performance of its functions;
(b) the cost to the authority of that performance;
(c) the cost to persons of any service provided by it for them on a wholly or partly rechargeable basis." (section1(3) Local Government in Scotland Act 2003).

Furthermore, "in maintaining that balance, the local authority shall have regard to -

(a) efficiency;
(b) effectiveness;
(c) economy; and
(d) the need to meet the equal opportunity requirements" (section 1(4) Local Government in Scotland Act 2003).

Under section 1(5) of the Local Government in Scotland Act 2003 a council must discharge its best value duties "in a way which contributes to the achievement of sustainable development". This requirement is developed in statutory guidance provided by the Best Value Taskforce which states that a local authority which secures Best Value will be able to demonstrate contribution to the achievement of sustainable development, i.e. consideration of the social, economic and environmental impacts of activities and decisions both in the shorter and longer term.

Finally, section 1(6) provides that "in measuring the improvement of the performance of a local authority's functions for the purposes of this section, regard shall be had to the extent to which the outcomes of that performance have improved".

Scottish local authorities have therefore a strong statutory mandate to pursue targeted recruitment and training requirements in a way which meets its sustainable development responsibilities, including the pursuit of equal opportunities subject to compliance with EU treaty principles.

3.3.2 Government Departments and Other Public Bodies

The scope for other public bodies to promote environmental and social requirements will depend on their particular frameworks, statutory powers and the basis on which funding is provided. This is very straightforward for organisations engaged in regeneration such as housing action trusts and regional development agencies. However, it will require specific attention for each organisation involved. Many public bodies have broadly framed ancillary or subsidiary powers to their main functions. It is the policies they adopt which will therefore be of critical importance in setting the scope for procuring sustainability in its widest context.

3.4 Legal Summary

In summary, therefore:

• Procurement can be used to achieve social and environmental requirements if they comply with the EU procurement rules and general EU law, which includes a duty to specify the requirements in the contract notice published in the Official Journal of the European Union ( OJEU). The contracting authority must also have the legal powers to pursue the requirements;
• In particular, the principles of equal treatment and transparency must be observed. Community benefit requirements in contracts must be objective and should not favour local suppliers or restrict employment or training to UK nationals. For example, contracting authorities must not express a preference for jobseekers from a particular locality to receive training or employment or require subcontracts to be placed with "local" SMEs. As wide a variety of suppliers as possible should be able to compete for the contract;
• Case law supporting use of social clauses and the extent of their use is available and should be observed;
• The EU legislative framework is generally more concerned with how public bodies procure, rather than what they procure, so long as value for money (vfm) is attained.

Contract Authorities should seek legal advice to ensure that the community benefit clauses they wish to use are within the parameters of their competence and comply with EC Treaty principles.