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Staff mutuals - what are the implications for procurement and state aid?

Contracts are the lifeblood of any business and staff mutuals are no different. Newly established mutuals almost always single-contract, single-customer ventures at the outset, through the services contract with its ‘parent’ local authority. However, the award of this contract is subject to procurement law, in the same way as any other contract awarded by the local authority.  

Due to the importance of this contract, which is likely to be the cornerstone of the mutual's business in its early years, establishing a procurement compliant basis for awarding the contract is fundamental to the viability of the entire project.

A newly established staff mutual, with no trading history or track record of previous service delivery, would struggle to compete in a tender process against well-established commercial providers. Therefore, in order to directly award the contract to the mutual without exposing it to a competitive tender process, authorities have been forced to rely on imaginative and sometimes risky procurement justifications. Squaring this circle – how to lawfully award a contract to the staff mutual without running a tender process – has historically proved to be a crucial, and sometimes fatal, obstacle in any staff mutual initiative.

Thankfully for authorities, an entirely new approach has been introduced under the Public Contracts Regulations 2015 that allows authorities to limit the bidders for certain types of contracts to mutual-type organisations. This is provided that the contract is for specific categories of services, including social services, leisure services and heritage services. This limited form of competition means that a staff mutual, whilst not having a free run at the contract, would only be bidding against other similar entities and, crucially, would not be competing against established commercial providers.

Any contract awarded under these new provisions would be limited to three years in duration. However, when the contract is subsequently re-let, under a normal, unrestricted tender process, the staff mutual should have gained enough experience to give it a realistic chance of competing with the established commercial providers.

State aid 

The process for establishing a staff mutual is likely to involve the transfer of premises and assets from the local authority to the mutual. The authority may also continue to provide some support services, such as finance, IT or HR, at the outset at least.  

Careful consideration will be required regarding the basis of this support, in order to ensure compliance with state aid requirements. Commercial competitors will be looking closely at the impact of the staff mutual on their market share and will be alive to any public support that gives an apparently unfair advantage. In recent years there has been an increased awareness of state aid by potential complainants, and in particular of its potential for causing significant disruption to a project.

State aids risks could arise where there the authority transfers land at an undervalue, provides grant funding to the staff mutual and/or provides services/assets to the mutual at no cost or at below market terms.

There are a number of ways of potentially establishing state aid compliance of any support. For low levels of aid, the De Minimis exemption is usually the most straightforward approach. Alternatively, the revised General Block Exemption Regulation (GBER), which came into force in July 2014, offers a wide range of exemptions, many of which could potentially be relevant to a staff mutual initiative.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at November 2015. Specific advice should be sought for specific cases. For more information see our terms & conditions on www.TLTsolicitors.com

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