Memorandum by the Welsh Office
LOCAL GOVERNMENT ACT 1988 (COMPETITION)
(WALES) REGULATIONS 1997 (S.I. 1997/1699)
1. This memorandum is submitted to the Joint Committee on
Statutory Instruments in response to the letter of 30 July in
which they ask for an explanation of the following points arising
in connection with the above Statutory Instrument:
"The `specified proportion' of the functional work
regulated by the `legal services regulations' (which is subject
to the restriction in section 6 of the 1988 Act) is defined in
the substituted definition in regulation 5 of these Regulations
as an amount equal to the amount produced by the formula set out
in that definition.
(a) whether the formula is capable in any circumstances
of producing a negative amount;
(b) if it is, what is the effect of a negative amount
on the application of section 6."
In the Joint Committee's 16th Report of Session 1996-97 the
corresponding Scottish Instrument, S.I. 1997/197, was drawn to
the special attention of the House.
2. The Department can confirm that, as in the case of the
Scottish Instrument, the "T" formula calculation will
usually produce a positive monetary figure for the specified proportion
of the functional work. However it is possible that it could produce
a negative (or nil) figure for the specified proportion. Unlike
the Scottish Instrument the definition in regulation 5 of these
Regulations does not provide for the specified proportion to be
nil in a case where the calculation would otherwise produce a
negative figure. It was considered that in reality a negative
figure must have the same effect as if the figure were nil.
3. The Department is aware of the Committee's views on the
Scottish Instrument that this may be an ultra vires exercise
of the powers under section 6 of the 1988 Act as, in effect, the
power was being used to disapply or exempt from the prohibition
on carrying out prescribed work without putting it out to competition.
Additionally, the power to describe work by reference to a specified
proportion cannot properly include the power to prescribe a proportion
which is zero. A proportion cannot be a nil quantity.
4. The Department hopes that the following clarification
as to how the "T" formula and the specified proportion
work will reassure the Committee that in fact the powers have
been exercised intra vires. The Committee may wish to note
that the "T" formula and the calculation of the specified
proportion has been in operation for several years. Thus for legal
services it can be traced back to the Local Government Act 1988
(Competition) (Legal Services) (England) Regulations 1994 (S.I. 1994/3164).
Because of local government reorganisation in Wales the introduction
of compulsory competitive tendering for legal services here has
been delayed. While some of the detail of the formula has subsequently
been "fine tuned", the possibility of the "T"
formula calculation producing a nil (or negative) amount for the
specified proportion has existed from the outset.
5. Section 6 of the 1988 Act applies in the case of legal
services (and also in the case of other "white collar"
services) to a specified proportion of the work falling within
that defined activity. This is calculated by means of a formula,
known as the "T" formula, in which authorities calculate
the total cost of that work "T". That is the starting
figure for consideration of the value of legal services an authority
is required to have subjected to the competitive tendering requirements
of Part I of the 1988 Act before it is able to perform those services
by its own Direct Service Organisation. From that total cost of
"T" an authority is allowed to offset certain amounts
(known as credits in the formula) in respect of work which has
already been exposed to either direct or indirect competition.
The precise credits vary depending on which defined activity is
involved. In the case of legal services for Wales, the credits
are "A", "B", "C", "E",
"F" and "G". Credits "B", "E"
and "F" are in relation to legal services which have
been subjected to direct competition while credits "A"
and "G" relate to legal services which have been subjected
to indirect competition, that is, they have been included with
other services of the authority which have been subjected to competitive
6. The other credit "C", is a purely financial
credit. It has two possible values. The first value is a percentage
of the "T" figure. In the case of Legal Services that
is set at 55% of "T". The second possible value is a
fixed figure which in the case of legal services is set at £300,000.
Whichever is the higher of these two values will be the amount
of credit "C" for which the authority has an allowance.
The £300,000 figure represents the minimum figure at which
the authority is required to subject its legal services to competitive
tendering. This figure is designed to enable an authority, if
it so wishes, to protect what it regards as essential core legal
services. It also reflects an approximation of the level at which
the cost involved in conducting a tendering exercise may exceed
the benefits to be gained from such an exercise.
7. Authorities perform the "T" formula calculation
for each year beginning with the element "T" and eventually
arrive at the specified proportion of work which must be exposed
to competition in accordance with the provisions of the Act.
8. By letting contracts for or including legal services which
meet the competitive tendering requirements an authority will
increase the amount of such work which falls into one or more
of the credits "A", "B", "E", "F"
and "G" and so simultaneously reduce the specified proportion
calculation. In some cases it may reduce the specified proportion
to nil or even, nominally, to a negative amount. It should be
borne in mind that the specified proportion imposes a minimum
legal requirement and authorities may expose a greater amount
of work to competition in accordance with section 6 of the Act
if they wish.
9. It is quite feasible therefore that authorities taking
a prudent approach to satisfaction of their legal obligations
may award sufficient work in accordance with section 6 of the
Act to give themselves, at any particular point in time, a specified
proportion of nil or less. In our view this does not render section
6 inapplicable; it merely means that an authority has exposed
sufficient work to competition to meet its current obligations
under the Act.
10. Assuming that "T" remains constant from year
to year, once an authority has exposed sufficient work to meet
or exceed its specified proportion under CCT contracts, it may
have a nil or negative specified proportion until such time as
the relevant contracts expire. In reality, however, the value
of "T" will fluctuate according to changes in circumstances
each year. This means that the value of the specified proportion
may fluctuate too and authorities will constantly need to re-evaluate
whether further work needs to be exposed to competition in accordance
with section 6 to supplement that already so exposed.
11. In summary therefore:
- it is quite common for authorities to achieve a nil
or negative value for the specified proportion but also to expose
work to competition in accordance with section 6;
- a nil or negative specified proportion relates to the
year in which the calculation is carried out. The fluctuation
of local authority work will mean that the volume of work which
needs to be exposed to competition in accordance with section
6 will vary from year to year and the allowable credits which
it claims will often include work which has already been exposed
to competition in accordance with the Act.
12. With regard to an authority whose "T" figure
does not at any time during a year exceed £300,000 then for
that authority the specified proportion will be nil or, nominally,
a negative amount. The Department has noted the report of the
Committee on the Scottish Instrument on this point but, with respect,
would argue that it does not inevitably follow that nil cannot
be a proportion. In our view it can in an appropriate case be
so. We would respectfully submit that when one considers section
6(3) of the Act, in the context of the purposes of Part I of that
Act it does not necessarily follow that Regulations under section
6(3) cannot have the effect that for some authorities at least
the specified proportion may be nil. As indicated above we would
contend that in reality any negative calculation must be equated
with a nil figure.
11th August 1997