§ Lord Lucas of Chilworth
asked Her Majesty's Government
What steps they intend to take to take to prevent local authorities from evading competition by forming their direct labour organisations into separate companies.
The Minister of State, Department of the Environment (The Earl of Caithness)
It has come to the Government's attention that a number of authorities are considering setting up companies, under their control, whose main function would be to carry out work which, if the Local Government Bill were enacted in its present form, would fall within a defined activity for the purposes of Part I of the Bill. It seems probable that the main, or perhaps the only, purpose of setting up such companies would be to circumvent the Bill's competition provisions.
As the law presently stands, authorities to whom Section 135 of the Local Government Act 1972 or Section 81 of the Local Government (Scotland) Act 1973 applies must make standing orders to secure competition for contracts for the supply of goods or materials or for the execution of works, but are not required to do so in relation to contracts for the provision of services. It would therefore be possible, even after enactment of the Bill, for an authority to award to its own company, and without competition, a contract for work which, if carried out by the authority's own employees, would be subject to the competition provisions of Part I of the Bill.
Although we are still considering, in the context of the Widdicombe Report, the wider aspects of local authority involvement in companies, my right honourable friend the Secretary of State for the Environment has decided that this particular issue calls for immediate action.
We therefore propose to make it unlawful for an authority to enter into a contract with one of its own companies for the carrying out by the company of 398WA work which falls within any of the activities which are defined activities for the purposes of Clause 2 of the Local Government Bill, unless the authority has taken steps for the purpose of securing competition for that work. An appropriate amendment to the Local Government Bill has been tabled and its text is set out below.
The authorities to whom the new provision will apply are local authorities in England, Wales and Scotland (as defined in Clause 1(2) and (3) of the Bill), police, fire and civil defence, waste disposal and passenger transport authorities and the Inner London Education Authority. For the purposes of the new provision, a company or its subsidiary or holding company will be treated as an authority's own company if, as a result of a decision of the authority, the authority, or any member or officer of the authority, or any nominee of the authority is a member of the company or its subsidiary or holding company.
Following is the text of the amendment:After Clause 32 insert the following new Clause:
("Local authority companies
—(1) A local authority or relevant public body shall not enter into a contract under which a company which is associated with the authority or body is to carry out work falling within a defined activity, unless, before entering into that contract, the authority or body has taken reasonable steps for the purpose of securing competition for the carrying out of that work.
(2) For the purposes of this section a company is associated with a local authority or relevant public body if, by virtue of any decision of the authority or body (including that of any committee or subcommittee thereof in the course of discharging any function conferred upon them by virtue of section 101 of the Local Government Act 1972, or, in relation to Scotland, section 56 of the Local Government (Scotland) Act 1973):
is a member either of the company or of another company which, in accordance with section 736 of the Companies Act 1985, is the company's subsidiary or holding company.
- (a) the authority or body, or
- (b) any member or officer of the authority or body, or
- (c) any nominee of the authority or body,
(3) In this section:
- (a) "defined activity" has the meaning assigned by section 2 above:
- (b) "local authority" has the meaning assigned by subsection (2) or, as the case may be, subsection (3) of section 1 above; and
- (c) "relevant public body" means any authority or committee falling within paragraphs (e) to (j) of subsection (1) of section 1 above.
(4) This section (and, so far as is relevant for the purposes of the definitions in subsection (3) above, sections 1 and 2 above) shall be deemed to have come into force on 11th February 1988 and, accordingly, has effect in relation to contracts entered into on or after that day.")