Snags in the great legal sell-off

If Whitehall lawyers are to be part of a civil service spin-out, there are state and EU legalities to consider


Earlier this month, The Independent reported that Whitehall’s lawyers are to be part of the ‘great civil service sell-off’ along with IT and personnel. These functions are to be spun off into joint venture companies part-owned by private sector investors.

The new companies, it said, will be free to supplement their government work by competing – presumably with, among others, law firms – for other sources of work.

The Treasury Solicitor, Sir Paul Jenkins, moved quickly to quash the story, stating in a letter to government lawyers: “There have been reports that legal functions are being actively considered for ‘sell-off’. The Attorney General and I assure you that this is not the case. Cabinet Office have explicitly confirmed that this formed no part of the briefing given to media and they are working to correct this inaccuracy.”

It is, however, the Government’s intention to reduce the size of the civil service over time by spinning off such supporting business units.

A central government spin-out programme would be consistent with local authority policy. Just last month the Tri-borough London Councils launched what is likely to be the first of many public sector ‘mutuals’ led by transferred council employees and involving a private sector partner.

In principle, there is no reason why lawyers should be excluded. Local authority legal departments (most notably Essex) have demonstrated success with marketing their services to other public authorities and beyond.

A greater obstacle would come in the form of EU law. It is far from clear how it could be lawful for government departments to contract with the spun-out entities, even at the times of their creation, without falling foul of procurement rules.

That is so even if the new units provide services only to public bodies. Even in relation to Part B services (such as legal services), competitive processes may need to be used to award the work.

Then there are the state aid rules, which apply even to entities holding Part B contracts in which there is no interest from potential providers from other EU member states. The provision of equipment, office space, central services or know-how could all constitute state aid.

How can these benefits be shown to have been charged for at market rate if they have simply been transferred? Has state aid compliance even been considered?

At times government planning can resemble that of young lovers rushing into marriage, letting their excitement about cake decorations get ahead of the need to discuss dull but important practicalities.

Spin-outs with employee participation have great potential to improve services and find economies of scale. But compliance with procurement and state aid law is vital and will help ensure that markets are not distorted.

Law firms and other private sector providers should not face unfair competition from spin-outs benefiting from implicit subsidies or the security of long-term government contracts that have not been competitively procured.