Finance Committee

Meeting date: Tuesday, January 12, 2010

Official Report 287KB pdf

---

Subordinate Legislation

---

Public Contracts and Utilities Contracts (Scotland) Amendment Regulations 2009 (SSI 2009/428)

Item 2 is consideration of a Scottish statutory instrument that is subject to the negative procedure. We considered related regulations previously and, given the instrument’s complexity and the issues that the Subordinate Legislation Committee raised, it was thought useful to invite Scottish Government officials to our meeting to answer members’ questions.

I welcome to the committee Jessie Laurie and Iain Moore from the procurement policy branch; and John Williams from the finance co-ordination team. I invite them to make a short opening statement if they wish.

We have liaised with, advised and been in dialogue with the Office of Government Commerce, which is part of Her Majesty’s Treasury, on the drafting of the legislation and what we plan to do, and the view that these are not designated receipts has not been formally challenged.

I invite questions from members.

Similar legislation covering procurement activities in the rest of the UK is going through Westminster, and the UK Government is aware of what is going on and is being kept informed of the wording of the legislation at every stage.

I do not doubt that comparable legislation has been introduced at Westminster. I presume that the UK Treasury decides whether or not something is a designated receipt. Has the Treasury or the UK Government told you that it is satisfied that, as the regulations are drafted, there is no prospect of classing such penalties as designated receipts? I would think that, at this moment, the Treasury would be quite keen to get any receipts that it could.

But sometimes these things have unintended effects. Have you had any discussions with, for example, business forums that have given you comfort that they, too, feel that the regulations will be nothing but beneficial to them and will have no downsides?

That is certainly our intention.

Let us consider a contract that is awarded for the Forth crossing, for example. The Government has asked the committee in effect to underwrite up to £30 million of contingent liability for the Forth crossing, so we have already been asked about the contingent liability of a contract of that scale. If such a contract involved challenging legal aspects, the sum involved could be substantial, and part of the consideration would be the use of that money if the sum were more than £10 million rather than £10,000. Does any mechanism exist to make it clear how that money would be determined, rather than simply having the Scottish ministers’ view that it would be retained income?

If a minister committed the crime and was fined, I guess that the money would flow back into the general fund and not into their specific portfolio. There would be a penalty for the portfolio.

If the witnesses want to clarify points after they have read the Official Report of today’s meeting, they should write to us.

Anything to do with Europe gets more complicated the more one looks at it.

If the witnesses have no further comments to make, I thank them for attending and for their evidence. We will await further written evidence on any issues that have come up during questioning.

Is the committee content to note the instrument?

Do we agree to note the instrument?

Members indicated agreement.

I understand that that is the Scottish Government’s clear view and, given what you have produced, such an interpretation does not appear to be unfair. However, the UK Government might well argue a different case. Is it correct to infer from what you have said that the Scottish Government is sufficiently clear in its own mind about its interpretation of the situation that it has not specifically sought the UK Government’s view to confirm whether it is thinking along the same lines?

After consulting widely within the Scottish Government and seeking the views of all parties, we found the view to be quite clear: the Scottish Government’s view is that such penalties would not be designated receipts. We have proceeded on that basis.

Is the Subordinate Legislation Committee aware that, with these amending regulations, the original legislation will have been amended more than five times? What is the background to that? I realise that you have already explained this a bit—I understand, for example, that it relates to the transposition of the remedies directive—but I would appreciate another short explanation of why you feel it necessary to take this route.

With regard to the section of the Executive note on financial effects, I can see clearly that the regulations are about public bodies and utilities adopting certain processes and do not impose any obligations on businesses. However, could this additional imposition on the procurement procedures of public bodies and utilities result in hidden costs for businesses?

So the legislation will be consolidated further down the line.

Yes.

Good afternoon. I want to be clear about proposed new regulation 47C of the Public Contracts (Scotland) Regulations 2006 and proposed new regulation 45C of the Utilities Contracts (Scotland) Regulations 2006. I understand that the Scottish ministers will consider any moneys that a court orders to be paid as income, but the regulations say that such moneys should be paid into the Scottish consolidated fund. A clear explanation probably exists, but I do not understand why the regulations that Parliament is considering say one thing while the Government says another.

I am not aware of whether the drafting of the regulations can be changed. This is as much as I have seen about how the money would be treated.

Was such a mechanism considered when the regulations were drafted?

Yes.

Yes.

I am not sure that that is a question for the officials.

I think that the witnesses said this earlier, but, for the record, will you clarify that it is your view that you have kept Her Majesty’s Government up to date on the Scottish Government’s interpretation and that to date you have received no indication that HMG is unhappy with how you are proceeding?

That is correct.

There was some point to what Mr Purvis was saying. I do not think that it is as simple as the portfolio minister not getting the money back—under another agenda item we will discuss changes to the format of the budget bill, which could overcome the issue. Clarification is needed, because we cannot have ministers paying fines to themselves; there must be a disincentive somewhere. Someone has to go away and think about that, lest the Government become a figure of fun because the arrangements are not credible. A remedy needs to be found—perhaps the money could go to the voluntary sector.

I am not sure of the process. I am aware that it is a negative instrument and that, so far, no member has lodged a motion to annul. What is the timeframe for what we do as a committee, considering that the Government officials are to come back to us?

I will make a short statement outlining the Public Contracts and Utilities Contracts (Scotland) Amendment Regulations 2009. The regulations implement in Scots law a European directive from 2007 and amend existing Scottish procurement legislation: the Public Contracts (Scotland) Regulations 2006 and the Utilities Contracts (Scotland) Regulations 2006. The 2006 regulations govern the processes and procedures that have to be followed by public bodies when awarding contracts over a certain financial value.

The purpose of European directive 2007/66/EC is to improve the effectiveness of review procedures with regard to contract award processes, and the new 2009 amendment regulations introduce two main changes to the 2006 regulations. First, they create a harmonised standstill period across all member states of the European Union between the decision to award a public contract and the notification of all bidders of that decision, and the award of the contract itself. The standstill period is designed to allow bidders to determine whether they wish to challenge the decision. Secondly, they introduce “ineffectiveness” as a remedy for breaches of procurement legislation. The concept of ineffectiveness is new to corporate procurement, and the 2009 regulations set out the circumstances under which courts shall make an order for ineffectiveness. An ineffectiveness order will render all rights and obligations in a public contract unenforceable from the date of the order and will state that the obligations rendered unenforceable shall not be performed by the parties.

If the court makes such an order, it shall also order the payment of a financial penalty by the public body and, in addition, the court may make any other such orders as it thinks necessary and appropriate to address the consequences of effective early termination of the contract. The court may decline to make an ineffectiveness order when it believes that there are overriding interests that require obligations under the contract to be maintained, but, if the court declines to make an ineffectiveness order, it shall require the public body to either pay a financial penalty or shorten the duration of the contract. When a financial penalty is ordered, the order shall state that the money be paid to the Scottish ministers. The 2009 amendment regulations stipulate that the Scottish ministers shall pay this penalty into the Scottish consolidated fund.

The European directive’s requirement is that fines be imposed in certain circumstances. Proceedings that will be brought under the amendment regulations will be civil proceedings. The Scottish Government takes the view that the directive’s requirements are satisfied by the imposition of civil financial penalties and not criminal fines. The Scottish Government’s view is that reference to “fines” in article 2(2)(b) of the Scotland Act 1998 (Designation of Receipts) Order 2009 refers to criminal fines but not to civil financial penalties. The Scottish Government is therefore of the view that any financial penalty paid into the Scottish consolidated fund under the new amendment regulations would not be a designated receipt and need not be paid to the secretary of state. In other words, money received in the form of civil fines under the regulations would become income that was available to be used by the Scottish ministers subject to the normal parliamentary scrutiny and approval of the Scottish budget and in-year budget revisions.

As this is a new procedure, it is not possible to state with any degree of accuracy how often the courts will order payment of financial penalties, nor indeed the level of financial penalties that may be levied. The regulations merely state that the order must be “effective, proportionate and dissuasive”. To my knowledge, only four cases have been brought before the Scottish courts regarding breaches of procurement legislation since 2006, so historically the numbers have not been significant. Whether the number of challenges remains low under the new legislation remains to be seen.

I will pick up on the point that Iain Moore raised towards the end of his statement about whether the money would count as a designated receipt. If I picked you up correctly, you suggested that it would not be a designated receipt, and therefore would effectively be within the consolidated fund and available for ministers to use as this Parliament authorised them. Has any discussion taken place with the United Kingdom Government on whether it also takes the view that the money would not be a designated receipt?

On your second question, I do not expect there to be any additional costs to businesses. As you have correctly pointed out, the processes relate to remedies against public bodies, and the fact is that the regulations will give businesses greater rights to challenge and better processes for challenging those bodies.

In the two rounds of general public consultation, we consulted business representative bodies, some of which responded and offered their views. There was nothing to suggest that businesses were concerned that the regulations would result in additional costs for or greater obligations on them.

Can you roughly outline your reasons for substantively amending the original legislation for the sixth time?

We realise that the convention is that, when a piece of legislation is substantively amended for the fifth time, it should be consolidated. Indeed, very early on in the process, we were proceeding on that basis. However, although the regulations themselves do not run to many pages, they are very complicated, and as we worked through the processes we came to the view that, in order to focus properly and ensure that things were implemented correctly, we should produce another set of amendment regulations and consider going back to consolidate some time this year. I think that I am correct in saying that we said in the second round of public consultation that we would consolidate the procurement legislation. However, as I said, because of the way in which events developed, the focus was on producing the regulations on time and correctly rather than on consolidation.

14:15

That will happen when other legislation is being transposed.

The understanding is that the Scottish consolidated fund is, in effect, the Scottish Government’s bank account. The money in the fund comes from the grant that is paid in from Westminster, national insurance contributions and any other odd items that might be paid in directly, and Parliament approves money that is to be drawn out of it.

If something that is a designated receipt is paid into the fund, the Scottish Government is obliged to pay that back to the Treasury. However, for any other items, if the Parliament approves, the funds can be drawn down to pay for Scottish Government expenditure. That is what would happen to the money that we are discussing, and access to the funds would need to come through a budget act or—more probably—an in-year budget revision.

I suspect that nobody has any idea whether income from the arrangements will be significant and, that being the case, we certainly would not budget for it. Such funds would probably appear as windfall income in the first year that fines appeared. It would then be for the Scottish ministers to propose ways to use that income.

I guess that this follows Mr Brownlee’s point. Is there no mechanism for the regulations to state categorically how such money will be treated? I understand the general point about money being paid into the consolidated fund; the question is therefore about the definition of such money and who has power over how it is spent. I understand that the amounts might be £1,000, £1 million or considerably more—that will depend on the size of the contracts. Is there no mechanism for the Government to state clearly in the regulations how such money would be retained as income?

I suspect that that issue is more for our legal people. I cannot comment on that.

No—not to my knowledge.

John Williams said that the question was for the Government’s legal people, from whom he could seek advice. If he sought that advice and informed us of the response, that would help the committee.

I have a question about the treatment of the Scottish ministers. I understand that the provisions apply to the Scottish ministers if they are the contracting body and that the court will treat the provisions differently in that situation. If ministers are the contracting body that is fined under the arrangements, they will pay the fine to themselves. That will be retained income, which they can decide how to spend. Is that correct?

I just wonder what penalty that would be. I am thinking not about the sum but about how there can be a disincentive to commit an offence if the offender is ordered to pay a fine that will go back into their own pocket. They could write a humble letter of apology, but that is all.

When the directive was being debated at European level, a discussion took place about whether it is possible to devise a process whereby public bodies could be fined but the money would not leave the public purse. Directive 2007/66/EC was drafted with that objective in mind.

As I understand it, if the Scottish ministers are the contracting authority in relation to which an ineffectiveness order is made and the court orders a financial penalty to be paid, the money is paid straight back to the Scottish consolidated fund. To be honest, I am not familiar with the financial side of the matter, but I understand that a decision must then be taken by the Parliament on how the money would be best spent. It is not a case of simply handing the money straight back to the Scottish ministers.

Retained income is reported to us in the budget documentation, but it is up to ministers to distribute it. Ultimately the Parliament authorises the overall budget, but the use of retained income in-year is a decision for ministers. I understand that a local authority or health board that was fined would lose a sum of money, so there is potentially a considerable penalty for such bodies, but there does not appear to be a penalty in relation to contracts entered into by ministers. What consideration has been given to what happens if ministers are the contracting body?

I will ask the clerk to assist at this point.

The 40-day date is 19 January, so we are really up against the wire on this one.