Ever since the R v HM Treasury ex parte University of Cambridge case (reported in October 2000), there has been ongoing debate within the HE sector about the applicability of the Public Contracts Regulations 2015 (PCR) to universities and variations as to how these are applied in practice. The debate was reignited in 2011 when David Willetts, the then Minister of State for Universities and Science, made the comment at the Conservative Party Conference that university funding reforms will mean that “EU public procurement rules will no longer apply to the vast majority of our universities.” No guidance or clarification was subsequently issued and as the Procurement Bill heads towards the end of its legislative journey, we thought it worthwhile to review this topic again.
The PCR only apply to "bodies governed by public law": this test remains substantively the same under the Procurement Bill. Some Universities may be governed by public law and others may not, it depends on the University's fact specific circumstances. To assess whether or not a body is governed by public law, there is a three-part test. All three parts of the test must be met in order for an entity to be classified as a body governed by public law.
Part one (general interest)
The first part of the test is to consider whether the University is "established for the specific purpose of meeting needs in the general interest, not having an industrial or commercial character". The commonly accepted position is that Universities are established for the purpose of meeting needs in the general interest. For example, if a University is a registered charity there is a clear indicator suggestion that it is established for meeting needs in the general interest. Similarly, Universities should review their constitution as it should set out the University's purpose and this will generally reflect a general interest. However, a University should not simply assume that it satisfies this test and should consider its own specific circumstances.
Part two (legal status)
The second part of the test is whether or not the University has legal personality. This depends on how the University is set up. Usually, this test will easily be satisfied as most Universities will be set up as a separate legal entity (whether by Charter, registered charity, etc).
Part three (key characteristics)
The third part of the test is whether or not the University has any of the following characteristics (only one of the sub-limbs below need apply for part three to be met):
- "They are financed, for the most part, by the State, regional or local authorities, or by other bodies governed by public law
- They are subject to management supervision by those authorities or bodies, or
- They have an administrative, managerial or supervisory board, more than half of whose members are appointed by the State, regional or local authorities, or by other bodies governed by public law".
Characteristics (ii) and (iii) generally do not apply to Universities so the only characteristic of relevance is (i). The key factor in assessing whether or not a University is subject to the PCR is whether "they are financed, for the most part, by the State, regional or local authorities, or by other bodies governed by public law". In practice, following the Cambridge University case, this means whether or not a University's income is made up of more than 50% of "state funding".
What is state funding?
What is classed as state funding is based on a broad approach. University income will be state funding if it originates from another public body and it is not paid by way of specific consideration for services rendered by the University to, or at the instigation of, that public body. So, this is funding which finances/supports the activities of the University where the University does not provide anything in return to the funder. For example, awards or grants paid to support general research work is state funding because the public body awarding the grant will not receive anything specific in return, it is simply providing financial support to the research work. However, this can be contrasted with funding for the supply of specific services comprising research or for consultancy services/conferences. This would not be state funding because here the funder is receiving something of value in return as it benefits from the services being funded.
There are many different types of funding that Universities receive from public bodies. These include:
Grant funding from funding bodies to support University activities
This could include funding from the Office for Students or Research England. This is funding which supports the University in its general activities to allow it to properly function. This type of funding is generally considered to be state funding.
Funding provided by a public body under contract to support a particular, specific research project is generally considered to be private funding.
Income from investments, including donations and endowments is generally considered private funding.
Income received from services such as residences and catering, conferences and operating income are generally considered private funding.
The real debate in recent years (given its large percentage of income for many universities) is whether the fees for student tuition represent public or private funding.
Student tuition is split into different categories:
- Tuition paid by the Student Loans Company (SLC) and some Northern Irish Local Authorities – tuition for students with student loans
- Tuition paid by the Department for Health and Social Care, Health Education England and local education and training boards – tuition for students doing particular courses such as medicine
- Tuition paid by students privately.
Both (b) and (c) are generally considered to be private funding due to the nature of the funding being consideration for the services of the course to the students. However, there is debate over whether tuition paid through the SLC (and equivalent) is classed as state or private funding.
Some commentators believe that student loans constitute state funding because it is a payment directly from a public body to the University for which the public body receives no benefit. This is because a student loan is provided on a low interest basis, where students do not pay it back until they earn above a certain threshold. In addition, it is written off after a certain amount of time so many students never pay the loan back in full. On this basis, applying the test means student loans are state funding as it cannot be said that the SLC receive any consideration in return for the funding provided.
The alternative view is that student loans are private funding because the funding is provided by the State but on behalf of students. This constitutes a commercial consideration - students freely enrol onto a course and SLC pay the course fees on behalf of the student to discharge their liabilities to the University. Some commentators therefore classify student loans as a subsidy to the student rather than the University because the loan is paid directly to the University purely for administrative convenience, and would otherwise be paid to the students first, who would then pay the University.
Overall, there is no clear-cut answer when it comes to student loans as there are arguments either way. The safest approach may therefore be for Universities to consider student loans as state funding until there is clear guidance from the court or parliament.
How often should universities assess their funding?
Following the Cambridge University case, Universities should make an annual assessment of their income streams to ascertain whether more than 50% of their income is derived from state funding. Ideally the assessment should be made before the start of each financial year using the latest figures available. If a reassessment of funding suggests that the University should be classed as a body governed by public law, then (in line with common transitional arrangements) it is likely to be acceptable to continue with any current procurements but any new procurements should be run in line with the PCR.
Will the Procurement Bill change anything?
Under the current form, the Procurement Bill provides that a "contracting authority" includes a "public authority" with "public authority" being defined as "a person that is:
- Funded wholly or mainly from public funds, or
- Subject to public authority oversight and does not operate on a commercial basis".
Although the wording slightly differs from the current wording in the PCR, its application is largely the same. The same financial assessment test is likely to be applied in relation to part (a). Part (b) should be considered where a University's income is not made up of more than 50% of public funding.
Part (b) refers to "public authority oversight". "Public authority oversight" has the same meaning as (ii) and (iii) in the Part 3 test above in the current PCR. The words "does not operate on a commercial basis" are likely to have the same meaning as "being established for the needs of meeting the general interest". Therefore, the test in the Procurement Bill is essentially the same as the previous test except that the financial aspect is a test in its own which could mean that a university is subject to public procurement without the need for the University to meet needs in the general interest.
If you require assistance in respect of whether your University could be subject to public procurement or procurement law generally, our specialist team is available to help - get in touch today.