Contract to succeed?

concern over a new model for contracting out local authority services

The London Borough of Lambeth awarded the largest ever local government contract last month when it agreed to transfer its entire blue-collar direct-service organisation to a private company. The model used by Lambeth, a joint venture in which part of any profits will return to the council, is likely to be endorsed by a future Labour government as its preferred alternative to compulsory competitive tendering. However, the choice as partner of ServiceTeam, a young company, has prompted observers to look at its track record.

By "externalising" the Direct Service Organisation (DSO), Lambeth has been able to argue that the arrangement is not a conventional contract for services, and it has been exempted by the Department of the Environment from compulsory competitive tendering rules. The original preferred bidder, the major local government contractor Sita UK, was dropped after detailed negotiations, and ServiceTeam was then awarded the contract, worth pounds 350m over 10 years.

Despite satisfying the DoE that the proposed contract complied with European legislation, Lambeth may be challenged in the courts by a local branch of the public sector union, Unison. Jon Rogers, secretary of Lambeth's Unison A branch, says: "I think there are grounds for concern about the use of 'negotiated procedure' within the European Union's public procurement regime, and we will be seeking legal advice about this."

Both Lambeth and ServiceTeam talk of the contract breaking new ground. The company will expand rapidly to take on 2,000 council staff, covering 17 services ranging from school catering to refuse collection; it currently employs 3,000 staff on a turnover of pounds 80m. ServiceTeam, backed by venture capitalists 3i, has agreed to move its national headquarters from Hertfordshire to Lambeth as part of the deal. A new joint venture company, for which Lambeth will appoint its own directors, will be established to operate the contract and bid for work from other councils.

Guy Bertram, assistant director of ServiceTeam, expects the arrangement to be widely copied. "It is indicative of the way contracts in local authorities may develop," he says. "Lambeth has set out for a partnership relationship, where we are both working to agreed policy objectives, to find mutually agreeable solutions." Profit-sharing arrangements are to be agreed by the end of this month.

One of the themes of the partnership is to ensure a good working relationship with trade unions. ServiceTeam has not always managed this in its contracts with other local authorities, even though one of the directors of the company is Dave Sullivan, former Labour leader of Lewisham. Several other senior ServiceTeam staff have come from Lewisham, including chief executive Mushtak Malik, the former director of DirecTeam, the Lewisham DSO. At Lewisham, Mr Malik and Mr Sullivan had argued for considering the externalisation of its DSO.

A major dispute broke out at Wandsworth, where ServiceTeam inherited an unprofitable refuse-collection contract from AAH Environmental, a company it had purchased. After a strike, and 26,000 complaints about the quality of the service, it was agreed in September that the contract would be terminated early, and the company is now serving its notice. The chair of Wandsworth's leisure and amenities committee, Kathy Tracey, says: "We have never been satisfied with the standards achieved by either ServiceTeam or their predecessors."

Tony Belton, the leader of the opposition Labour group, echoed this. In a private letter in December 1995 to the leader of Lewisham council, where Mr Sullivan is still a councillor, he wrote that his group had reacted with utter dismay when they learned that a fellow Labour Party councillor was involved, and expressed concern about standards achieved by the company.

ServiceTeam is also in the process of being prosecuted by the Health and Safety Executive for alleged breaches of health and safety legislation in Barnet, where the company has another contract. It appears that one worker had his foot amputated by a bin wagon, and another was crushed between the bin lift and the back of a dust-cart.

Lambeth, which is now a hung council after many years of Labour control, agreed the contract with ServiceTeam with support from both the Liberal Democrat and Labour groups. Heather Rabbatts, chief executive of Lambeth, says the authority has complete confidence in ServiceTeam.

"The council looked in detail at the financial position and ability to perform of those companies shortlisted," says Ms Rabbatts. "All of them were able to satisfy the council on every point. We operated throughout the process in accordance with top-level independent legal advice to ensure compliance with European and UK law, and to secure the best possible outcome for the council."

A spirit of co-operation that brings contractors and councils together is the way forward for local government, says Ms Rabbatts. "The best private sector companies like Marks & Spencer and its suppliers, and the Japanese motor companies, seek to ensure value for money in a collaborative environment. It is different from the old-fashioned policing type of arrangement. This is an exciting new development. This way we can get the best from the private and public sectors"n