12 January 2012 | Paul Henty

In December the European Commission set out three new proposed directives, which would significantly amend the existing directives on public sector and utilities procurement and introduce a new directive on “concessions”.

The Commission’s proposals aim to remedy some of the perceived deficiencies of the regulations and to promote more efficient buying by government bodies.  They will now be considered by the EU Council and European Parliament and then adopted, amended or rejected.

Change to the scope of procurement directives

The proposed directives would amend procurement procedures so that:

● Time limits for participation and submission of offers would be shortened, expediting and streamlining current processes.

●“Part A” and most “Part B” services would be subject to the full scope of regulation. “Part B” services have previously been subject to a lighter regime which, for example, excludes rights for bidders to receive Alcatel letters or observe standstill periods.

●There would no longer be an exemption from the rules for R&D services. This may come as good news to many suppliers in the technology sector, who may become aware of new R&D opportunities. This is coupled with the introduction of an “innovation partnership” procedure, which may be suitable for R&D projects.

●  A light procurement regime will continue to apply to social, health and education services. The EC considers these have specific characteristics that make them inappropriate for the application of the regular procedures for the award of public service contracts.

Change to rules on procedures

Some amendments have been made to the procedures used to award public and utilities contracts.

● The competitive dialogue procedure would be made freely available (whereas, currently it can be invoked only for complex projects).

●The more flexible negotiated procedure with competition would be more widely available. For works projects, the procedure is available where the scope of the project encompasses works and design together or where the legal or financial make-up of the works cannot be easily defined in advance. For contracts for services or supplies, the procedure would be available where the technical specifications for those services or supplies could not be drawn up precisely beforehand.

The trade-off for extended availability of the negotiated procedure is the introduction of new safeguards to prevent discrimination and unfair treatment.  For example, there can be no changes to initial qualification criteria. Any amendments to the structure of the authority’s proposed procedure must be communicated to all participants at the same time and in the same manner. In addition, the contracting authority must draw up a report at the end of the process on how it has conducted the procedure.

Splitting contracts into small lots

One of the EC’s focuses has been on opening up contract opportunities for SMEs. The proposed directives would encourage high value public sector contracts whose value exceeds €500,000 to be split into smaller, “bite-sized” lots, which would be more contestable by smaller operators. Contracting authorities would be required to explain why they had opted out of structuring a contract into lots in this manner.

A number of concerns have been raised regarding this proposal. It may be more difficult to obtain external project finance for a multitude of smaller projects than for larger ones. There may also be efficiency reasons for an authority not to split up a project into smaller packages (and in some cases the procurement costs may be higher). The burden of proof being on the authority, it may opt for a more costly buying strategy for fear of being non-compliant.

Contract change: Modifications to contract scope

Legal uncertainty surrounds the permissibility of changes to a regulated contract after this has been awarded. Previous case law has ruled where there is a substantial change to an awarded contract, the agreement will need to be competitively re-tendered.

Following earlier case law, the proposed directives define a “substantial change” as one which: (a) introduces conditions that, had they been part of the initial award procedure, would have allowed for the admission of tenderers other than those initially admitted, or for the acceptance of a tender other than the one initially accepted; (b) extends the contract's scope to encompass services not initially covered; or (c) changes the economic balance in favour of the contractor in a manner not provided for in the initial contract. The proposed directive codifies this definition, but also adds some clarifications. For example, it confirms small changes to scope (those which fall under the thresholds and are worth no more than 5 per cent of the contract price) should not be considered substantial.

The proposed directive also clarifies a change will be permitted where it was foreseen at the outset of the original contract by an option clause set out in clear, unequivocal and precise terms. That clause must not enable the “overall nature” of the contract to be changed (a term which is not defined further).  Furthermore, certain changes may be permitted where these are required to accommodate an unforeseen change in circumstances.

Contract change: supplier substitution

The Pressetext ruling also created uncertainty in a variety of situations involving mergers and acquisitions, assignment and insolvency.

Although the directive codifies the case law, it also proposes there should be no substantial change where one supplier (which would have qualified for the original tender) succeeds another supplier following a corporate restructuring or the insolvency of the first supplier.

Whilst additional certainty is helpful, the proposal does not go far enough. For example, what is meant by “legal succession” of one contractor for another?  Does this encompass assignment and/or novation or changes of ownership in the contractor? In addition, does the notion of “corporate restructuring” include the sell off of assets to a third party outside of the contractor’s group? Arguably it does not, and refers only to group re-organisation (the situation arising in the Pressetext case).

Lighter touch for non-central government

The directive proposes to differentiate the rules for procuring entities that are not central government (such as local and regional government authorities).  The purchasing activities of such entities should not, in the Commission’s view, continue to be regulated by the full scope of the procurement rules. There should, instead, be a simplified procedure that would offer more flexibility.  This procedure would, for example, offer these purchasers increased the ability to avoid the publishing an OJEU contract notices where a prior information notice had already been placed. There would also be increased scope for them to set the tendering timetable in agreement with bidders.

Re-admission of excluded contractors

The current directives provide for the mandatory or discretionary exclusion of bidders who have been involved in certain criminal acts or other serious infringements of the law or professional misconduct. The proposed directives aim to tackle uncertainty on how these provisions should be applied and whether mandatory exclusions should be permanent.

The proposed directives provide that an excluded bidder may make a case for its re-admission to tender processes where it has (a) provided compensation for its previous wrongs, (b) co-operated with any official inquiry relating to its wrongdoing and (c) taken internal steps to prevent the recurrence of future, similar offences. The authorities must take into account any such case made and consider whether readmission is warranted and must also give reasons for rejecting a provider’s request.

Concessions

The Commission has proposed a new directive on the issue of works and service concessions (arrangements under which the supplier is paid mainly from the end beneficiaries of the works or services it provides).

The scheme of regulation to works and service concessions is quite basic at present. These need to be awarded in accordance with the “general principles” of EU Law (transparency, equality and non-discrimination). Disagreement frequently arises as to how these general principles will apply in practice. The Concessions Directive would continue to allow contracting authorities a degree of discretion on how to structure the tender award procedure. The directive requires seven “procedural guarantees” to be observed. For example, the authority must not favour one provider over another in the information that it provides on the tender process. Effectively, this gives specific guidance on how the general principles apply to concession procurements, assisting the authority to structure its process in a compliant way.

What will these changes mean in practice?

The directives do propose welcome flexibility, but this is offset by an extension of regulation in some areas. Many contracting authorities would bemoan the inclusion of Part B services within the full procurement regime. On the other hand, this would avoid arguments about whether a services procurement is Part A or Part B (projects can involve elements of each).

It is right that the new directive should address questions over contract modifications. But the proposed provisions leave unanswered questions in their current form. It is still unclear whether or not public contracts can be transferred as part of a corporate sale.

The provisions on exclusion and re-admission are of interest (even more so following the introduction of the Bribery Act). Contracting authorities may not welcome the apparent tightening up on the exercise of their exclusion powers.  But there is at least more guidance on how and when an authority should remove a supplier from its list and when to re-admit it.

The wider availability of the negotiated procedure has been welcomed in the UK, where this procedure was widely used until the introduction of competitive dialogue in 2004. The proposals would allow this procedure for many PFI projects, which would be welcome. The competitive dialogue procedure has proved costly to implement.

While the proposals contain a number of useful improvements to the law, certain aspects require tightening up. There is opportunity for this to occur, as the proposed directives will now be submitted to the EU Council and Parliament for negotiation and possible adoption. Already, the UK Cabinet office has sought stakeholders’ views on the proposals with a deadline for responses of 20 January. If the package is adopted by the end of 2012, the new directives will become binding in EU Member States by 30 June 2014.

☛ Paul Henty is a solicitor at Speechly Bircham