Are you making concessions? Procuring community infrastructure wisely…

All of these can be concession contracts which differ from usual contracts because:

• The operator usually collects some income from service users – for example from people who buy heat or pay bus fares combined with receiving some money from the Authority; and
• some operating risk or revenue risk must be taken by the operator – for example the risk of costs of maintaining a swimming pool or the risk of a variable number of passengers catching the bus.

Improving infrastructure through concession arrangements will lead to better outcomes for communities – helping remove some inherent disadvantages – for example poor transport links leading to isolation or underemployment (transport concessions), having no drive to charge your car (LEVI projects) or living in a community with poor health outcomes (leisure concessions).

Here are the major points to consider when letting a concession:

1. Procurement Panic
To avoid panic, leave time to engage with the market and with potential service users before you hold a formal procurement process. Often, the market will come to a bidder day or briefing event and give useful feedback about the best method for procurement. Many concessions are reasonably complex and would be above threshold (£5.3million including VAT), meaning Authorities could use the competitive flexible process under the Procurement Act 2023 – which allows scope to design an appropriate award process. For example, for a heat network project, you might have a demonstration phase, where potential operators demonstrate their proposed customer interfaces together with written price and quality submissions.

2. Risk Reflection
The concession contract terms must detail who is taking which risk. Often, Authorities will own the underlying infrastructure, and there will not be a significant return or profit to the operator, so the allocation of risks needs to bear this in mind. For example, making the operator take the risk of fixing major defects with a heat network owned by the Authority (where the operator has not installed the system), would not be reasonable or proportionate. On the other hand, it would be sensible for the heat network operator to take the risk on smaller consumables or maintenance costs, so that it is incentivised to be efficient and effective in running the network. Getting the risk allocation right is key to a successful procurement and a long term, sustainable partnership with the selected operator.

3. Payment Precision
The payment mechanism needs to reflect the contract terms, and ensure that you incentivise the operator to both increase customers, maximise income and achieve social objectives. For example, in charge point operator concessions for electric vehicles, making sure that the Authority manages the competing concession objectives through the payment mechanism is key. Usually, an Authority will want:

• regulated charges for residents without off-street parking, for example setting a margin cap so that operators can only charge a certain amount more than the base cost of electricity;
• to pay the Council a concession fee which assists the Council with an income stream, usually to recognise that either highway or parking assets are being used; and
• incentives for the operator to drive revenue through ultra-fast charging.

4. Swerving Subsidy
Many concessions involve elements of subsidy or capital contribution from an Authority. For example, on a LEVI scheme, the Council uses grant funding for electric vehicle infrastructure which is made available to the operator to help fund charge point installations. There are many ways of dealing with subsidy to ensure compliance with the Subsidy Control Act 2023, chiefly through appointing an operator through a formal competition, which eliminates (or substantially mitigates the risk of) the subsidy. However, if you are considering sub-granting funding, or have held an informal process to appoint an operator because the concession value is below threshold, Authorities will need to take separate subsidy control advice to ensure resources are used and passed on lawfully. Any process should also seek value for money.

5. Peak Performance
Although the Procurement Act 2023 does not require key performance indicators (KPIs) in a concession contract, it is still a good idea because most concessions are longer term and public facing – so good contract performance is critical. If you specify KPIs, you also need to set out:

• the minimum levels of acceptable performance, and what happens if these are not met – usually a short chance to rectify the situation and then termination if the failure continues; and
• the target level for performance, and what happens if these are not met – usually a combination of improvement plans and service credits – i.e., a reduction in the return to the operator.

And finally…

Letting a concession contract needs a number of moving parts to all come together – including the procurement process, dealing with subsidy control implications, having a clear payment mechanism which integrates with the contract terms, together with good way of incentivising good performance. If we can assist with your concession, please do get in touch.

For more information, contact Richard Brooks.