Providers need to be alive to the risk of contractors becoming insolvent and how to limit the resulting inevitable disruption.
This ebriefing highlights some of the key changes the Directive will make, and the implications of those changes for local authorities registered providers of social housing and ALMOs.
The Directive now includes the test in the Teckal case. This exempts from tendering contracts between contracting authorities and their subsidiaries where:
- the parent exercises control over the subsidiary that is similar to the control that it can exercise over its own departments, (which will be the case if the parent exercises a “decisive influence” over its “strategic objectives” and “significant decisions”);
- the subsidiary carries out 90% or more of its activities “for” the parent; and
- there is no “private participation” (for example, external shareholding) in the subsidiary.
There is also specific authorisation of “shared services” arrangements, where two or more contracting authorities jointly control the “subsidiary”.
The codification of the rules on groups is likely to lead to an increased emphasis on ensuring that the “Teckal” test is satisfied. In order to be sure that the exemption applies, groups will need to ensure that:
- the parent organisation exercises a decisive influence over its subsidiary’s strategic objectives and significant decisions (for example, by the parent having control over the subsidiary’s business plan and requiring it to follow group policies); and
- each subsidiary carries out 90% or more of its work for the parent and/or other organisations within the group.
Paradoxically, there is now greater flexibility for a DLO or other business unit to work for third parties if it is simply a division of the main group organisation than if it is located in a separate legal entity. This is a further driver towards collapsing group structures, as long as funder consents can be secured for this without a costly repricing.
The extent to which the EU procurement rules apply to development agreements has been a source of concern in the UK. Currently, where a developer controls the site, a contracting authority has to take the risk of a procurement challenge, since there is no clear exemption from the need to tender in these cases. The Helmut Muller case has helped by saying that there is only a procurement issue if the authority controls the specification for the development. However, it has not eliminated all of the challenge risk from development agreements.
The Commission proposes to include this test in the new Directive as a new part of the definition of a public works contract. This will include a contract, “which has as its object the realisation of a work corresponding to the requirements specified by the contracting authority exercising a decisive influence on the type or design of the work”.
There is no definition of “requirements specified by the contracting authority”, so it is not clear whether this would still apply if the contracting authority just has the right to prevent changes to the specification.
Commercially when buying from a developer some control will be needed over the specification and quality, especially if the development is grant funded from the HCA. Contracting authorities will still, therefore, need to consider:
- the risk and impact of their development agreement being cancelled post signature; and
- whether to protect against this risk by placing a “VEAT” notice in OJEU.
Variations and contractor insolvency
The Pressetext case, governing changes to contracts, will be codified into the Directive. The following changes will be categorised as “substantial changes”, requiring a tender process for a new contract:
- a change of contractor, other than to a successor contractor following insolvency and corporate restructuring of the original contractor;
- any change that, had it applied during the tender process, would have led to different contractors being selected to be invited to tender or a different contractor winning the tender;
- a “considerable” extension of the scope of the contract to cover new supplies, services or works it does not currently cover; or
- any change to the economic balance of the contract in favour of the contractor.
The following changes will not be regarded as "substantial":
- the transfer of the contract to a successor contractor following the insolvency or corporate restructuring of the original contractor;
- a price variation with a monetary value that is both below 5% of the initial contract price and below the EU tendering threshold;
- a price increase of up to 50%, where the need for the change is due to circumstances that were unforeseeable when the contract was tendered originally and the change does not alter the overall nature of the contract.
The ability to transfer a contract to a successor following insolvency is new and very welcome. Other than this, essentially there is “no change”. Care will still be needed over whether any change to a contract is a “substantial change” leading to the need to retender.
Extension of the full rules to new services
The full EU tendering procedures will apply to additional categories of services contracts. These will include security patrols and alarms, agency and temporary staff, travel arrangements and legal services. Only social services, education and leisure will fall outside this regime.
This change will open up a number of additional contracts to tendering, including grounds maintenance, site watching and security, agency staff and legal services.
Tendering “social services” contracts
For the limited range of services that are left outside the full tendering regime:
- the tendering threshold will be €500,000 (which currently equates to £434,835);
- an OJEU contract notice will be required, as well as a contract award notice; and
- there will be a discretion for the UK to set an “appropriate” procurement procedure (which must be “transparent” and treat suppliers equally) for these types of contracts.
In practice social services contracts are often tendered via a full OJEU process anyway. There may be greater visibility of some education and training and leisure contracts due to the need to place an OJEU notice “up front”, but this is the only major change.
The Directive will require all the "procurement documents" (including the contract terms) to be made available on the internet from the date of publication of the OJEU notice.
Fully electronic procurement, including the online submission of tenders, will be required by 30th June 2016. The technical electronic capability required is likely to include encryption and time stamping of tenders, electronic signatures and enhanced security measures to prevent them being tampered with.
Whilst it is good practice to draft all of the procurement documents up front, in practice this does not always happen. Where external legal advisers are supporting the procurement, it will become more important than ever to bring them in early on in the procurement process. This will be a major change to current procurement practice.
Instead of publishing an OJEU contract notice for each procurement, a contracting authority will be able to publish a PIN (prior information notice) instead. This will give details of all their proposed procurements over the next 12 months (with each procurement being treated as a separate "lot"). Suppliers will respond to the PIN to “express an interest”. When the contracting authority starts each actual procurement, they will send an “invitation to confirm interest” to each of them.
We think it unlikely that many contracting authorities will know their procurement programme enough in advance to be able to publish a PIN. For those that do, publishing a PIN could be simpler than publishing a series of OJEU notices, although the saving will not be substantial.
When procuring a works contract with a value above the tendering threshold or a supplies or services contract with a value of over €500,000, a contracting authority will need to give reasons if the contract is not split into lots.
A contracting authority that has properly considered its procurement strategy should have no problem doing this. These reasons could include economies of scale and simplicity of contract administration.
There will also be a specific power to limit the number of lots any tenderer can win. This must be stated in the OJEU notice/invitation to confirm interest.
This is very welcome. At the moment there is considerable uncertainty over whether it is legitimate to limit the number of contracts (lots) that can be won by the same contractor. This means that contracting authorities have to factor into the tender evaluation the “delivery risk” of the same contractor winning more than one lot.
New prequalification rules
There will be significant changes to prequalification:
- Suppliers will be able to apply for a “European Procurement Passport” (renewable 6 monthly) which certifies that they have not been convicted of any offences that would make them ineligible to bid and that they are not insolvent;
- There will be a significant restriction on the questions that can be asked about bidders’ financial strength. This will limit the information that can be asked for to:
- a balance sheet;
- previous three year turnover figures; and
- a bank reference or evidence of “professional risk" insurance.
Any minimum turnover requirement cannot be greater than three times the annual contract value unless “special risks” (which must be stated) justify a higher figure;
- Bidders will "self-declare" that they meet the minimum prequalification requirements. This will not be checked until later in the procurement (usually just before contract award);
- Bidders can be excluded on the grounds of poor past performance of a contract for the procuring contracting authority where this is objectively “proportionate”;
- There seems to be greater flexibility over the "selection" criteria. It seems that these no longer have to be linked to financial strength or technical ability and experience. It will seem that any criteria can be used as long as they are transparent and treat bidders from different EU member states equally.
The limit on the financial information that can be requested for prequalification is a major concern in relation to contractor solvency. Contracting authorities may want to consider lobbying to get this changed.
The ability to leave the prequalification “check” to the end of the process may be helpful in terms of reducing administration. However, it is likely to increase the risk of challenge if a contractor who has tendered and “won” is deselected for failing to meet minimum prequalification requirements, despite self-declaring earlier that they have met them.
The ability to select contractors to be invited to tender based on more flexible grounds is also welcomed. However, this could lead to a body of case law developing around the criteria that can be used, in a similar way to that in which the case law concerning award criteria has developed.
Service concessions (where a contractor is given the right to provide a service to the public, eg operating a car park and to keep the money paid by the public for that service) will now be regulated. There will be a new Directive covering both services and works concessions. This is more likely to impact on local authorities than registered providers or ALMOs.
Conflicts of interest
There will be specific provisions dealing with conflicts of interest between staff of the authority and contractors. Conflict of interest provisions will also apply to a contractor that has advised on or being involved in preparing for the procurement.
This is likely to lead to greater regulation of an area that has developed through case law, with a slight loss of flexibility as a result. Greater care will be needed over potential conflicts of interest in future. It will be interesting to see how this interfaces with the “community right to challenge” under the Localism Act.
Competitive procedure with negotiation
One of the most common criticisms of the EU procurement rules is their inflexibility. The inability to negotiate with bidders post tender in the open and restricted procedures has led to “bid clarification” being extended well beyond its original meaning!
The Commission has responded to this criticism by reinventing the negotiated procedure as the “competitive procedure with negotiation”. This procedure will be similar to the competitive dialogue procedure and will be available in similar circumstances. It will require tenders to be invited from at least 3 bidders. The contracting authority will be able to negotiate with bidders post tender, to “improve the content of their offers”. As with competitive dialogue, there will need to be a “final tender” stage during which bidders must be given the chance to submit new or revised tenders.
The ability to let bidders choose whether to improve their tender through a BAFO stage, rather than requiring full tenders from all bidders at that stage, is the only real change from what is possible through competitive dialogue at the moment.
New “innovation partnership” procedure
There will be a new procedure for an “innovation partnership”. This will allow a contractor to propose the development of an “innovative product, service or works” in response to an OJEU notice. This is then procured via the competitive procedure with negotiation.
This procedure is unlikely to have a major impact on “standard” maintenance and development arrangements, but may impact on other services.
The new minimum tender period under the restricted procedure will be reduced to 35 days, or 30 days under full e-tendering. For contracting authorities other than central government this period can be reduced if all bidders agree. Where bidders have been approached to seek to get them to agree to shorter tender period, but they do not agree, the contracting authority can set the tender period. This must be at least 10 days.
The minimum tender period under the open procedure will be 40 days. Given that the procurement documents will need to be available from the date of the OJEU notice, these shortened timescales are welcome.
Each EU Member State will need to set up a body responsible for oversight of the EU procurement rules and with the power to review procurement decisions.
This is likely to be an alternative route of challenge for contractors. However, the very short timescales for a procurement challenge via the courts mean that this route of challenge is likely to be used either as an additional route of challenge or for challenges that are either weaker or where the values involved do not justify the costs of a court application.
Procuring authorities must send this body copies of works contracts valued over €10 million and supplies and services contracts valued over €1 million.
All public contracts will have to include clauses allowing them to be terminated if the European Court declares that they were procured in breach of the Directive or EU Treaty. Provisions similar to the “relevant discharge terms” in PFI contracts will need to be included in all contracts to deal with liabilities on termination.
The new rules will offer greater opportunities for environmentally beneficial and “fair trade” purchasing. Compliance with environmental management systems (such as EMAS, the EU Eco Management and Audit Scheme) can also be required, where they are relevant to the contract. Any “standards” required will need to be based on scientific evidence and objective criteria established through an “open and transparent process involving all stakeholders”.
There is also more emphasis on lifecycle costs in tender evaluation. Environmental costs can be taken into account if quantifiable in monetary terms.
All this is helpful, and promotes an agenda many contracting authorities will want to support. However, the requirement for objective evidence of monetary benefits and costs can make it difficult in practice to reflect these factors in a procurement process in a way that is “challenge proof”.
The Cabinet Office has invited comments on the proposals. Comments should be sent to the Service Desk: 0845 000 4999 or firstname.lastname@example.org.
The Procurement Lawyers’ Association has also set up a working party to liaise with the Cabinet Office during the negotiations. Andrew Millross from our office is a member of this working party. If you would like to discuss any of the proposals with Andrew, he can be contacted on 0121 212 7473 or email@example.com.
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