PFI in the United Kingdom A real policy review at last The rapid expansion of the use of PFI in the United Kingdom was not underpinned by a prior analysis of the approach which best accorded primacy to the public sector s aim for whole life value for money in the achievement of its service delivery objectives and assessed the true nature of the risk being accepted in PFI by private sector partners and lenders. The United Kingdom approach to PFI largely evolved through practice and the public sector failed to anticipate the evolution of the PPP market in certain key ways such as the development of secondary markets in PPP stakes and debt re financing. Subsequent policies were developed on refinancing gain sharing, funding competitions, guidance on compensation on early termination, insurance and the Public Sector Comparator and the standard form of PFI contract has also evolved. But none of this added up to fundamental review of PFI policy until the announcement of the review process launched last month by HM Treasury. This review is both timely and long overdue and the need for it is again underlined by the latest UK PFI data (to November 2011) published by the Treasury, which shows predicted future commitments on signed PFI contracts to be 242 billion between 2011/12 and 2048/49. The key aim of the review is the development of a new model for PFI which looks to retain the benefits that successful PFI can deliver within the context of a new approach to the delivery of infrastructure which: Is less expensive and uses private sector innovation to deliver services more cost effectively Can access a wider range of financing sources, including encouraging a stronger role to be played by pension fund investment Strikes a better balance between risk and reward for the private sector Has greater flexibility to accommodate changing public service needs over time Maintains the incentive for the private sector to deliver capital projects to time and to budget and to take performance risk on the delivery of services Delivers an accelerated and cheaper procurement process Gives greater financial transparency at all levels of the project so that the public sector is confident that it is getting what it paid for and that the taxpayer is sure it is getting a fair deal now and over the longer term. The background to the review is a series of critical reports in 2011 on the functioning of PFI in the United Kingdom, such as from the House of Commons Treasury Select Committee ( Private Finance Initiative, August 2011), House of Commons Public Accounts Committee ( Lessons from PFI and other projects, September 2011) and from the National Audit Office ( Lessons from PFI and other projects, April 2011). 1
The scope of the review is wide ranging, with 44 questions in 13 sections with the open invitation to address any other issues considered relevant. The sections cover the role of the private sector in delivering public infrastructure, the future role of institutional investment, the Government s role in project funding, possible changes in the approach to debt finance, issues associated with equity investment in PFI schemes, current risk allocation in PFI contracts, current procurement and contract management practice, balancing innovation and standardisation in PFI contracts, the future of soft facilities in PFI contracts, value for money in hard facilities management, insurance of risks, flexibility within contracts and transparency associated with operational PFI contracts. Key questions many of which echo issues raised in 2007 in EIPA s book PPP A decision maker s guide include: How should the use of private finance be evaluated when considering the best procurement route to deliver a public asset? What if any role should public sector capital play in the financing of the construction or operational phase of public assets and services? What is the view of respondents to an approach which financed the construction period of projects separately from the operational phase? What are respondents views on an approach that capped equity returns or that provided for public sector sharing in returns achieved above a specified level? Should the public sector limit the transferability of PFI equity? Should the public sector share in gains on sale of PFI equity, and what impact would this have on investment appetite and pricing? What views do stakeholders have on public sector co investment or joint venturing alongside private sector equity? What further improvements could Government consider to the standard approach to PFI procurement in order to streamline the process and reduce costs, while meeting wider objectives for effective competition, accessing bidder innovation and maintaining a robust contractual framework? Are there particular ways in which the private and/or public sector approach to contract management can be improved in order to manage contracts more cost effectively? What is the right balance of output based versus standardised specification, when considering the twin objectives of accessing greater contractor innovation and reducing costs? Are the insurable risks of PFI projects most appropriately dealt with (a) by the private sector with a fixed cost passed through to the unitary charge, (b) by a premium risk sharing mechanism or (c) by the public sector? Should there be more and/or earlier break points in contracts and what would be the expected pricing impact for the public sector? Are there specific points that break points should be linked to? 2
What are respondents views on the current approach to determining voluntary termination compensation, are there alternative approaches that should be considered, in particular should there be differentiation in compensation amounts reflecting the point at which the termination arises? What degree of financial transparency should be adopted for future privately financed and delivered assets and services? One thing is sure the progress of this review will be keenly followed, not just in the United Kingdom but, also, because of the breadth of its experience in PPP, elsewhere in the EU. Michael Burnett January 2012 3
What next for Competitive Dialogue after the recent European Commission consultations? In early 2011 the European Commission launched two consultations with a potential impact on the future use of Competitive Dialogue i.e. the consultation by DG Markt on possible future changes to the European public procurement rules and the consultation by DG ECFIN on the Europe 2020 Project Bond initiative. Two aspects of the public procurement reform consultation could potentially impact significantly on Competitive Dialogue i.e.: The public procurement consultation (Q17) raised the possibility that Competitive Dialogue might modified or abolished The summary of the results of the public procurement consultation refers to the fact that there is broad support for the suggestion to allow more negotiation in public procurement procedures and/or generalising the use of the Negotiated Procedure with Prior Publication of a Contract Notice. Generalising the use of the Negotiated Procedure with notice would in effect render Competitive Dialogue redundant. If Competitive Dialogue is not abolished or rendered redundant, could it be substantially modified? This possibility has arisen because of a parallel consultation undertaken by the Commission in the context of the Europe 2020 Project Bond initiative. Public procurement aspects were not specifically addressed in the questions to stakeholders as part of the Europe 2020 Project Bond consultation. However, at the consultative conference on 11 April 2011, public procurement issues, and, in particular, the use of Competitive Dialogue, were addressed by the service provider, investor and lender community. In its summary of the results of the consultation, the Commission referred to the fact that procurement process...obstacles in terms of requiring fully funded and committed fixed price offers to a tight timeline generally does not favour or even allow bond solutions. The process differs across Member States, but in general the demand was that the procurement process should be more flexible to allow bond solutions with their different benchmark, volatility of spread and timing requirements. The focus of discussion in the context of the Europe 2020 Project Bond initiative was thus to amend either the legal text or the implementation of key parts of Article 29(6) and Article 29(7). These regulate the conduct of the award procedure after the submission of final tenders which, according to Article 29(6), shall contain all the elements required and necessary for the performance of the project and thus should not need to be significantly modified. 4
Article 29(6) provides that these tenders may be clarified, specified and fine tuned at the request of the Contracting Authority. However, such clarification, specification, fine tuning or additional information may not involve changes to the basic features of the tender or the call for tender, variations in which are likely to distort competition or have a discriminatory effect. Article 29(7) provides that at the request of the Contracting Authority, the tenderer identified as having submitted the most economically advantageous tender may be asked to clarify aspects of the tender or confirm commitments contained in the tender provided this does not have the effect of modifying substantial aspects of the tender or of the call for tender and does not risk distorting competition or causing discrimination. The main focus of this discussion appears to be to widen the scope of the changes which are legally permissible in the post tender phase i.e. to: Widen the definition of what is permissible as clarifying, specifying and fine tuning tenders Widen the definition of what is permissible as clarifying aspects of the (winning) tender or confirming commitments contained in the (winning) tender Restrict the definition of what are changes to the basic features of the tender or the call for tender, variations in which are likely to distort competition or have a discriminatory effect Restrict the definition of what has the effect of modifying substantial aspects of the tender or of the call for tender and (risks) distorting competition or causing discrimination. Does the possibility of abolition or substantial modification of Competitive Dialogue merit serious consideration? Is the original logic for introducing Competitive Dialogue still relevant i.e. as a means to both improve the conduct of public procurement procedures for complex projects and to solve the particular challenges arising from the award of complex contracts in a way which is transparent, competitive and minimises legal uncertainty? Two recent studies have highlighted the benefits which have resulted from the use of Competitive Dialogue when applied effectively. In November 2010, HM Treasury published a review of the implementation of Competitive Dialogue in the UK which identified several positive aspects of its application, i.e. that: Both (the public and private sectors) are in agreement that the process is capable of maintaining sufficient competition. Over 90% of public sector respondents felt their procurements maintained competitive tension throughout the process. When the private sector respondents were asked the comparable question, the percentage remained above 90% 5
Competitive Dialogue has successfully addressed the issue of protracted post preferred bidder discussions. Based on evidence received during the review, the period from Preferred Bidder stage to Financial Close for PFI projects is shorter under Competitive Dialogue and the practice of making late changes to contracts appears to be much reduced In addition to reducing the scope for significant changes to be made to contracts following the completion of the competitive stage of the process, the introduction of the Competitive Dialogue procedure has brought valuable discipline to the post preferred bidder period, introducing a clear and structured process, with a contracted deadline for closing projects The introduction of Competitive Dialogue has improved procurement outcomes by enabling the public and private sectors to develop and deliver more appropriate, bespoke, value for money outcomes. 78% of respondents to our general survey agree that bidders have an increased or significantly increased ability to deliver improved solutions when compared to the Negotiated Procedure (with notice). The practical implementation of Competitive Dialogue across the EU has also been addressed in a recent study by the European PPP Expertise Centre, published in July 2011. This highlighted the following positive aspects of Competitive Dialogue, based on input from the countries that use it relatively frequently compared to alternative procurement procedures: Improved communication between the Contracting Authority and the bidders during the dialogue, which allows a better definition of the Contracting Authority s needs and come up with better design and innovative solutions Enhanced competitive tension during the dialogue period which allows the Contracting Authority to achieve better value for money and agree on all vital commercial issues while there is still competition among participating bidders Better price discipline which leaves less room for price creep at the post preferred bidder stage A general perception that Competitive Dialogue does not expose the Contracting Authority to greater risk of legal challenges than alternative procurement procedures. Competitive Dialogue was created to address a specific public procurement challenge the award of complex contracts in a way which is transparent, competitive and minimises legal uncertainty which is unlikely to cease to be relevant as an issue. The reasons for its creation are still valid and the abolition or substantial modification of Competitive Dialogue would return Contracting Authorities to the same unsatisfactory choices which they faced prior to its creation. 6
Competitive Dialogue has been shown to bring benefits when effectively applied, though, even if the benefits were less clear cut, a maximum of five years of experience with Competitive Dialogue would be insufficient to act as a basis for abolition or substantial modification at this stage and thus it would be more appropriate to optimise and make more consistent the effective application of Competitive Dialogue. The failure of Contracting Authorities to implement Competitive Dialogue effectively in individual procurements is not a reason for abolishing or significantly modifying Competitive Dialogue. The difficult credit conditions of the financial crisis have created challenges for the application of Competitive Dialogue but these difficult conditions will not be permanent. It is thus not appropriate to respond to any temporary challenges in application by amendments to the public procurement rules which could undermine the reasons for the creation of Competitive Dialogue and have an effect which lasts beyond the current crisis. Amendments to the public procurement rules are in any event only of one of several potential instruments to facilitate the award of complex privately financed contracts in the current crisis. In its recently published evaluation of the Public Procurement Directives, the Commission highlights the fact the benefits of European public procurement rules amount to approximately 20 billion per year, as compared to costs of approximately 5 billion per year. The generalisation of the Negotiated Procedure with Prior Publication of a Contract Notice in the public contracts sector potentially places these benefits at risk. Furthermore, as the Commission has pointed out, stakeholders are well aware that an increased use of negotiated procedures can have negative consequences in terms of transparency, non discrimination and fair and objective proceedings. A clear majority of respondents share the view that a generalised use of the negotiated procedure might entail risks of abuse and discrimination and that additional safeguards for transparency and non discrimination would be necessary in order to compensate for the higher level of discretion. In short, Competitive Dialogue remains a key element of the means by which the public sector can secure value for money in the award of public contracts. Rather than talking about changing or undermining Competitive Dialogue, surely it makes more sense to enshrine value for money as a public procurement principle by referring to value for money specifically in the Directives? Michael Burnett November 2011 7
Reform of EU public procurement rules What could it mean for PPP? At the end of January 2011 the European Commission launched a consultation on possible future changes to the European public procurement rules in the form of a Green Paper ( Towards a more efficient European Procurement Market COM(2011) 15/4). (http://ec.europa.eu/internal_market/consultations/2011/public_procurement_en.htm) It is a wide ranging document with 114 questions for consultation, reflecting the growing interest in using public procurement as a tool for implementing other policies such as promotion of innovation, support for SMEs and underpinning European social and environmental policies. The consultation does not deal with concessions, which have been the subject of earlier separate consultation exercises and impact assessment and, as I wrote in last month s Talking Point, a long awaited legislative initiative on concessions is expected before the summer. PPP are, of course, a form of complex and often high value public procurement, so any changes to the Public Procurement Directives will also apply to them. The questions with the most potential to impact directly on PPP include: Do you think that the distinction between A and B services should be reviewed? (Q4) Do you think that the procedures and tools provided by the Directive to address specific needs and to facilitate private participation in public investment through public private partnerships (e.g. dynamic purchasing systems, Competitive Dialogue, electronic auctions, design contests) should be maintained in their current form, modified (if so, how) or abolished? (Q17) Would you be in favour of allowing more negotiation in public procurement procedures and/or generalising the use of the Negotiated Procedure with Prior Publication? (Q19) Should the Public Procurement Directives regulate the issue of substantial modifications of a contract while it is still in force? If so, what elements of clarification would you propose? (Q39) Where a new competitive procedure has to be organised following an amendment of one or more essential conditions would the application of a more flexible procedure be justified? What procedure might this be? (Q40) Do you think that EU rules on changes in the context of the contract execution would have an added value? If so, what would be the added value of EU level rules? In particular, should the EU rules make provision for the explicit obligation or right of Contracting Authorities to change the supplier/terminate the contract in certain circumstances? If so, in which circumstances? Should the EU also lay down specific procedures on how the new supplier must/ may be chosen? (Q41) Do you agree that the EU Public Procurement Directives should require Member States to provide in their national law for a right to cancel contracts that have been awarded in breach of public procurement law? (Q42) 8
Do you think that Contracting Authorities should have more possibilities to exert influence on sub contracting by the successful tenderer? If yes, which instruments would you propose? (Q44) In your view, should it be mandatory to take life cycle costs into account when determining the economically most advantageous offer, especially in the case of big projects? In this case, would you consider it necessary/appropriate for the Commission services to develop a methodology for life cycle costing? (Q73) And the consultation also contains an open ended opportunity (Q113) to comment on any other issues which might be addressed in a future reform of the EU Public Procurement Directives but which are not covered by the consultation questions. So it may be used to return to issues such as: The need for greater transparency regarding the use of the Negotiated Procedure without Prior Publication to minimise its inappropriate use Reducing the diversity within national legal systems in the application of the Remedies Directive. What is likely to happen next? The consultation is open until 18 April 2011 and then it can be expected that the Commission will produce a summary of the responses to the consultation. Since many of the issues are likely to attract widely differing views from respondents, summarising the results of the consultation is likely to be both far from easy and protracted. Following the consultation on PPP and concessions from April to July 2004, which included 22 questions, the summary of the results did not appear until May 2005. It would therefore be surprising, given the wide scope of this consultation, if such a summary appeared before 2012. On the basis of the contributions received the Commission will then, where appropriate, submit concrete follow up initiatives, which may be legislative or non legislative. The legislative process is also likely to be keenly contested both in the Council and the European Parliament and thus will probably be lengthy. The current Public Procurement Directives (Directives 2004/17 and 2004/18) were adopted on 31 March 2004, but originated in a Commission proposal in May 2000. Nothing is, therefore, likely to happen soon, but the debate about the future of the Public Procurement Directives goes to the heart of what the Internal Market is and should be about and how the fundamental conflicts between different EU policies will be resolved. So no one with an interest in these matters can afford to stay on the sidelines including, of course, this web site, where all are invited to submit comment for debate. Michael Burnett March 2011 9
The proposed legislative initiative on service concessions Is it needed and what will it achieve? In the Single Market Act the European Commission promised that in 2011 it would adopt a legislative initiative on service concessions. The aim is that clear and proportionate rules will improve market access for EU undertakings by ensuring transparency, equal treatment and a level playing field for economic operators. This is consistent with the Commission s Work Plan for 2011, which sets out the aim as being to provide legal clarity and certainty as to the rules governing award of concessions contracts. The legislative initiative is long anticipated the possible need for such an initiative was referred to in the Commission s PPP Communication of November 2005 and it is important to PPP, because 60% of PPP are considered by the Commission to be capable of being classified as service concessions. Since November 2005 there has been a lengthy process of impact assessment and consultation, including two periods of public consultation in 2010, but it now looks likely that there will be a proposal for a legislative initiative in Spring 2011. It is still not clear if the initiative will be a stand-alone Directive or proposed by way of amendments to Directives 2004/18 and 2004/17. What is not in doubt is as the Commission has pointed out in its indicative road map that do nothing is not an option because it would preserve the situation of legal uncertainty and fail to address the key problems identified by the Commission of: Disparity of definitions and régimes in Member States, which could act as an entry barrier to different national markets Deficient application of the principles of transparency, equal treatment and non discrimination, especially as current practices in Member States are very often not in line with these principles Insufficient legal certainty, since the case law of the European Court of Justice is not very precise or even complete on the concrete obligations resulting from the application of the principles, leaving Contracting Authorities unsure if the advertisement and award methods they apply are compliant with the EU law and bidders unsure if a contract which they have bid for in good faith may be open to challenge Imperfect legal protection of tenderers, since the exclusion of service concessions from Directives 2004/18 and 2004/17 and works concessions from Directive 2004/17 also means that interested parties cannot seek remedies using the Public Procurement Remedies Directives. Competitive Dialogue, giving the freedom to Contracting Authorities discuss all aspects of the contract with selected candidates, creates the conditions for those genuinely uncertain about the extent to which risk can be transferred to the contracting partner and thus whether or not a transaction should be classified as public contract or as a concession. 10
If Competitive Dialogue is used, and its procedural rules followed, this will fulfill the procedural requirements for both forms of transaction and will thus minimise the risk of infringement of EU law. But the use of Competitive Dialogue for this purpose presumes, of course, the intent to maximise transparency and competition on the part of the Contracting Authority. So what options might the Commission pursue? In an article in the European PPP Law Review in 2008 I argued that there were three main options for legislators i.e.: A new Concessions Directive setting out rules for the award of concessions Repeal of Article 17, Directive 2004/18 (which excludes service concessions from the scope of that Directive) and to extend the scope of the Articles which refer to works concessions also to include service concessions A new definition of a public service transaction embracing both what are currently public contracts and concessions, introduced by amendment to Directive 2004/18. I concluded then that the most straightforward way to address the problems highlighted by the Commission was to make all public works and service contracts and all works and service concessions above the thresholds and not exempted by reason of the objective of the contract subject to identical award procedures. In effect, this would render redundant the current distinction in Community law between public contracts and concessions. This is a solution which the Commission appears to have ruled out (e.g. in the PPP Communication of November 2005), though there is in reality little justification for the different award procedures public contracts and those which are classified as concessions, especially for PPP. Treaty principles themselves do not provide sufficient justification and nor does the potential existence of additional risk to the supplier in a concession, the fact that the principal beneficiaries are third parties rather than the Contracting Authority or the nature of the service provided. I also drew attention to the fact that the existing distinction between public contracts and concession contracts encouraged régime shopping i.e. the process by which a Contracting Authority can use the existence of different rules to structure a transaction so as to be able to use an award procedure with the intention to avoid transparent and competitive procurement. Transparent and competitive procurement is key to securing value for money for the public sector, and is especially important at a time of crisis in European public finances. Since then, the European Court of Justice judgment in the Eurawasser case has made the need for action more urgent. It appears to have re defined the nature and extent of the risk which needs to be accepted by the concessionaire and thus potentially widened the number of transactions which may be classified as a concession. 11
Yet, in doing so, the European Court of Justice has not definitively resolved the uncertainty about how much and what type of risk has to be present for a transaction to be classed as a concession as opposed to a public contract. What are the new rules likely to cover? The indications are that they are likely to cover: The definition of a concession, including the nature and extent of risk necessary for a transaction to be classed as a concession as opposed to a public contract The thresholds for the application of the rules and the method of calculation of them The procedures for awarding concessions The selection and award criteria for concessions The duration of concessions Amendments to a concession during its lifetime Remedies regarding infringements relating to concessions. It is not clear whether or not the legislative initiative will cover both works and service concessions or only service concessions and how to deal with concessions which could be classified as both works and service concessions. What is likely to happen? There have been different views in the Council over many years on this issue, differences which still remain, and the European Parliament s view, as expressed in the Rühle report in May 2010, was that any proposal for a legal act dealing with service concessions would be justified only with a view to remedying distortions in the functioning of the internal market and points out that such distortions have not hitherto been identified, and that a legal act on service concessions is therefore unnecessary as long as it is not geared to an identifiable improvement in the functioning of the internal market. So it is not clear what progress this Directive will make, and thus whether the uncertainty for Contracting Authorities will remain to be resolved through European Court of Justice. In any event, Contracting Authorities need more guidance, be it from Member States or the European Commission, to address in some detail the factors discussed above and thus to clarify the concept of concessions, perhaps by way of examples of what types and extent of risk accepted by the contracting partner would or would not constitute sufficient risk to classify the transaction as a concession. The European Court of Justice could also, when another judgment is required from them (for example in the Passau case where the Advocate General gave his opinion in September 2010), use the opportunity to clarify the whether or not their judgement in the Eurawasser case will become part of its settled judgment of how a concession is to be defined. Michael Burnett February 2011 12
Competitive Dialogue What is a particularly complex contract? The legislative framework for Competitive Dialogue contained in Article 29, Article 1(11)(c) and Recital 31 of Directive 2004/18 leaves many questions unanswered, as does the European Commission s Explanatory Note on Competitive Dialogue in the Classic Sector, published in January 2006. Nor has there so far been any case law in the European Court of Justice to assist Contracting authorities and their professional advisers. One of the main issues is the definition of what constitutes a particularly complex contract and there has been a divergence of views amongst legal commentators, and thus possible legal uncertainty, principally about the extent to which the interpretation of particularly complex should be broad or narrow. This divergence has centred on issues such as: The meaning of objective impossibility (which could, in its strictest sense, mean absolute impossibility or not possible without disproportionate effort, in which case it raises the question of what would be a reasonable amount of time and costs for a Contracting Authority to devote) The interpretation of the phrase without this being due to any fault on their behalf and how Contracting Authorities can demonstrate this (e.g. the extent to which they need to use their own resources, those of their networks and/or those of external advisers and/or market consultation with potential bidders and, in the case of PPP, with lenders etc.) The degree of discretion afforded to Contracting Authorities to determine when the use of the Open or Restricted Procedure will not allow the award of the contract and how they can demonstrate this Whether or not the formulation of the legislative provisions for Competitive Dialogue means that it is in reality intended to be an exceptional procedure, used rarely, and thus, in practice, unlikely to be any easier to justify than the grounds for using the Negotiated Procedure with Prior Publication of a Contract Notice. Does this matter in practice? Some early commentators, concluding that the grounds for using the Competitive Dialogue procedure were, in fact, to be interpreted very narrowly, thought that the application of the procedure would thus be relatively rare. 13
But this has not prevented the extensive use of Competitive Dialogue in the EU, because of the calculation that both disaffected losing bidders and the European Commission would be more likely to challenge the way that the procedure is implemented rather than the choice of the procedure. From the perspective of the European Commission, the risk of challenging the choice of the Competitive Dialogue procedure is that it would re create the difficult choice faced by Contracting Authorities before Directive 2004/18 between the inflexibility of the Restricted Procedure and the more flexible but less legally certain Negotiated Procedure with Prior Publication of a Contract Notice. Thus the complexity test may turn out to be more formal than substantive, though the burden of proof nevertheless lies with the Contracting Authority to demonstrate that the use of the Competitive Dialogue has been properly justified. The elements of a complexity test are likely, at minimum, to involve the Contracting Authority in a process of: Identifying the uncertainties which it needs to test by using Competitive Dialogue Ensuring that it has followed a process of attempting to determine how its needs can be satisfied without using Competitive Dialogue i.e. setting out the actions it has taken and plans to take and forecasting the time and costs which would need to be expended in attempting to determine how its needs can be satisfied without using Competitive Dialogue. These will act as evidence that the use of Competitive Dialogue has been taken in the context of the need to demonstrate absence of fault and the need, at least, to demonstrate objective impossibility insofar as it is defined as not possible without disproportionate effort Documenting the decision such that it can be explained if challenged by third parties or questioned by auditors Obtaining a robust legal opinion to support the decision. What kind of uncertainties will enable a contract to qualify as particularly complex? A variety of justifications have been used, but not, as noted above, tested in the courts. One key negative test which can be applied is that, since the principal way to resolve uncertainties during the award process is the dialogue phase, the decision by a Contracting Authority to exclude a matter from the dialogue should be based on an assessment that there was no significant uncertainty or complexity about the matter. Thus, any matter which does not fall with the planned scope of the dialogue foreseen by the Contracting Authority, cannot, logically, be a justification for the use of Competitive Dialogue. 14
Possible justifications could relate to the existence of volatile market conditions at the time of the launch of the procedure (of which the continuing financial crisis, with its impact on public finances and capital markets, is an obvious example), the existence of technically complex and difficult to access geological conditions of a nature which might justify the use of the Negotiated Procedure with Prior Publication of a Contract Notice on the grounds permitted in Art 30(1)(b) of Directive 2004/18 and the arrangements of candidates for managing contract interfaces. In any event, Contracting Authorities need more guidance, be it from Member States, the European Commission or the European Court of Justice, who, if a judgment is required from them, could use the opportunity to address in some detail the factors discussed above and thus to clarify the concept of particular complexity for Contracting Authorities. And, of course, more debate and comment via this website would be welcome. Michael Burnett November 2010 15
Competitive Dialogue procedure Current trends The emerging evidence of practice to date in the dialogue phase is that different decisions are being made about the number of phases in the dialogue, the objectives of the dialogue sub phases, how the phases are conducted, the time to be allowed for the dialogue phase, the information to be requested from bidders in the dialogue sub phases, whether or not elimination of solutions should occur during the dialogue phase and, crucially, the position which the Contracting Authority needs to arrive at by the end of the dialogue phase. The current methods of conducting the dialogue phase may be summarised as follows: Inviting several solutions, then narrowing the differences between them towards a single merged solution i.e. to use the early part of the dialogue phase to develop a hybrid solution (one based on the best features of the solutions proposed by the different participants). This, of course, would require their agreement in the light of the confidentiality provisions in Directive 2004/18 Inviting outline solutions and then one or more progressively more detailed solutions A consecutive approach i.e. dialogue first on technical/operational aspects and then on financial aspects of the offer Starting from a provisionally preferred solution of the Contracting Authority and inviting bidders to comment on it by marking up the solution as the basis of the dialogue. All of the approaches described here are compatible with the legal requirements for the Competitive Dialogue procedure in general and the dialogue phase in particular. But the fact that they are legally permissible does not mean that, in terms of the likelihood of securing value for money for the public sector, they are necessarily equally effective. The main conclusions emerging from these different approaches are that: Most of the approaches have, in practice, led to at least two sub phases within the dialogue phase There has not always been sufficient clarity about the objectives of each sub phase i.e. what the Contracting Authority needs to have achieved at the end of each sub phase The methods used in the dialogue phase have converged towards written submissions by bidders, regular one to one discussions between the parties, presentations by bidders, availability of information through extranets, access by bidders to relevant personnel of the Contracting Authority and submission of interim solutions by bidders The time allocated in practice by Contracting Authorities for the dialogue phase has varied widely, with the observed range being between one and eight months. There are practical difficulties associated with the approach of inviting outline, then detailed solutions because of the pressure that it creates on the Contracting Authority if it has failed to devote sufficient resources to understand the issues associated with the project in detail and to work out its approach to them in advance of discussions with bidders, thus placing it at a disadvantage in the dialogue 16
It is difficult in practice to separate out the technical/operational and financial aspects of a bid because of the links between the cost of project and its scope, duration and performance standards. Michael Burnett January 2010 17
The IPPP Interpretative Communication Creating a loophole for misuse? The eagerly awaited Interpretative Communication on IPPP foreseen in the Commission s PPP Communication of November 2005 was published by the European Commission in February 2008. Much of the content was as expected, addressing the issues of how the private partner be selected initially in the most common situation i.e. where an operational management role is envisaged for it and possible events during the life of the IPPP. As the Interpretative Communication makes clear, the private input to the IPPP normally consists apart from the contribution of capital or other assets in the active participation in the operation of the contracts awarded to the public private entity and/or the management of the public private entity. But what was unexpected was the inclusion in the Interpretative Communication of the statement not further elaborated that simple capital injections made by private investors into publicly owned companies do not constitute IPPP and are therefore not covered by the present Communication. This is in contrast to the fairly clear steer in the November 2005 PPP Communication that the Stadt Halle case (European Court of Justice case C 26/03) was regarded as settled case law i.e. that the opening up of the share capital of a previously 100% owned public enterprise to a private investor changes the nature of the service delivery entity. It follows from this that, at the moment of opening up of the share capital of the public enterprise, a new contract comes into being, requiring the application of the public procurement rules. This outcome is in effect what happens with any kind of capital injection by a third party, so it is unclear whether or not this Interpretative Communication is consistent with the judgement of the European Court of Justice in Stadt Halle. In any event, it is almost invariably the case that a private investor who invests in a public enterprise will be doing so to influence the direction of the entity, even if their only intention is to receive dividends. The lack of qualification of the statement about capital injections in the Interpretative Communication also leaves a number of questions still to be answered, namely: Is any limit on the size of initial shareholding in public enterprise to which this derogation applies? What happens if a private financial investor then acquires a further stake in the public enterprise, especially one which results in majority shareholding? What happens if a private financial investor subsequently wants to assume service delivery responsibilities? 18
What decisions would, if influenced by the private investor, be regarded as operational management e.g. would asset acquisition or disposal, expansion to new business areas, cessation of business activities, appointment of non executive directors or dividend policy decisions fall into this category? Does operational management extend to any decisions for which the private investor s approval is needed? Should there be a time limit or value threshold for the unexpired period of any contract held by the public enterprise with its host Contracting Authority beyond which a capital injection is not covered by the derogation? How should capital injections made in the period prior to the expected award of a new contract by the Contracting Authority? There is, of course, nothing to prevent a Contracting Authority which wants to conduct a process for the injection of capital conforming to the procedures in the Public Procurement Directives from doing so and every reason for them to do so on grounds of compliance with the principles of transparency, equality of treatment and non discrimination as well as securing value for money. Nor is it impossible to devise selection and award criteria for such a process, weighted to be relevant to the purpose of the engagement of the private partner. For example, if the private partner were being selected because of the size of the capital injection needed, it would be expected that the award criteria might be more heavily weighted to the amount that it was prepared to pay for the shares acquired than if, for example, the private partner was being sought because of its ability to raise money from third parties in capital markets, the goodwill (in the strict accounting sense of reputational benefits) it would bring or its ownership of intellectual property assets.. In short, this derogation has created the possibility of legal uncertainty about what constitutes a simple capital injection and, possibly, a loophole for avoidance of the Public Procurement Directives which almost certainly was not the Commission s intention. Michael Burnett April 2008 19
PPP Challenges for 2008 2008 is likely to be a challenging year for PPP with the pressures driving the use of PPP being as strong as ever i.e. the need to modernise infrastructure, the budgetary pressures on public administrations and the demands of citizens for better quality public services. Public authorities are likely to need to use PPP, when they are the most appropriate solution, for the delivery of a wide range of public services for the foreseeable future. But the world changed in 2007 and it is not yet clear if the global credit crunch will impact on the ability to raise debt to finance (or refinance) PPP Will 2008 be the year in which funding supply becomes an issue, with PPP in Europe having to compete for funds for PPP in other global locations where PPP is becoming more prominent, such as Asia? And there is still some outstanding business on the legal framework following the November 2005 Interpretative Communication by the Commission, which envisaged a possible future legislative initiative on concessions, as many PPP are. The Commission is still reflecting and consulting on the need for, and possible shape of, such a legislative initiative before taking further action. It appears still to be undecided on whether it would be desirable or if so how to do it i.e. by the means of a Concessions Directive or an amendment to the Public Procurement Directives. And it remains to be seen if the imminent Interpretative Communication on IPPP will provide the legal clarity and certainty sought by public authorities. As always the tests to be applied in assessing the effectiveness of any proposals will be: Do any proposed changes lead to greater legal certainty for public bodies and their private partners? Legal certainty the assurance that the process will, if conducted according to known and well defined rules, lead to an outcome which is unlikely to be successfully challenged is particularly important in attracting interest in PPP. This is because they are long term, high value contracts which usually call for high levels of investment by service providers and long term financial commitments by public authorities Do any proposed changes provide greater clarity for public authorities about how to conduct a transparent and competitive procurement process? Transparent and competitive procurement processes are needed to ensure that value for money, defined by the UK Treasury as the optimum combination of whole life cost and quality (or fitness for purpose) to meet the user s requirement, can be achieved. Public administrations cannot afford anything else, since otherwise the massive scale of infrastructure investment needed will simply become even larger. 20
Competitive Dialogue, the new procedure for awarding public contracts introduced by Directive 2004/18 (the Public Contracts Directive), has now started to be used to implement PPP projects within the EU. 2008 should start to see the emergence of best practice in the conduct of the dialogue phase of Competitive Dialogue and what is and is not permitted in the post tender phase. Within the EU, two issues will be watched with interest i.e.: How will the commitment to PPP as a means of public service delivery impact in major economies such as Germany, where public service reform is taking hold? How will countries like Greece where all the fundamentals for successful implementation of PPP seem to be right such as political consensus, political will, a new law to remove legal barriers, a record of successful PPP and a skilled and enthusiastic central task force manage its PPP programme in way which avoids overheating of the market? All this adds up to an interesting year both to ensure that the evolution of the legal framework for PPP keeps pace with needs of both public and private partners and to watch developments in implementation of PPP both at national level and through the expected emergence of the EIB based European PPP Expertise Centre. Michael Burnett January 2008 21