consultation response to EU Commission Green Paper: ON PUBLIC-PRIVATE PARTNERSHIPS AND EUROPEAN UNION LAW ON PUBLIC CONTRACTS AND CONCESSIONS General Comments on Green Paper The Green Paper appears to have as its main concern that there is not specific legislation to deal with all possible elements of PPP where market abuse may potentially occur. The questions seem to focus on obtaining evidence for this rather than on seeking views on how best to develop PPP as a vehicle for delivering infrastructure and services across the European Union. Experience in the UK which has been used as a model elsewhere is that a co-ordinating body (PUK) along with other institutions across various sectors (4Ps, OGC, Partnerships for Health) developing best practice in the context of the roll out of real projects provides the basis for developing workable rules. Grant Thornton consider that a pan-european approach along these lines co-ordinating the experiences of national bodies is preferable to legislation which if required at all should only follow tested practices in the market which have provided value for money and affordable solutions to the public sector. Further legislation is likely to increase bid costs, constrain innovation and prolong procurement times and should be resisted. 1. What types of purely contractual PPP set-ups do you know of? Are these set-ups subject to specific supervision (legislative or other) in your country? There are a whole host of differing PPP arrangements in the UK and elsewhere. Private Finance Initiative ("PFI") contracts for the provision of services to a government body which takes some or all of the demand risk are the most common, however, there are also concession arrangements where by the operator exploits the opportunity to carry out an operation (eg leisure, waste). There are also "hybrid" arrangements combining institutionalised PPPs such as LIFT (Local Infrastructure Finance Trust) in the health sector and the proposed LEPs (Local Education Partnerships) under BSF (Building Schools for the Future) in the education sector). These comprise "partnership" elements perhaps formalised though an equity participation by the public sector in a project company with a concession to carry out works (subject to periodic tests of competitiveness) including under both contractual PPP arrangements (PFI contracts) and conventionally funded arrangements. Such set-ups generally fall under the supervision of the National Audit Office which ensures that terms are reasonable for the public body involved. Partnerships UK, 4Ps, OGC and other departmental bodies provide backup before signing a contract to ensure that terms are reasonable.
2. In the Commission's view, in the context of a purely contractual PPP, the transposition of the competitive dialogue procedure into national law will provide interested parties with a procedure which is particularly well adapted to the award of contracts designated as public contracts, while at the same time safeguarding the fundamental rights of economic operators. Do you share this point of view? If not, why not? The competitive dialogue procedure is likely to increase bid costs and lead to longer procurement periods when compared to the negotiated procedure as implemented in the UK. For any form of the competitive dialogue procedure to work issues such as the following must be effectively addressed: economic advantage not being interpreted simply as price (an output specification is a hurdle rather than an absolute - if innovation encouraged in the Green Paper is to be realised then the benefits of the innovation of a solution must be given economic weight along with price); the protection of initial bidder's intellectual property; the public authority must be able to assess the affordability of projects prior to final pricing by allowing indications of price from tenderers as part of the competitive dialogue; and, there must be a capacity to deal with details reflecting improved information or changed circumstances post appointment of preferred partner and prior to contract signature with up to date information (eg TUPE). Competitive dialogue cannot fully remove opportunities for corruption: that possibility would still exist as by selecting options that one bidder can deliver more/better/cheaper than others bidding can still be skewed. Similarly by sharing the good ideas from one party with all the others the incentive to come up with innovative structures is removed as there is no point spending the time if that then gets offered to everybody else for free. This question appears to assume that the negotiated procedure does not work which is not the case. It works well in the UK (so far the most advanced market) without real complaint so the Commission would be better to focus on how to ensure it was implemented and worked similarly well across the EU. 3. In the case of such contracts, do you consider that there are other points, apart from those concerning the selection of the tendering procedure, which may pose a problem in terms of Community law on public contracts? If so, what are these? Please elaborate. Uncertainty in terms of 1) potential future EU Directives 2) any suggestion of reopening transactions already agreed will be a negative factor for any investor. Much legislation amy have unintended consequences but the fear that legislation is proposed which may not take account of the needs of the different parties to ensure the best terms, and ignores experience in the EU
country with most experience in this area can make many investors decide that the risk of participating is too high. Interference with step in rights makes it likely that a) banks will be much more unlikely to invest (and then on less attractive terms); or b) public authorities have to provide alternative termination compensation mechanisms that are costly and bring project on-balance sheet. In either case the aim of achieving low cost long term funding is defeated. 4. Have you already organised, participated in, or wished to organise or participate in, a procedure for the award of a concession within the Union? What was your experience of this? The firm has bid for tenders, organised and supervised tenders on behalf of the public authority and acted for private sector bidders on tenders. The experience is that the negotiated procedure is already too slow (but becoming faster through adopting best practice innovation and standardisation) but it works. 5. Do you consider that the current Community legal framework is sufficiently detailed to allow the concrete and effective participation of non-national companies or groups in the procedures for the award of concessions? In your opinion is genuine competition normally guaranteed in this framework? The current framework is not a positive bar to effective competition but is open to being frustrated should a government body not wish to seek competition or pursue openness in awarding a contract. The desire for a level playing field should not be such that the incentives to research, identify and develop concepts for voluntary concession arrangements is removed. (See Q6 below). Even EU legislation can be implemented and enforced in different ways still leading to a potentially uneven playing field - the way to deal with this is not by more legislation but by EU wide expertise and overview. 6. In your view, is a Community legislative initiative, designed to regulate the procedure for the award of concessions, desirable? Legislation is only desirable if the benefits of the formal non-discrimination outweigh the drawback of the more informal pressure of budgetary constraints. This is unlikely to be the case.
7. More generally, if you consider that the Commission needs to propose new legislative action, in your opinion are there objective grounds for such an act to cover all contractual PPPs, irrespective of whether these are designated as contracts or concessions, to make them subject to identical award arrangements? Providing clarity by defining the treatment of concessions may be useful. However, legislation may not be the best route for this and guidance (using a central body such as PUK in the UK) is likely to be most effective. It would be better to omit provisions for concessions that unnecessarily restrict such activity. 8. In your experience, are non-national operators guaranteed access to private initiative PPP schemes? In particular, when contracting authorities issue an invitation to present an initiative, is there adequate advertising to inform all the interested operators? Is the selection procedure organised to implement the selected project genuinely competitive? It would be reasonable to expect such opportunities when advertised by an authority to appear in the Official Journal. The selection procedure should be competitive but to prescribe the means by new legislation is likely to increase bid costs and reduce the scope for innovation. In practice, at least in the UK, non-national operators are guaranteed access, exemplified by the success of such companies as Bouygues and Bilfinger Berger in winning contracts. However, there are suggestions that this is not the case in all countries, with some clients avoiding particular countries due to perceived lack of objectivity in awards. 9. In your view, what would be the best formula to ensure the development of private initiative PPPs in the European Union, while guaranteeing compliance with the principles of transparency, non-discrimination and equality of treatment? In particular, the following need to be considered where the private sector initiates a PPP: initiator to recover development costs (preferably from within the project); how the fact that the public sector will not specify the outputs can be dealt with in the context on non-discrimination provisions; and, whether limitations on the concession length may balance reward for initiative and first mover risk with long run competition. rewards for innovative and improved solutions ability to source long term low cost funding The Commission and national authorities would probably achieve more by adopting programmes to develop best practice (and there will be a degree of trial and error in this) than to adopt a legislative route. It has to be remembered that the easiest way to ensure absolute transparency and equality is to have nothing done at all under PPP. The proposals risk creating such equality. Recognition of the role of PPPs, ongoing EIB
support for them and promotion of the concept among member countries are likely to do more to ensure the development of PPPs. 10. In contractual PPPs, what is your experience of the phase which follows the selection of the private partner? In the pre-contract signing post selection phase the efficiency and success of this process depends on the quality of the original ITN, the effectiveness of the clarification process prior to appointment and the completeness of the terms of preferred bidder appointment document. It is important that it is clear that all members of a preferred partner consortium are committed to the terms of the appointment. Most PPP contracts are still as yet in a relatively early phase, but appear to be operating effectively. The provisions incentivising delivery of construction projects on time whereby payment only commences where construction is complete and services commence does appear to be delivering positive results. 11. Are you aware of cases in which the conditions of execution - including the clauses on adjustments over time - may have had a discriminatory effect or may have represented an unjustified barrier to the freedom to provide services or freedom of establishment? If so, can you describe the type of problems encountered? We are not aware of any such cases. The provisions for variation and benchmarking and market testing were agreed as part of the competitive appointment on contract award. 12. Are you aware of any practices or mechanisms for evaluating tenders which have a discriminatory effect? In Grant Thornton's experience the competitive process is effective in the UK. Advice is taken by procuring authorities during the process to ensure that actions are not discriminatory. The process of adopting standard documentation has been effective in providing certainty to and equality between bidders. 13. Do you share the Commission's view that certain "step-in" type arrangements may present a problem in terms of transparency and equality of treatment.? Do you know of other "standard clauses" which are likely to present similar problems? Step in arrangements provide protection to both the public sector and the lenders to a project ensuring continuity of service and failure to service debt. These form part of the provisions negotiated prior to contract signature and include objective tests and consequently it is difficult to argue that there is a problem with the transparency and equality of treatment in the arrangements. It would be extremely damaging to the Bankability of projects to adopt legislation requiring contracts (or elements thereof) to be
re-let using a full public procurement type tendering mechanism - particularly if this applied to existing contracts. Step-in rights have existed in project finance contracts for many years without being abused. It is important to remember that such step-in rights only operate in limited circumstances where otherwise there might be immediate termination of the contracts. Banks are loathe to use them but the fact that they exist as a "last line of defence" mean that the cost of lending remains low without the need for public sector compensation methods. Removing step-in rights is likely as a minimum to significantly increase debt costs (direct and indirect) but runs a significant risk of killing off the PPP market completely. As an example we note that one major international bank in particular has indicated that one reason that relatively little real project finance has been carried out in France is the lack of availability of the requisite step-in rights and that if this approach were implemented Europe wide it would be likely to lead to banks no longer being willing to finance most projects. The alternative of easier termination could lead to less transparency overall rather than more as it makes it easier for public authorities for political or personal reasons as well as genuine ones to terminate contracts and pursue other alternatives or retender. 14. Do you think there is a need to clarify certain aspects of the contractual framework of PPPs at Community level? If so, which aspects should be clarified? The principles set out in the current Directives should be sufficient. Whilst guidance on preferred practice has been of assistance in the UK there is a danger that unbankable provisions may be enacted in legislation without the flexibility to obtain derogations to reflect project specific issues. We would advise against legislative provisions on contractual details. It should be up to member states to deal (on a non-discriminatory basis) with the contractual framework as a whole. 15. In the context of PPPs, are you aware of specific problems encountered in relation to subcontracting? Please explain. In the case of UK PFI the competitive process has generally left subcontractors holding the risks they are best able to manage. There appears to be a competitive market with competitive pricing. Contractual provisions for operating phase subcontractors include benchmarking and market testing provisions as well as best value obligations which both protect the sub-contractor from unsustainable prices where market conditions change whilst ensuring that the public sector can benefit from efficiencies. The market testing process implies that a non-discriminatory competition is held and the public sector will be able to monitor this.
16. In your opinion does the phenomenon of contractual PPPs, involving the transfer of a set of tasks to a single private partner, justify more detailed rules and/or a wider field application in the case of the phenomenon of subcontracting? As long as the overall procurement process does not fetter the main contractor in a way that discriminates as between sub-contractors (ie the procuring authority requiring the inclusion of a particular (eg local) subcontractor) then there is no need for such rules. Any rules limiting the freedom of the main contractor to organise a consortium should be resisted. Unless consortium leaders are allowed to fully evaluate for subcontractors not just price but subjective criteria such as ability to deliver on time, quality of workmanship, the extent of cooperative working practices with other subcontractors then consortium leaders would be forced to increase pricing significantly to allow for the risks of having to deal with a subcontractor causing such problems. If they are allowed to take such factors into account then the current system enables that and any inflated costs from a subcontractor simply serve to make a contractor less competitive overall. 17. In general, do you consider that there is a need for a supplementary initiative at Community level to clarify or adjust the rules on subcontracting? No. Such an initiative runs the risk of making the whole construction market (not just PPPs) practically unworkable. At a time when rapid investment in infrastructure is required and projects such as TENs are behind schedule, an initiative with no likely gain but significant likely delay as a minimum is to be avoided. 18. What experience do you have of arranging institutionalised PPPs and in particular, in the light of this experience, do you think that Community law on public contracts and concessions is complied with in such cases. If not, why not? The LIFT arrangements in the UK are a form of institutionalised PPP. The LEPs envisaged under the Building Schools for the Future Programme are another example. Both envisage that the private sector investor in the LIFT company or LEP would also (probably) be involved in the provision of services either through investment in a limited recourse vehicle or directly. In either case the initial award of the opportunity to invest in the institutionalised PPP would be made in conjunction with a competition for the provision of the initial tranche of services. Any element of services not to be commenced immediately would be subject to arrangements which would form part of the appointment to ensure competitive prices were applicable to such services. This constitutes a competitive process whilst ensuring that a disproportionate resource is not consumed in the bidding process itself.
19. Do you think that an initiative needs to be taken at Community level to clarify or define the obligations of the contracting bodies regarding the conditions requiring a call for competition between operators potentially interested in an institutionalised project? If so, on what particular points and in what form? If not, why not? In general and independently of the questions raised in this document: In general this would not be helpful if it were to restrict the scope to develop institutional PPPs. The process of developing a new institutional PPP will often be unique and require an investment from the private sector that would not take place in the context of additional procurement risk. The public sector should nevertheless not offer guarantees of exclusivity to any private sector partner to the extent that the relevant services were not substantially defined at the time of appointment. Where underlying activities would be the subject otherwise of contracts falling within the existing procurement rules then this should provide sufficient protection. 20. In your view which measures or practices act as barriers to the introduction of PPPs within the European Union? As compared to the negotiated procedures competitive dialogue may hinder the growth of PPPs unless flexibly applied. Further legislation as opposed to the development and sharing across the European Union of best practice is likely to hinder the introduction of PPPs. In particular in the accession countries the skills and resources to follow complex and time consuming procedures may make PPPs an unfeasible option. 21. Do you know of other forms of PPPs which have been developed in countries outside the Union? Do you have examples of "good practice" in this framework which could serve as a model for the Union? If so, please elaborate. We note with interest that the approach to PPPs adopted in the UK has been adopted in South Africa as a robust model and that countries as far afield as for example Canada (including Quebec), Mexico, Poland, the Czech Republic, Singapore and Taiwan, with a variety of legal frameworks and backgrounds are looking to the experiences of the UK in shaping their own PPP programmes 22. More generally, given the considerable investments needed in certain Member States in order to pursue social and sustainable economic development, do you think a collective consideration of these questions pursued at regular intervals among the actors concerned, which would also allow for the exchange of best practice, would be useful? Do you consider that the Commission should establish such a network? Clearly the sharing of best practice would be of benefit. Whether this should be under the auspices of the Commission or simply promoted by the Commission should be considered further. Contact: David Smith ++44 (0)870 991 2655