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Public procurement – new regulations bring a few surprises

Mark Johnson, partner at public services law firm Geldards LLP, considers the new rules for procuring public contracts.

The European Commission has been on a mission to overhaul the Procurement Directives since 2011. Their professed aim: to modernise and simplify, to open up contracts to SMEs and to allow procuring authorities to make more use of environmental and social criteria in purchasing.

This culminated in the adoption of three new Directives on 17 April 2014, covering public sector contracts, concession contracts (where payment is derived mainly from end-users) and contracts procured by utility companies. Member states have until 18 April 2016 to transpose these into national law. The UK, represented by the Cabinet Office’s Crown Commercial Service, lobbied for various changes. They want the new rules implemented as soon as possible.

The ambitious timetable saw publication on 19 September of draft Public Contract Regulations, which are expected to come into force in early 2015, following a consultation. Implementation of new regulations for concessions and utilities will follow on shortly after.

New approach for below-threshold contracts

The draft regulations, which apply to all public sector bodies including schools, academy trusts, housing associations and CCGs, contain some surprises. They have been prepared using the ‘copy out’ procedure, whereby the text of the directive is transposed into the regulations as far as possible (including, helpfully, the numbering system). This is to avoid accusations of gold-plating the legislation to impose burdens that go further than the EU text.

However, this has the disadvantage sometimes that areas of Euro-speak creep in, leaving uncertainty or ambiguity. Reading the original EU text, particularly the lengthy recitals, can aid understanding of the rules. Part four of the regulations introduces new rules that apply domestically only to below-threshold contracts. These are intended to implement Lord Young’s 2013 recommendations on opening up contracts to smaller businesses. They introduce new mandatory requirements for central government to advertise contracts of £10,000 or more on the government’s Contracts Finder website.

Local authorities and housing associations must do so for contracts of £25,000 or more.

Post-award notices are also required. The use of pre-qualification questionnaires for such contracts is banned. Any questions about suitability to bid must in future be ‘relevant and proportionate’. The Cabinet Office intends to use more detailed mandatory guidance to further shape the content and best practice.

Summary of main changes

Leaving aside the purely domestic regime for below-threshold procurements, the new rules introduce several welcome changes:

• The time limits for requests to participate and return of tenders are shortened by a third in most cases and may be shortened even further where e-portals are used. Authorities must move toward mandatory electronic communication by 2018.
• There is explicit clarification that social and environmental benefits can be considered during evaluation. More emphasis is placed on ‘whole life costing’, so exit costs, ongoing maintenance liabilities and environmental disbenefits are taken into account.
• The distinction between Part A and Part B services (mainly social, healthcare educational and cultural services) goes, although a new ‘light touch’ regime is introduced for contracts here that exceed €750,000 in value (about £630,000). Below this level, the new domestic rules on transparency still apply. There is some ambiguity about whether legal services are subject to full competition – advice in connection with litigation is now outside the scope of the rules completely, as is legal advice in connection with the ‘exercise of official authority’. Expect authorities to take a broad view of what falls into that category until told otherwise by the courts or mandatory guidance.
• There is a new power to reserve certain types of contract for welfare, social and educational services to social enterprises and mutuals, provided fairly strict criteria are satisfied, including a requirement that the contract does not exceed three years’ duration. This does not allow for direct award without competition, simply that the field of bidders can be limited.
• The ability to award contracts to authority-controlled companies and partnerships (the so-called Teckal and Hamburg Waste exemptions) is now specifically drafted into the legislation. There is a welcome clarification that these bodies can trade externally in their activities up to 20% of their turnover without losing the exemption.
• The formerly tarnished ‘negotiated procedure’, which the Commission believed was often manipulated to anti-competitive effect, has a new lease of life as the ‘competitive procedure with negotiation’. The circumstances in which it, and its cousin the ‘competitive dialogue procedure’, can be used are widened. A new ‘Innovation Partnership’ procedure is introduced to encourage the development of completely new solutions to problems where the supplier and authority work up a product or service which they may later commercialise.
• There are new safeguards against corruption, collusion and managing conflicts of interest – in particular where authority staff may have a vested interest in the procurement outcome.
• Market engagement and consultation prior to formal tenders is actively encouraged and permitted.
• More light is thrown on the thorny question of when authorities can vary a contract without having to re-run the competition. A new de minimis limit of 10% (15% for works contracts) is introduced, with clarification of the ability to switch supplier in the case of insolvency or corporate restructuring.

Interestingly, NHS commissioners have been given a reprieve from complying with the new Regulations until 18 April 2016, potentially because of the possible political sensitivities about tendering healthcare services in the run-up to the general election.

Prepare now

Many of the reforms are welcome clarifications of principles already developed by case law. The changes to procedures, particularly the new domestic rules for ‘below threshold’ contracts (£111,676 or £172,514 for services or supplies in central government or local authorities respectively, or £4.32m for works contracts), will require authorities to adjust systems and processes in readiness.

The consultation runs until 17 October. The new regulations will enter into force in January.

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