Procurement law issues for PFI contracts

United Kingdom
An update on the public procurement regime

Sue Hankey gives a timely reminder of the procurement law issues for PFI contracts

In its first few months in office, the new Government has tried hard to revitalise PFI. On 1st January 1998, revised sterling thresholds came into effect for procurement under the EC and WTO regimes. Time, therefore, to review the essentials of your PFI strategy.

Is it a Works or Services Contract? Is it a concession?

The procurement regime distinguishes between works, supply, services and concession contracts.

Defining a project can be tricky. The DBFO of a sewerage plant may include works, but it will more often properly be categorised as a long term services contract. Indeed, guidance from HM Treasury/PFPE (Appendix 1 to "PFI in Government Accommodation", October 1996) recommends the structuring of projects, where possible, as a requirement for a long-term service provision based on an output specification, because this also makes the choice of procedure easier. This has implications for the applicable threshold. PFI projects categorised as concessions include the Channel Tunnel Rail Link and the Dartford QE2 bridge.

Is the contract over the relevant threshold?

This can also be a complex issue. Two regimes currently apply to public and utilities sector procurement. As well as the familiar EC rules, there is the Agreement on Government Procurement (the "GPA") established under the WTO. The GPA has had direct effect in the UK since 1st January 1996. It is not easy to interpret and a case by case analysis is needed to ascertain whether tenders from particular contracting WTO countries must be included in the process.

Box 1What sort of contract?

  • Works: building or civil engineering, demolition, roads and railways, completion work.
  • Supplies: products (including associated services and siting).
  • Services: only certain services are covered by the full regime - including architectural, engineering and related services, transport, some telecommunications, sewerage and refuse disposal.
  • Works or services concession: a contract giving the private sector the right to exploit the works or services.

The EC Directives have at long last been revised to take into account the WTO rules. But those amended Directives do not have to be implemented in member state law until October 1998. So, for the time being, we are still operating under two parallel regimes. A simple practical approach is to assume that procurement is regulated if it is over the lowest of the various applicable thresholds, and then to follow the more familiar EC procedures, which will fulfil the spirit of the GPA.

The EC makes a fairly simple divide between public sector and utilities in establishing thresholds. The GPA further breaks down the public sector into central and sub-central government. Whilst the thresholds are near enough to cause little excitement in larger projects, for smaller contracts central government departments should check both sets of values, because the WTO thresholds are considerably lower.

Box 2Sterling thresholds 1/1/98 - 31/12/99
Works and works concession thresholds

EC regime
All contracting entities
ECU 5m
£ 3,899,337

WTO regime
All contracting entities
SDR 5m
£ 4,016,744

Services thresholds

EC regime
public sector
ECU 200,000
£ 155,973

utilities except telecoms
ECU 400,000
£ 311,947

ECU 600,000
£ 467,920

WTO regime
central government
SDR 130,000
£ 104,435

sub-central government
SDR 200,000
£ 160,670

SDR 400,000
£ 321,340

Box 2 sets out the revised equivalents of the ECU and WTO special drawing rights ("SDR") thresholds which now apply from 1st January 1998 to 31st December 1999.

Valuation of services contracts depends primarily on the length of the contract, the inclusion of options and the proper aggregation of related services. If the contract is for a fixed period of less than 4 years, the relevant value is the total consideration payable. If the contract is for more than 4 years or for an indefinite period, the relevant value is 48 x the notional monthly payment.

Selecting the procedure

The EC regime provides three procurement routes for public sector bodies. The open procedure, in which all interested parties make a full tender, is unsuitable for PFI projects. The restricted procedure provides a mechanism for shortlisting, but allows very little scope for discussion beyond clarification of requirements and tenders. PFI purchasers therefore prefer the negotiated procedure, which does what it says. The drawback is that the use of the negotiated procedure generally requires justification as an exception to the rule for public sector bodies, unless the contract is a concession, where there are no restrictions on choice of procedure. Utilities can always choose what they wish.

Where a contract is for a concession, the procedural rules are relaxed entirely. An advertisement must be placed in the Official Journal, setting a date for responses. It is up to the purchaser whether it wants full bids directly or just expressions of interest. After receipt of those responses, the purchaser sets its own agenda, provided it acts in accordance with EC and other applicable international principles (including the important EC rule of non-discrimination). There are, however, rules governing sub-contracting and the award of contracts by concessionaires. But that is a topic for a future Update.

Box 3Justifying PFI through negotiation

  • Advertise requirements in the Official Journal
  • Difficult to draw up precise specifications to permit use of open or restricted procedures
  • Initial specification is merely a starting point, often based on proposed service output, requiring discussion of appropriate risk allocation and performance levels
  • Complex and detailed specifications can only emerge through negotiation

Public Procurement Procedures for PFI Projects