Procurement changes on the horizon - Part 1

The European Commission (“EC”) adopted the Single Market Act which sets out a series of measures to boost the European economy and create jobs.  One of these measures is a review of the existing public procurement processes. The aim is to create a simpler and more flexible procedure for contracting authorities and to provide easier access to contract opportunities for companies, particularly SMEs and micro-businesses.  The EC also wants to implement policy that fosters demand for environmentally sustainable, socially responsible and innovative goods, services and works. 

The EC previously consulted on the modernisation of public procurement in April 2011.  Draft directives were subsequently issued in December 2011 for comment by Member States including the UK’s central and devolved governments.  These directives (once finalised) will replace Directive 2004/17/EC (procurement in the water, energy, transport and postal services sectors),  and 2004/18/EC (public works, supply and service contracts) (“the Public Contracts Directive”). The EC has also proposed the adoption of a directive on concession contracts. 

This article focuses on the draft directive that is due to replace the Public Contracts Directive (“the New Directive”), and highlights some of the proposed amendments to the procurement regime.  We will highlight further proposed changes in Part 2 of this article in a follow up article. 

Removal of Part B Services

The proposed directive no longer distinguishes between Part A and Part B services.  However, there will be a separate regime for certain specified services including social, health, legal and education services on the basis that the EC considers there will be limited cross-border interest in these contracts.  These are set out in Annex XVI of the New Directive (“Annex XVI Services”). 

Currently, Part B services are subject to limited provisions of the Public Contracts Directive.  The procedure for the Annex XVI Services is much simpler than under the current Part B regime.  A contract notice or a prior information notice (“PIN”) will need to be issued.  The contracting authority is entitled to stipulate that no further notices will be issued following the publication of the PIN.  In addition, the contracting authority must issue a contract award notice.  There is no requirement placed on the contracting authority to follow a specific procurement procedure.

Member States can set out in domestic legislation how contracts for Annex XVI Services will be awarded.  The New Directive does make clear that award can take place on the basis of lowest price.

Thresholds

The proposed directive does not make any real amendment to the value of the financial thresholds.  However, the New Directive does contain an increased threshold for the Annex XVI Services, which is due to replace the existing regime for Part B services (see section above).  Currently, for Part B services, the financial threshold is 211,000 euro. A Part B services contract with a value equal to or greater than this threshold will be subject to the more limited provisions of the Public Contracts Directive.  Under the New Directive, the financial threshold for the Annex XVI Servicees has been increased to 750,000 euro.  This should mean that fewer contracts will be subject to a formal procurement process.

In addition, the New Directive contains new rules relating to the method for calculating the estimated value of the procurement.  The proposed directive also contains more detailed provisions relating to the review and possible revision of the thresholds every two years from 30 June 2013 (this date is likely to change once the final version of the New Directive is issued, as this was the EC’s intended date for the New Directive to come into force).

Increased Use of Lots

In order to open up the market to SMEs and micro-businesses, Article 44 of the New Directive places an obligation on contracting authorities to include in the procurement documents or in their individual contract award report why they have not divided a contract into lots where: 

• Contracts for supply and services have a value equal to or greater than 500,000 euro; and 
• Contracts for works where the value is equal to or greater than 5,000,000 euro. 

Concern has been raised during the consultation process that this requirement may result in increased challenges with regard to how contracting authorities run their procurement processes.  However, this provision has been retained in the most recent version of the New Directive so it is unlikely to be dropped going forward.

Use of Competitive Negotiation

The New Directive retains the open, restricted and competitive dialogue procedure, and introduces the competitive procedure with negotiation (“the Competitive Procedure”).  

The Competitive Procedure is based on the existing negotiated procedure however, the New Directive introduces provisions to address the issues of transparency and anti-competitiveness that are associated with the existing negotiated procedure, as follows: 

• Tenderers will submit initial tenders as the basis for negotiation, and each subsequent tender will be negotiated on save for the final tender which will be evaluated in accordance with the contract award criteria.  
• The contracting authority will negotiate with all tenderers with a view to getting tender submissions more in line with the evaluation criteria, which must remain constant throughout the process. 
• All tenderers remaining in the process must be notified of any changes to the technical specification and procurement documents with sufficient time for tenderers to amend documents prior to tender submission. 
• Before the negotiations are concluded, everybody must be given the opportunity to submit final tenders.  
• The contracting authority will be able to award on the basis of the initial tender as long as this is specified in the contract notice or the tender documents.

The Competitive Procedure may be used in specific circumstances including where the technical specification cannot be established with sufficient precision; in the event of irregular or unacceptable tenders in response to an open or restricted procedure; and where, due to specific circumstances related to the nature or the complexity of the works, supplies or services (or the risks attaching to them), the contract cannot be awarded without prior negotiation. 

There is a great deal of support for the introduction of this procurement procedure.  It will allow contracting authorities to achieve the best fit by negotiating with bidders, which is in line with generally accepted commercial practice. 

Modification of Contracts

Under the existing regime, parties need to be mindful of case law when considering whether a proposed amendment to a contract will be considered a material change by the courts (Pressetext Nachrictenagentur GmbH v Republik Österreich (Bund), APA-OTS Originaltext-Service GmbH and APA Austria Presse Agentur registrierte Genosseschaft mit beschränkter Haftung Case C – 454/06) (“the Pressetext case”), as the Public Contracts Directive is silent on this point. 

The New Directive contains provisions that incorporate principles set out in the Pressetext case.  When an amendment is deemed to be a substantial change (as it is called in the New Directive) it will be considered to be an award of a new contract and a new procurement procedure should be undertaken.  Failure to do so will constitute a breach of the New Directive.

The New Directive provides that a modification to contract or framework agreement will be considered substantial where it renders the contract or framework agreement materially different in character from the one initially concluded.  A modification shall be considered substantial where one of the following conditions is met: 

• The modification includes conditions which, had they been part of the initial procurement procedure, would have allowed for the admission of other candidates than those initially selected or for the acceptance of an offer other than that originally accepted or would have attracted additional participants in the procurement procedure;
• The modification changes the economic balance of the contract or the framework agreement in favour of the contractor in a manner which was not provided for in the initial contract or framework agreement;
• The modification extends the scope of the contract or framework agreement.

A substantial modification will not require a new procurement procedure where the following cumulative conditions apply: 

• The need for modification has been brought about by circumstances which a diligent contracting authority could not foresee;
• The modification does not alter the overall nature of the contract;
• Any increase in price is not higher than 50% of the value of the original contract. 

It is essential that contracting authorities understand the current case law and the proposed amendments in the New Directive to ensure that they do not act in breach of them, thus exposing the process to risk of successful challenge. 

The Next Step   

We expect the New Directive (in final form) to be in force in the near future. 

A second article will be issued covering the following points: 

• Relations between public authorities;
• Change of contractor;
• Choice of participants;
• Life cycle costing;
• Revised timeframes for procurements.