In this article on the Procurement Act, we look at the scope, principles and objectives of the procurement regime under the Act and highlight key areas of difference from the current EU-based rules and areas where the rules will remain broadly the same.
A particular theme that runs throughout the Act is that the shift from rules based on EU law to a purely domestic system of law is liable to lead to challenges of interpretation and potentially significant shifts in the way that procurement is approached in England, Wales and Northern Ireland.
The Act applies to most contracts for goods, services or work awarded by the public sector, including central and local government and health bodies. It also covers utilities contracts in the water, energy and transport sectors, concession contracts and defence and security contracts. The Act brings the current Public Contracts Regulations 2015, Utilities Contracts Regulations 2016, Concessions Contracts Regulations 2016 and Defence and Security Public Contracts Regulations 2011, under one all-encompassing Act.
Whilst the Act generally applies to all "contracting authorities" in England, Wales and Northern Ireland, most Scottish authorities are not captured due to Scotland's decision to retain its existing procurement regulations. The Security Service, the Secret Intelligence Service, the Government Communications Headquarters and the Advanced Research and Invention Agency are all excluded authorities under the Act.
The concept of a "contracting authority" is defined, somewhat counterintuitively, as including not only public authorities but also public undertakings and private utilities, which would not, especially in the latter case, be considered to be contracting authorities under the current rules. However, this appears to be a function of the combination of the current separate sets of regulations into a single statutory code: "contracting authority" is the catch-all term used to refer to all bodies/entities that are covered by the Act. The underlying definitions of "public authority", "public undertaking" and "private utility" are not materially different from those in the current rules. It is therefore unlikely that any bodies/entities that are covered by the current rules will not be covered by the Act and vice versa.
The financial thresholds in the Act are the same as those that currently apply in the various sets of procurement regulations, which in turn reflect the financial thresholds under the GPA, with the power for the Government to update those thresholds from time to time.
Rules requiring contracting authorities to aggregate the value of contracts that could reasonably be procured together are retained though considerably slimmed down and simplified.
As with the current rules, there are a number of types of contract that are exempt from the application of the Act. The exemptions are broadly consistent with the current rules but with some different nuances.
Vertical and horizontal arrangements
As in the present rules, which derive from the well-known Teckal case, contracts between public authorities and entities that they control, either solely or jointly with other authorities, are exempt contracts under the Act. The Act preserves the essential features of the present exemption including the requirement that, in additional to being controlled by one or more public authorities, the controlled entity must carry out more than 80% of its activities within the controlling parent or parents. Furthermore, the rule any level of private participation in the controlled entity excludes controlled on the part of the public authority/-ies is preserved, and hence the exemption will not apply in those circumstances.
Similarly, the Act preserves the exemption for so-called horizontal arrangements between public authorities, deriving from the EU Hamburg Waste case, which enables public authorities to enter into arrangements with each other with the aim of achieving objectives in common.
Equivalent exemptions in relation to utilities are also preserved in somewhat modified/clarified form. Thus the following are exempt in the case of utilities contracts:
- Contracts awarded for the purpose of resale or lease to third parties where the utility does not have a special or exclusive right in relation to those goods, services or works
- Contracts awarded by water and energy utilities for, respectively, the purchase of water and energy or fuel
- Contracts between a utility and certain joint ventures or affiliated undertakings
Land and buildings etc
The exemption for contracts for the acquisition of land, buildings or any other complete work is preserved in the Act. This important exemption forms the basis on which many public authorities and developers seek, with varying degrees of success, to avoid the application of the public procurement rules to development agreements which involve the transfer of publicly-owned land to the developer.
However, beyond re-stating the exemption for these types of agreement, the Act leaves at large the sometimes difficult question of where to draw the line between an exempt land agreement and a regulated public works contract. A definition of "works contract" is included in the Act – albeit difficult to find since it is buried in the Schedule setting out the financial thresholds for the application of the tendering rules in the Act and is not used other than in that Schedule and in one other limited instance. The definition of "works contracts" in the Act carries forward some of the features of the definition of "public works contract" in the present rules. It is, for example, not limited to contracts for the carrying out of construction works but includes contracts that facilitate the carrying out of construction works in compliance with specifications set out in, or determined under, the contract (i.e. development agreements). However, the language used and some of the concepts are different. It is therefore unclear whether the Government intends to carry across in substance the concept of "public works contract" under the present rules or whether something different is envisaged.
This is liable to create uncertainty in relation to local authority development agreements and regeneration projects in which it is often important to know whether a particular arrangement is subject to the procurement rules or not. Under the present EU-based procurement rules, the question of whether an arrangement amounts to a public works contracts or an exempt land agreement had been the subject of extensive and detailed case law at both the EU and domestic levels (e.g. Auroux, Flensburg, Helmut Mueller, Midland Co-operative, and Faraday). While complex in some respects, this case law is generally well-understood. Since the Act once enacted as a standalone Act of Parliament will no longer constitute "retained EU law" for the purpose of the European Union (Withdrawal) Act 2018, it follows that the courts will no longer be bound to interpret the concept of a "public works contract" and the scope of the exemption for land etc agreement in accordance with the applicable EU case law. Presumably the courts could use that case law, where appropriate, as an aid to the interpretation of the relevant provisions of the Act. However, the door seems to be open to developing an entirely new jurisprudence in this area.
Defence and security
The application of the present rules in the field of defence and security is complex (probably needlessly so). A contract involving defence and security aspects might fall within the Public Contracts Regulations 2015 or the Defence and Security and Public Contracts Regulations 2011, or it might be so sensitive that it is exempt from both. There is a complicated and inter-locking set of exemptions in both sets of regulations that need to be considered in each case.
The Act does away with much of this complexity. Defence and security contracts are in general covered by the Act. However, there are exemptions for:
- Contracts that the contracting authority determines should not, in the interests of national security, be subject to the provisions of the Act
- Contracts for the purposes of intelligence activities
- Defence and security contracts:
- Where the supplier is located in an area outside the UK in which the armed forces are deployed and the operational needs of the armed forces require the contract to be awarded to that supplier
- Where the supplier is located in a state or territory outside the UK in which the armed forces maintain a military presence and that state or territory requires that the supplier supplies the goods, services or works in question
- Where the supplier is the government of another state or territory
- Awarded under a procedure adopted by an international organisation of which the UK is a member
- Awarded under an arrangement between the UK and one or more other states or territories, where the purpose of the arrangement is, or is in connection with the joint development of a new product by or on behalf of the parties to the arrangement, or the exploitation of that product once developed
Whilst many of the above replicate exemptions that exist under the present rules, the general exemption for contracts that the contracting authority determines should not be covered on the grounds of national security represents a significant broadening of the government's power to take contracts outside the scope of the public procurement rules on national security grounds.
When the UK was a member of the EU it was always the case that under the EU Treaties matters of national security remained the sole responsibility of Member States (Article 4.2 of the Treaty on European Union and its predecessors). However, although Member States would be given a wide margin of appreciation to determine what amounted to national security, this was not unlimited and was ultimately subject to review by the European courts. Furthermore, it is clear from the European Commission's efforts to open up defence procurement within the EU to competitive tendering (which resulted in the Defence and Security Public Contracts Regulations 2011) that certain contracts that governments might have claimed to fall outside the rules on the grounds of national security did not necessarily do so – hence, the rather complicated set of exemptions in the current rules.
The general power to determine that a contract should be exempt on national security grounds sweeps away such constraints. If a contracting authority determines that a contract is security-sensitive it is hard to see a court gainsaying that determination if the decision were subject to judicial review.
Other exemptions contained in the present rules are carried across into the Act in similar or somewhat clarified form including exemptions for:
- The acquisition of broadcast content
- Contracts facilitating the provision of electronic communications services or networks by contracting authorities
- Certain legal services and ADR
- Contracts in the financial services sector for lending, investment services in relation to financial instruments and the provision of services by the Bank of England
- Employment contracts
- Contracts for the provision of emergency services by not-for-profit organisations
- Contracts for the provision of public passenger transport services (to be specified in regulations)
- Research and development services for the benefit of the public, not involving the provision or goods or services
- Contracts awarded pursuant to international agreements
- In relation to concession contracts:
- Certain concession contracts in the water sector
- Concession contracts for air services provided by a qualifying air carrier (to be specified in regulations)
- Concession contracts for the provision of public passenger transport services
Principles and objectives of the Procurement Act
Under the EU procurement rules, contracting authorities are required to treat economic operators equally and without discrimination and to act in a transparent and proportionate manner. This is in pursuit of the overriding objective of opening up public procurement markets within the Single Market to cross-border competition.
The Single Market objective is of course no longer relevant in the UK, but the Act nevertheless requires contracting authorities when carrying out a covered procurement to have regard to the importance of:
- delivering value for money;
- maximising public benefit;
- transparency and the sharing of information; and
- acting, and being seen to act, with integrity.
Equal treatment is retained in perhaps more hard-edged form: contracting authorities must treat supplies "the same" unless a difference between the supplies justifies different treatment.
Contracting authorities (except private utilities) must also have regard to the National Procurement Policy Statement published from time to time by the Government (or in Wales by the Welsh Ministers).
These principles and objectives under the Act have some resemblance to the principles underlying EU procurement law (although, notably, proportionality as an overriding principle is omitted). With that said the Act primarily, choses to express principle and objectives as matters to which contracting authorities must "have regard", rather than hard-edged obligations or objectives that authorities must seek to achieve. Therefore, while at present contracting authorities are required to act in a transparent manner when conducting procurements, that being fundamental to ensure that procurements are run in a fair and objective way, under the Act authorities will merely have to "have regard to the importance of" transparency. This implies that transparency over and above the express transparency obligations that appear throughout the Act (e.g. obligations to publish various form of notice) is not an overriding objective in the EU sense that would allow the Courts to fill in gaps left by the legislation. Rather, it is a sort of "nice to have" that has to be considered but, having been considered, can be discarded. The one principle, however, that remains mandatory is equal treatment: contracting must treat suppliers "the same" unless a difference in treatment is justified.
This shift of emphasis, in particular the different legal approach to equal treatment compared to transparency, could have a significant impact on how procurements are designed and run, especially given the much greater flexibility afforded to contracting authorities under the Act in the design of competitive procedures. It is to be hoped that this does not end up leading to less transparency in procurements than is currently the case.
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