After a long legislative process which began in Brussels over 10 years ago the Concession Contracts Regulations 2016 (Regulations) have finally come into force in England, Wales and Northern Ireland.

The Regulations cover distinct types of contracts where the risk in the delivery of the works or service is passed to the contractor. Prior to 18 April 2016 only works concession contracts awarded by Contracting Authorities were subject to (very) light regulation under the Public Contracts Regulations 2006. Indeed, services concessions were not regulated in UK law at all (although the treaty principles require that competitions are generally conducted in accordance with the principles of equal treatment, transparency and non-discrimination). In form and structure, the Regulations owe much to the Utilities Contracts Regulations 2016 and the Public Contracts Regulations 2015.

So what do the Regulations require? In this note we look at some of the most important characteristics of concession contracts and the requirements placed on awarding bodies by the Regulations.

What are concession contracts?

A preliminary point to note is that there are two types of concession contracts.

First "works concession contracts". These were regulated under the Public Contracts Regulations, and concern contracts where a contracting authority or utility contracts a counterparty to perform construction works and the payment in return for that contract is either the right to exploit the works or the right to exploit the works together with a payment. The classic example of a "works concession" is a new bridge where the contractor receives the right to levy a toll on users of the bridge for a defined period of time.

The second type of concession is a "services concession". These were not regulated by UK law prior to the enactment of the Regulations (although EU treaty principles did apply). They cover the situation where a contracting authority or utility appoints a contractor to provide a specific service, and in return the contractor receives a payment from the contracting authority or utility in respect of the provision of the service (either on the basis of a payment from a user or from an authority on the basis of usage) or receives a service user payment together with a payment from the contracting authority or utility.

In either case there must be a transfer of "operating risk" to the contractor. In this context "operating risk" means transferring either the demand risk or the supply risk (or both). An example of demand risk would be where the contractor was exposed to the risk that there were insufficient users to make the service or work offered profitable.

It is also a requirement of the definition of a concession contract that the degree of risk that the concessionaire is exposed to involves "real exposure to the vagaries of the market". The Regulations require that the exposure to any potential loss is not merely "nominal or negligible".

Who is covered by the Regulations?

The Regulations have broad application – they apply both to contracting authorities within the meaning of the Public Contracts Regulations and to utilities regulated under the Utilities Contracts Regulations. A preliminary point to note is that this represents a considerable extension as compared to the previous position: "utilities" were not previously subject to specific legislation when awarding concession contracts (although in many cases they may have been subject to the treaty principles).

Readers familiar with the Public Contracts Regulations and the Utilities Contracts Regulations will understand the definition of "contracting authorities" and "utilities".

To summarise, "contracting authorities" are essentially all state entities (government departments, agencies and local authorities), and any entities created by such entities to carry out a public function (not having a commercial or industrial character) which is either financed or controlled or closely regulated by a state entity.

"Utilities" include contracting authorities, public corporations (essentially state bodies created to fulfil "utility" type functions) and entities which perform certain activities within regulated sectors in reliance on "special or exclusive rights". "Special or exclusive rights" are essentially monopolistic rights granted by the state. The regulated sectors include the provision of gas and heat, electricity, water, transport services (especially rail and light rail), postal services and the extraction of oil, coal and gas.

Exclusions from the application of the Regulations

Not all concession contracts are subject to regulation. The Regulations borrow a number of exclusions from the Public Contracts Regulations and the Utilities Contracts Regulations. For example, the Regulations allow utilities to award concessions directly to affiliated undertakings or to joint ventures to one of the members of that joint venture. These exclusions are subject to turnover tests, which measure the extent to which the utility is dependent upon its affiliate for revenue.

For contracting authorities awarding concession contracts there are provisions which codify the "Teckal" exemption from the procurement rules. Essentially these allow contracting authorities to grant concessions to entities which are "in-house", subject to certain conditions. Those conditions include the requirement that the entity to be awarded the contract is controlled by the contracting authority or contracting authorities in a similar way to the way it would exercise control over its own departments. A further requirement is that a specified amount of the controlled entity's activities are performed for the controlling authority or authorities.

Threshold

The threshold at which contracting authorities and utilities are obliged to advertise concession contracts is £4,104,394 (ex. VAT).

Procedure for awarding concession contracts

Contracting authorities and utilities are obliged to publish a notice in the Official Journal of the European Union (OJEU), as for to regulated contracts under the Public Contracts Regulations or the Utilities Contracts Regulations.

They are then provided with considerable freedom to determine the procedure for the award of the concession contract provided that they comply with the principles of equal treatment, non-discrimination and transparency when conducting the procedure.

Contracting authorities and utilities may conduct a two-stage procurement process in which they establish the criteria used to limit the number of tenderers to be invited to participate in the next stage of the process. Where contracting authorities or utilities proceed in this way they must undertake the selection process in a transparent manner and on the basis of objective criteria. In the same manner as in other regulated procurement procedures, bidders may rely on the capacities of other parties to fulfil the criteria set for the process.

Regardless of the procedure used, the Regulations contain a number of mandatory and non-mandatory grounds of exclusion (for example bribery, corruption, tax evasion) which contracting authorities are required to apply before awarding a concession contract.

Awarding the contract

The Regulations contain specific rules relating to the formulation of the award criteria that are to be used to establish the most advantageous tender received. There is a requirement that the award criteria be linked to the subject matter of the concession contracts – that means that only matters relating to the performance of the contract can be assessed at this stage (not issues such as the characteristics of the bidder) and that the criteria cannot confer unrestricted freedom of choice on the contracting authority (i.e. must be capable of interpretation by bidders). There is freedom to use criteria to assess environmental issues, social issues and matters relating to innovation.

Duration of concession contracts

One important point to note is that concession contracts must be of a limited duration – they cannot be indefinite. Where a concession contract lasts for more than five years the term cannot be longer than the period that it would reasonably be expected to take to recoup the investments made which are necessary to deliver the works or service(s) (together with any return on investments).

Modification to contract terms

The Regulations codify the existing case law in the European Court of Justice (ECJ) (notably the leading Pressetext case) and, in addition, carve out some specific situations from the general prohibition on substantial change to contracts.

In particular Regulation 43 allows for additional works or services to be provided in certain circumstances where the requirement was not foreseen by the utility. It allows for certain low-value changes to be made to the contract. It provides for changes to the contracting party in limited situations (for example, the exercise of "step-in rights" by lenders to a project).

Implied rights to terminate

One right for authorities which is likely to be of concern to suppliers is the right to terminate (Regulation 44). This provides that a utility may terminate a contract where:

  1. there has been an unlawful substantial modification to a contract;
  2. the awarding entity is a public body and the contract has been awarded to a contractor that should have been excluded by through the application of the mandatory grounds of exclusion (which are set in the Public Contracts Regulations); and
  3. there is a ruling in the ECJ against the contract award procedure.

Enforcement and remedies

A significant change is the introduction of the same remedies regime as is currently applied in the Public Contracts Regulations and the Utilities Contracts Regulations to concessions. At present, only works concessions awarded by contracting authorities are protected by the remedies. However, after 18 April all works and services concessions awarded by contracting authorities or utilities will be subject to an enhanced regime of enforcement and remedies.

The regime that is being put in place will be familiar to many readers, as it closely follows the model in the Public Contracts Regulations and Utilities Contracts Regulations. In summary it is based on requirements to provide a debrief document which sets out the reasons for the award of the tender (including the relative advantages and characteristics of the winning tenderer as compared to the recipient of the notice).

The Regulations provide the right for a claimant to obtain the automatic suspension of the award of the contract where a claim is issued during the standstill period. Finally, there are specific remedies of damages payable by the awarding entity or, in certain circumstances, the possibility of a contract being declared ineffective by the courts.

Conclusion

The implementation of the Concession Directive (Directive 2014/23/EU) through the Regulations represents quite a significant extension of the procurement rules. Considering the relatively limited extent of the procurement obligations set out in the Regulations, and the degree of investment that bidders make when they bid for valuable concessionary opportunities, the additional legal certainty offered by the Regulations is likely to be welcomed by many. However, certain opportunities were missed to make the Directive more flexible – for example the provisions concerning the award criteria could have been less strict (allowing more factors to be taken into account at contract award stage) and the case law concerning post-contract change could arguably have been more flexible (considering the judgment in the Wall ECJ case, which concerned change to an awarded service concession).