On 17 March the long-awaited text of the Utilities Contracts Regulations 2016 was finally published and laid before Parliament.

The Government has waited as long as possible before implementing these regulations, presumably on the basis that they, overall, add to the regulatory burden on regulated businesses. Whilst we are not certain that this is correct – noting that the new regulations give clarity in a number of contentious areas – as of 18 April the regulations are in force. So what are the key changes?

Coverage and scope

The scope and coverage of the new regulations in terms of the sectors covered is much the same as in the old regulations1. One slightly unhelpful change is that there is no longer a list of entities covered by the regulations contained in the schedule.

A useful point of clarification in the new regulations is the new definition of "special or exclusive rights". Where a company operates within a regulated sector on the basis of "special or exclusive rights" it must procure contracts related to the regulated activity in accordance with the regulations.

But what are "special or exclusive rights"? They are essential monopoly-type rights which restrict the provision of a service to a limited number of operators. Under the old regulations significant areas of doubt existed. In particular, there was uncertainty as to whether entities that had obtained their "special or exclusive rights", by means of an open and transparently run competition, were in fact within the scope of the regulations.

The new regulations make clear that such organisations are not covered provided certain conditions are fulfilled. This clarity promises to be helpful for a large number of organisations operating in regulated sectors. For example, train operating companies which obtain franchises or concessions in open and transparent competitions can expect to be outside of the scope of the regulations in the future.

A further helpful clarification is the extent to which the so-called "Teckal" exemption applies to contracts between public bodies. This allows the direct award of contracts between public bodies in certain defined circumstances.

Conflicts of interest and early market engagement

The new regulations contain helpful guidance for contracting entities on issues relating to early market engagements and the related question of conflicts of interest.

Regulation 58 specifically empowers utilities to carry out market consultation allowing them to consult with, amongst others, market participants noting that there is still a requirement for utilities to avoid acting in a way that distorts competition or violates the principles of non-discrimination and transparency.

Helpfully the new regulations (Regulation 59) also give clear guidance as to the approach to dealing with the situation where a bidder has had prior involvement with the preparation of the tender procedure – either as part of a market engagement exercise or otherwise. The Regulation outlines measures that might be appropriate to allow a bidder to continue in the competition – for example, communicating relevant information to other tenderers, or extending time limits to allow other tenderers sufficient time to adapt their offer to the requirement. Further safeguards for bidders who are at risk of exclusion are set out in the Regulation. Bidders are only to be excluded where there is no other means to ensure that the principle of treating bidders equally cannot be maintained and bidders are to be given an opportunity to prove that their involvement is not capable of distorting the competition. For example, bidders may wish to address these issues through the establishment of ethical barriers between a bid team and other individuals within an organisation who may have been involved in advising on the preparation of the tender.

Social and other specific services

The distinction between Part A and Part B services as set out in the Utilities Contracts Regulations 2006 has been replaced with the concept of "social and other specific services". A new "light touch" regime is set out in Part 3 of the new regulations.

Procedures

The new regulations make provision for the three existing procedures – the open procedure, the restricted procedure and the negotiated procedure (with a prior call for competition) in a way that is unchanged from the previous regulations. However, the new regulations also provide for two new procedures:

  1. the competitive dialogue; and
  2. the innovation partnership.

Competitive dialogue

The competitive dialogue procedure allows for a process through which tenders can be developed through dialogue before submission. After submission the scope for further change is limited to their being "clarified, specified and optimised at the request of the contracting entity". Once a preferred bidder has been selected, by reference to the award criteria, there is some scope for changing the final bid to allow for the bidder to "confirm financial commitments or by finalising the terms of the contract".

Innovation partnership

This procedure allows for utilities to award contracts to one or more bidders with the aim of "the development of an innovative product service or work". It essentially allows multiple stages of performance so that an innovative service or product can be developed (following research and development) before a contract is awarded for the actual production or delivery of that work or that good or service.

One point to note in relation to both the competitive dialogue and the innovation partnership procedures is that they do not add greatly to the flexibility provided by the existing "negotiated procedure". As a result it is perhaps difficult to imagine circumstances where utilities that are already familiar with the negotiated procedure would be keen to move away from this tried and tested approach.

Lots

As before, the new regulations allow for the division of contracts into "lots". However, an additional welcome flexibility is the ability to limit the number of lots that one particular supplier could win. This would allow a tenderer utility to achieve a significant degree of security of supply – by ensuring strategically important service provisions are not provided by a single supplier, for example.

Framework agreements

Similar to the old regulations, the new regulations provide for the award of "framework agreements".

These can be between either one or more utilities or one or more economic operators. Under the new regime there is a general limit on their duration of eight years, which applies save for in exceptional circumstances, justified by the subject matter of the framework agreement. Some additional requirements in respect of rules and criteria for the award of call-off contracts have been added. However, the new obligation is, most likely, merely a codification of what the equal treatment principle would require utilities to do in any event.

Award criteria

The new regulations make some changes to the approach to award criteria. Under the new regulations all awards take place on the basis of "most economically advantageous tender" – although it should still be possible for awards to take place on the basis of price only.

Matters which a utility can take into account when setting the award criteria have been broadened slightly. It is now possible to take into account social aspects "which are linked to the subject matter of the contract" as well as any environmental aspects. It is also being made clear that it is possible to evaluate the CVs of staff dedicated to the provision of the service.

The new regulations also make clear that life-cycle costing can be used to evaluate the cost element of a contract. This would allow a utility to take account of the costs borne by "the utility or other users" relating to the contracted service. The new regulations also make specific provision for the pricing of environmental externalities where this is based on objectively justifiable and verifiable criteria.

Modification to contract terms

The new regulations codify the existing case law in the 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 88 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).

Administrative requirements

The new regulations also codify what is probably regarded as best practice for most large procurements, in so far as that they require a report to be kept which justifies all significant decisions made by the utility during the various steps in the procurement procedure. It will also be necessary to document all communications between the utility and the bidders during the process.

Implied rights to terminate

One new right for authorities which is likely to be of concern to suppliers is the right to terminate (Regulation 89). This provides that a utility may terminate a contract where: (i) there has been an unlawful substantial modification to a contract; (ii) the awarding entity is a public body and the contract has been awarded to a contractor which should have been excluded by contravention of the mandatory grounds of exclusion (which are set in the Public Contracts Regulations); and (iii) there is a ruling in the European Court of Justice against the contract award procedure.

Conclusion

In general the new regulations offer some welcome clarity to the law in a number of respects, not least in relation to the meaning of "special or exclusive rights". For the non-expert, the codification of many significant cases of the last 10 years is particularly helpful. However, because many of the changes represent a codification of the case law, and recognition of existing procurement practice, the actual impact on day-to-day procurement decisions is probably going to be less profound than some other changes (such as those made to the remedies regime at the end of 2009).