On February 5, 2017, the Regulation on Deindexation, introducing important developments for companies with public sector contracts, came into force.

Royal Decree 55/2017 of February 3, implementing Act 2/2015 of March 30 on the Deindexation of the Spanish Economy (Spanish Official Gazette BOE 4/2/2017), is part of a number of actions aimed at establishing new non-indexing practices in price reviews of public goods and services, bringing to an end the practice of indexing the price review for public contracts, tariffs, levies and regulated prices to standard periodic formulas, most commonly the CPI. The purpose of this regulation is to eliminate so-called “second round effects” and inflation inertia. 

The new regulation links the price review to the evolution of costs, setting out the exceptions to such general rule in which indexation is allowed and the formulas for carrying it out. 

Specifically, the new regulation provides for exceptions to the prohibition on indexing in certain cases, stipulating that the prices of public sector contracts falling within the scope of the Consolidated Text of the Spanish Public Sector Contracts Act (the TRLCSP) can be subject to a predetermined, periodic review, as provided in the regulation. 

Impact on Price Reviews in Public Sector Contracts

Application and implementation of legal provisions relating to the referencing principles of cost, efficiency and good business management.

Developments in the prive review of public sector contracts to which the TRLCSP is applicable, other than government construction and supply contracts for manufacturing weapons and equipment.

Determination of rules for establishing predetermined, periodic formulas.

MAIN DEVELOPMENTS OF THE REFORM:

Establishing Common Principles for Monetary Value Reviews Due to Cost Variations

The new regulation lays down three principles that will govern all monetary value variations caused by cost variations: 

Cost referencing principle, according to which it will be necessary to take as a reference the cost structure of the activity and assess the different cost components that are essential for properly carrying out the activity on the basis of their specific weight in the value of the activity.

Efficiency and good business management principle, which implies that only those variations in costs that have been borne by an efficient and well-managed company, identified as such on the basis of best practices in the sector, can be passed on to prices. 

Restriction on labor costs: when these costs are passed on to the revised value, their increase cannot exceed the increase in public sector wages in accordance with budget laws. 

Predetermined, Periodic Review od Prices in Public Sector Contracts

A) Government Construction or Supply Contracts for Weapons and Equipment

Provided that it is stipulated in the terms and conditions, the regulation allows for predetermined, periodic price review. The current standard formulas and, where applicable, the monthly price indices for basic materials published by ministerial order will be used for the review. 

The review can only take place two years after entering the contract and when at least 20% of its amount has been completed.

B) Other Public Sector Contracts Subject to the TRLCSP

  • The prices of these contracts can only be subject to a predetermined, periodic review, notwithstanding the right to economic and financial rebalance, and the following requirements apply: 
  • Two years  must have elapsed from the date of entering into the contract.
  • At least 20%  of the amount must have been completed, except for public service management contracts.
  • Investment recovery period of five more years.
  • The review formula must be specifically provided in the terms and conditions of the contract. They must also itemize the cost components of the contract activity and their weight on its price, the individual prices or specific price indices related to each component subject to review, and the efficiency incentive mechanism. 

The contracting authority will ask five economic operators from the relevant sector to provide information on their respective cost structures and will use that information, if any, to draw up a cost structure proposal for the activity and submit it to public consultation before approving the terms and conditions. 

Likewise, if the price of the contract is five million euros or above, the contracting authority will include in the tender dossier a mandatory report assessing the cost structure, issued by the Senior Committee on Public Sector Contract Prices (Comité Superior de Precios del Contrato del Estado) or the relevant regional body. 

C) Principles for Establishing Formulas for Predetermined, Periodic Reviews

The formula will include the costs of the activity on the basis of the referencing principles of cost, efficiency and good business management.

It will only contain cost components regarded as “significant” above 1% of the full value of the activity. 

Variations in financial costs, depreciation, overhead and structural expenses and industrial return are excluded. Labor costs may be included if they are significant, but the increase that may be passed on may not be more than the increase in public sector wages in accordance with budget laws. 

The possibilities existing in the market for hedging the risk of variation in the costs of an activity can be taken into account when deciding whether to exclude a specific cost from the formula, as well as parameters or restrictions encouraging efficiency.