In case law this month the courts have looked at long established issues - that re-negotiating essential contract terms risks being a substantial modification which requires a new procurement, that the utilities rules apply to passenger transport suppliers operating on a fixed network, and that exempting ambulance services from the procurement rules is inextricably linked to the existence of an emergency service (deemed unlikely to have cross border interest) - and added a further layer of understanding to their interpretation. We also look at issues raised by the Outsourcing Playbook (featured in last month's Pulse) in particular on how to apply more objective analysis of what constitutes an abnormally low tender, and report the latest baseline profit rate for the purposes of single source suppliers in the defence sector.

Trying to argue your way out of a fixed network : Competition is necessarily constrained where a business carries out its activities on a fixed network. In those circumstances the lighter procurement rules set out in the Utilities rules will apply. SJ AB - a rail passenger services operator - sought to argue that it had full autonomy as to how it ran its business, and that the Swedish Infrastructure Operator was obliged to allocate train paths to it on which to operate - save in the event of full capacity. The Swedish Competition Authority expressed concern that SJ AB - a private company wholly owned by the State and providing rail transport services - directly awarded contracts (valued in the region of Euro 5 million) for cleaning the trains which it operates. Its view is that SJ AB is involved in "activities relating to the provision or operation of networks … in the field of transport by railway…" in accordance with the Utilities Directive (2004/17/EU). At first instance in the Swedish courts, SJ successfully argued that it was not involved in that type of activity, but the Competition Authority appealed and questions were referred to the European court for preliminary ruling. Article 5(1) of the Utilities Directive states that a "network" exists where the transport services are "provided under operating conditions laid down by a competent authority of a Member State, such as conditions on the routes to be served , the capacity to be made available or the frequency of the service." The Competition Authority argued that the Infrastructure Manager appointed pursuant to the Re-cast Rail Package (Directive 2012/34/EU) and its obligation to put together a national network statement setting out the general rules, deadlines, procedures and criteria for charging and capacity allocations schemes on the rail network, satisfied the requirement for "conditions laid down by a competent authority". SJ AB did not have real autonomy in how it ran its rail services - requirements imposed by the Infrastructure Manager significantly reduced its commercial freedom. The European court agreed. Although a train operator has some freedoms to determine how it provides its transport services, inevitably a rail operator is bound by systems dictating train paths and any conditions relating to them. SJ AB's argument was based on semantics, and did not take into account the purpose of the Utilities rules. The court therefore made it clear that its conclusion is also corroborated by the historical development of the Utilities Directives. Article 5(1) picks up the wording of the previous Utilities Directive, which introduced bus services into the Utilities rules, and required wording to clarify that a network exists even where no physical structure exists. By doing so, the EU did not intend to limit the scope of the Directive to the extent that it applied to physical networks.

C-388/17 Konkurrensverket v SJ AB

Contract term is an essential aspect of any contract/ Finn Frogne reaffirmed for problem contracts : Many would argue that having let a contract lawfully, it is not commercially viable to require public sector bodies to re-let the contract if a material change to it is required to settle objective difficulties. Italy let a works concession in 1969 for a motorway to be built between Livorno and Civitavecchia. No EU rules specific to public procurement existed at the time. The contract was amended in 2009 with the effect that the original expiry date of 2028 was extended for a further 18 years to 2046. Italy argued that the extension was required to "guarantee the balance of the contract", following a number of delays and changes in Italian law which resulted in two tranches of the motorway not being completed. The Advocate General was not supportive of Italy's case:

  • Following Finn Frogne, the court reiterated that it does not matter that a material change is not caused by the deliberate intention of the contracting authority and contractor to renegotiate terms, nor does the objectively unpredictable nature of the contract provide justification for a decision to modify a contract in order to resolve difficulties encountered in its performance.
  • A member state cannot plead financial, practical or administrative difficulties (eg a change in the law) to justify non-compliance with procurement law.
  • Italy could not argue that there was no obligation to advertise a modification to a contract which was originally let before regulation of public procurement. The Court clarified that it was the 2009 contract variation which breached the procurement rules.
  • Agreement on contract duration is an essential term of the contract, therefore any extension fell for consideration within Pressetext principles - that a change may be considered material when it is "materially different in character from the original contract (now codified in regulation 72(8)(a) PCR'15), and therefore such as to demonstrate the intention of the parties to renegotiate the essential terms of the contract." The parties clearly intended to renegotiate an essential term of the contract, and did so in a way which changed the economic balance in favour of the contractor (now codified at regulation 72(8)(c) of PCR'15)
  • Italy could not argue that the "additional works" exemption applied, as the same works were being carried out - but over a longer time period.

Case C-526/17 European Commission v Italy - opinion of Advocate General Sharpston

Interpretation of terms used in emergency services exemption : A number of EU member states have been keen to preserve close relationships they have with the not for profit sector in the emergency services sector - which would be difficult if that sector had to compete with larger commercial companies. Directive 2014/24 therefore explicitly explained in its recitals that patient transport ambulance services do not fall within the CPV categorisation of "land transport services" and should only be subject to the light touch regime. In this case Falck argued that the direct award by the City of Solingen of an emergency services contract was unlawful. Article 10(h) of 2014/24 (implemented at regulation 19 of the Public Contracts Regulations 2015 (PCR'15) states "This directive shall not apply to public service contracts for civil defence, civil protection and danger prevention services that are provided by non-profit organisations, and which are covered by CPV codes … 85143000-3 [ambulance services] except patient transport ambulance services." The case is useful as it clarifies what is effectively an exception from the exemption. Falck argued that Solingen's rescue services were not "danger prevention services" which should be interpreted in the context of danger to large groups of people in extreme situations - and if that were the case, should have been advertised. The court felt that was extreme, and that the definition could equally well cover "prevention of danger to the health and life of individuals where those services are mobilised against an imminent danger from normal risks such as fire, illness or accidents" (ie collective or individual emergencies) - in which case Solingen fell within the exemption. But first it had to prove that its services fell within certain CPV classifications, were provided by non-profit organisations and were not "patient transport ambulance services". The court held that:

  • Non profit organisations are those whose purpose is to undertake social tasks with no commercial purpose, and which reinvest any profits in order to achieve their objectives. This should not be confused with organisations which are based on employee ownership or active employee participation in their governance - which are subject to the light touch regime.
  • Those services must fall within specified CPV code definitions - in this case :
    • 85143000-3, which CPV simply describes as "ambulance services". The court held that this classification requires not only the presence of qualified personnel/paramedics on board, but also that it can be shown (in its words "at least potentially") that patient health is at risk of deterioration during transit in the ambulance.
    • And 7525200 which CPV simply describes as "rescue services". The court confirmed that this classification also required care of patients in an emergency situation by a paramedic in a rescue vehicle.
  • So, how to define the exception from the exemption (ie when the procurement rules will apply) - "patient transport ambulance services"? The court confirmed that such services may have qualified medical personnel on board, but if objectively it is unlikely that a patient has such serious health problems that they are at risk of deterioration whilst in the ambulance, then they do not qualify for the emergency services exemption.

Case C-465/17 Falck Rettungsdienste GmbH v Stadt Solingen

Playbook promotes a more granular approach to abnormally low tenders (ALT) : In last month's Pulse we looked at the Government's Outsourcing Playbook which alerts procuring authorities to the impact of insolvency risk where the capacity and robustness of strategic suppliers have not been adequately evaluated, and methodologies which will require bidders to prove the sustainability of their offering. To prevent unsustainable bids, the guidance requires evaluation methodologies to "include a lower cost threshold below which bids will be considered abnormally low" and require the contracting authority to carry out further investigations in accordance with regulation 69 of the PCR'15. This is a new approach, but is in line with the Northern Ireland Construction and Procurement Delivery's (CPD) recent updating (February 2019) of its ALT guidance. The CPD guidance defines an ALT as one which is more than 15% lower than the Adjusted Average Price for the relevant procurement (average of all tender prices, save for the highest price), and more than 1% lower than the lowest qualifying price (lowest price submitted that is more than or equal to 85% of the Adjusted Average Price). To date in England and Wales, the only guidance has been in the form of case law which has avoided mathematical formulae, preferring to define an ALT as one which is not "serious and genuine" (Lombardini), "reliable and serious" (Renco), "sound and viable" (SECAP) or a bid which is not "likely to provide the contracting authority with the services it seeks" (Amey v Scottish Ministers). The Pulse will track any further developments which indicate what the methodology should be for calculating the "lower cost threshold" suggested in the Playbook guidance.

Single source contracts - updated guidance on baseline profit : This statutory guidance applies to all qualifying defence contracts and sub-contracts, and updates the version published in March 2018 - in particular setting out a new baseline profit rate for 2019/20 (7.63%), and revised guidance in relation to the application of step 6 - capital servicing adjustment. Six specified steps must be taken when determining the profit to which a contractor is entitled where no competitive procurement has taken place, either because there is only one possible supplier or because there is a very strong case for maintaining national capability. The new guidance supersedes all previous guidance.