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General framework

i Types of public-private partnership

Outside of PFI/PF2, there are several other forms of PPP used in the United Kingdom, considered below.

Concessions

Under a concession, a private entity is granted an exclusive right to build, maintain and operate specific assets for a period of time. These projects are financially free-standing and usually the contractor is paid through usage charges, availability fees or a combination of both to ensure the operating model can encourage both ongoing capital expenditure and service delivery innovation. This structure is often used for projects such as tolled roads and river crossings. The United Kingdom's rail franchise model is also a form of concession operating in a highly regulated industry.

Strategic infrastructure partnerships

In a strategic infrastructure partnership, a public sector body enters an arrangement with a private sector partner as a joint venture or under a contract. This structure is usually suitable where there may be several phases of works or where several similar small projects are bundled together.

Public delivery organisation (integrator)

The public sector appoints a contractor to adopt a 'client-side' role and manage the delivery of a project from preparation to operation. The contractor will usually only manage rather than deliver the project. This approach may be suitable where the project is long-term and requires a flexible approach.

Regulated asset base structures

The regulated asset base model structure is used to license out a commercial activity, and the licensee will recover returns on expenditure used to develop and operate the assets. Competitions are held for the award of the licence, and the activity and returns on investment are usually subject to independent regulation. The regulated asset base model has been used successfully in the regulated water, power distribution and airport sectors.

With a regulated asset base model, the initial value of assets (often at privatisation) is added to the cost of further investment allowed by the regulator (each subject to depreciation) and the value realised from any disposal is subtracted. This regulated asset base (RAB) (also known as a regulated asset value) is then subject to indexation, creating a net invested capital value.

While models vary dependent on industry, the RAB (i.e., CAPEX) is, in basic terms, then used to calculate the required revenue for the provider through a (risk-weighted) allowed return (which will take account of a number of factors including the provider's weighted average cost of capital) being applied to the RAB. This allowed return is then (subject to an amortisation allowance) added to allowable OPEX costs to calculate a total required revenue. This required revenue is then raised from customers (subject to provision of any grants or other funds from the public sector) through their usage or bills.

Direct procurement

Ofwat, the water sector regulator, and Ofgem, the electricity regulator, exemplify a further procurement option. Ofwat has used direct procurement to deliver large-scale assets. This model encourages partnership arrangements for the delivery of an asset to increase competition for financing with the hope of driving down financing costs. Thames Water's Thames Tideway Tunnel project is an example of the use of direct procurement in the regulated water sector. In the case of the energy sector, Ofgem has used direct procurement methodology for Offshore Transmission Operators and had previously intended to use direct procurement for its Competition in Onshore Transmission programme (a programme that has now been suspended).

Joint ventures

The government may adopt a joint venture model to deliver a project utilising limited companies or partnerships. Joint ventures may be adopted to operate a public service where the revenue does not cover the operational costs, or to realise development potential in publicly owned real estate.

Government-owned, contractor-operated companies

An authority may want to retain control of a strategic asset but will need a contractor to operate it for the duration of the services. Once in operation, the asset will be transferred back to the government.

Hybrid projects

Structures may develop that combine together aspects of the above structures and these may be used for specific one-off projects that have special requirements.

ii The authorities

The following public bodies are responsible for PPP in the United Kingdom:

  1. the European Commission, which sets the regulatory framework for public procurement in the European Union. Post Brexit, much of the existing framework will remain in UK law but the extent of future application of EU rules will depend on any final agreement;
  2. Her Majesty's Treasury, which controls public spending and sets the general direction and policy on PPP. It also approves the project business cases;
  3. the Cabinet Office, which oversees the standards and efficiency of government functions and procurement and approves procurement structures;
  4. the Infrastructure and Projects Authority (IPA), which helps translate long-term planning into successful projects. The IPA publishes National Infrastructure Delivery Plans to cover infrastructure policy over a five-year period;
  5. procuring bodies: the authorities that structure and procure projects. They are the contracting party and manage the project and pay the contractor;
  6. independent regulators: some areas of activity are regulated by a specific body, for example, gas and electricity, large airports, water, and environment;
  7. planning authorities that decide whether to grant development consent for a project. The size and location of the project will define who the relevant planning authority is; and
  8. the Comptroller and National Audit Office, which scrutinises government spending. The Comptroller and National Audit Office recently published a report on the costs and benefits of PFI/PF2.
iii PPP project requirements

In the United Kingdom there is no PPP law as such, unlike in many other jurisdictions outlined in this book. UK PPP projects are promoted under the general legislative powers of government and public bodies. A PPP concession is granted by government under English contract law (or under Scottish law where the concession is granted by the Scottish government using devolved powers), although in some sectors of government, primary legislation has been passed to enable PPP projects to be financeable. The powers of central government departments are mainly unfettered unless limited by common law or legislation. Local government and other public bodies will have more restricted powers conferred by legislation.

The choice of what PPP model to use on each project is up to the procuring body to decide and there is no standard approach or correct structure when procuring a project. The Cabinet Office and Her Majesty's Treasury will oversee any decision on the structure of the project and ultimately (and most importantly) the source of funding for the project.

Similarly, the approach to PPP contracts will depend on the structure of the project. However, the contracts for PFI/PF2 projects have been standardised by Her Majesty's Treasury in SOPC4. SOPC4 sets out recommended and required provisions that should feature in the contract.

By way of example, in the United Kingdom, PFI/PF2 projects had to be approved before procurement and a typical framework for approval is:

  1. the Cabinet Office approves the procurement route. The IPA operates a staged assurance process that the project must go through when proceeding to procurement; and
  2. the strategic outline case, outline business case and final business case must be approved by Her Majesty's Treasury. The strategic outline case will be approved at the beginning of the project, the outline business case at the pre-market stage and the final business case before any final negotiations begin.

Each procuring body must follow its relevant approval process. Local government bodies and other public bodies usually require sign-off from their sponsoring department.

All of these approvals are obtained by the procuring body and not the contractor. Once it has successfully bid for the project, the contractor will have to obtain various consents such as planning consents and environmental permits. The contractor is not required to obtain any PPP-specific consents.

Bidding and award procedure

The procurement of works, goods and service contracts by public bodies in the United Kingdom is governed by the Public Contracts Directive 2014/24/EU (the Directive) as implemented in UK law in the Public Contracts Regulations 2015 (the Regulations).

The Directive applies when works, services or supply contracts are procured that have a value in excess of the published thresholds for that year and they are not excluded contracts. It describes three regimes. The primary regime requires fully regulated procurement, and this applies to most contracts above the thresholds. It involves advertisement of the opportunity in the Official Journal of the European Union (OJEU) and compliance with detailed rules when carrying out the competition. This regime applies to the majority of PPPs.

The second regime describes a 'light touch' procurement process that must apply to a limited number of specific types of contract referred to as 'social and other specific services'. There is a higher financial threshold, and while advertisement in OJEU is still required, the process itself is less prescribed. This process may be used, for example, in the procurement of medical equipment or social services.

Finally, there is very limited regulation in respect of 'below threshold' contracts that are between a de minimis threshold (£10,000) and the main threshold. The below-threshold regime requires advertisement on a national website, though not the OJEU. In the United Kingdom this website is Contracts Finder, and will include most, if not all, contracts, whether above or below the thresholds. It is familiar to most contractors in the United Kingdom and the preferred source of contract opportunities.

There are two ancillary Directives that may apply in specific circumstances:

  1. The Concessions Contracts Directive 2014/23/EU applies when public bodies procure concession contracts, that is, contracts where the contractor receives remuneration from third parties by exploiting the relevant asset or concession (e.g., toll roads). This came into force in the United Kingdom in 2016 under the Concession Contract Regulations 2016.
  2. The Defence and Security Directive 2009/81/EC applies to the procurement of contracts that require a higher degree of confidentiality and data security because of their sensitive nature.

Though an OJEU notice is still required, the Concessions Contract Directive offers less-onerous rules of competition. Though it could apply to many infrastructure projects and PPPs, the public sector has been slow to make use of it in the United Kingdom, preferring the familiarity of the main Directive.

All of the Directives require the application of overriding principles of fair procurement, namely: the equal treatment of all bidders; transparency of the procurer's requirements and decision-making processes to bidders; and non-discrimination.

Where the full regime applies; there is a choice of five procedures:

  1. the open procedure;
  2. the restricted procedure;
  3. the competitive dialogue procedure;
  4. the competitive procedure with negotiation (often referred to as the 'negotiated procedure'); and
  5. the innovation partnership procedure.

In summary, the open and restricted procedures do not allow any form of negotiation or discussion between the bidder and the authority (although clarification of proposals is allowed). They are generally considered unsuitable for procuring complex PPPs. Innovation partnerships are a new feature of the 2014 Directives but do not appear to have gained much traction. They are appropriate where the authority is looking to the market to develop a new product to meet its needs and be the 'first customer' of such product.

Common practice in the United Kingdom for PPPs has oscillated over the years between the negotiated procedure and the competitive dialogue procedure. An earlier version of the negotiated procedure was preferred until 2006, being extremely flexible and allowing the deselection of one bidder early in the process. However, the United Kingdom was heavily criticised for this and it was generally felt that the lack of competition during the key contract negotiations prolonged the award of the contract rather than facilitated it, as all terms were often erroneously considered up for negotiation by the 'preferred' bidder and the authority. By 2006, the United Kingdom had worked with the EU Commission to devise the competitive dialogue procedure as an alternative, which enabled negotiation with multiple bidders until the submission of final tenders only, after which there would be no further discussion. Between 2006 and 2015, the UK government championed this new process, but it was generally considered the worst of all worlds in practice. It required significant resources and time (for bidders and authorities) to negotiate more than one contract to the stage where a final tender could be capable of acceptance without further discussion.

The 2014 Directives dealt with this criticism by amending the competitive dialogue procedure to allow some negotiation with the preferred supplier post-final tenders, provided there is no material modification. Meanwhile, the negotiated procedure in the Public Contracts Directive no longer allows negotiation post-final tender. Competitive dialogue is arguably now the more flexible procedure. Perhaps for this reason, the UK government has relaxed its policy prohibition on the use of the negotiated procedure and, ironically, public bodies have flocked back to it, perhaps in the belief that it still provides its previous flexibility. It is once again the most common procedure for large PPPs.

Whichever process is chosen, lack of government resources and a tightening of legal budgets has led to a focus on reducing procurement timetables. To do this, public bodies tend to limit which areas they are prepared to discuss or negotiate. Often, the main terms and conditions may not be debated at all, only the technical solutions. As much as possible of any negotiations are also now conducted electronically by use of web-based applications. The days of PPPs taking three years to negotiate are long gone.

EU procurement law provides a number of remedies to disgruntled bidders such as a right to damages and in some circumstances a right to have a contract rendered ineffective. These remedies can be found in the Directives and Regulations, though are subject to very short limitation periods. Courts in England and Wales have in the past arguably been unsympathetic to procurement law challenges, and litigation levels remain relatively low compared with the rest of Europe (and with a comparatively low success rate, though it has been steadily increasing over the past decade).

Procuring authorities are also subject to freedom-of-information laws and concluded contracts are generally published (usually with redactions of particularly sensitive information).

i Expressions of interest

All above threshold contracts to which the Directives apply must be advertised in the OJEU. The name, description and value of the contract is given together with the link or contact details for obtaining further information. This information usually consists of an information memorandum detailing the opportunity and background information, together with anticipated timescales and selection criteria for the initial shortlisting of those who will be invited to tender. It may also include a draft contract and evaluation criteria to apply to the tenders at the next stage.

Vitally, the information pack will also include a selection questionnaire to be completed by interested parties and returned within a 30-day period (other than in cases of urgency where this period may be reduced). Most public bodies now use the UK government's standard form questionnaire. It asks a series of questions aimed at identifying the bidding organisation or bidding consortium, its financial strength and experience, and whether there are any mandatory or discretionary grounds for exclusion (e.g., a history of criminal conviction, fraudulent activity, tax evasion or poor performance on previously awarded public sector contracts).

Respondents will be assessed against their ability to meet the minimum thresholds with regard to financial standing, and technical ability or experience. Only those that meet the minimum requirements shall be scored, and a shortlist of usually between three and five respondents will be invited to the tender stage of the competition.

ii Requests for proposals and unsolicited proposals

Private parties often liaise with public bodies in an effort to persuade them to enter into PPP arrangements with them. These discussions more often than not take place in the context of official pre-market engagement exercises, which are now specifically allowed under the Directive and promoted by the government. Care must be taken by the authority to ensure they are transparent about these discussions and provide the same level of information to all interested parties (though information received in return should be kept confidential). Sometimes, however, discussions are entered into on an exclusive basis but an authority may not accept any unsolicited offer without considering whether the contract in question would be subject to the Directives. If it is, the body may not accept such offer without the risk of procurement law challenge, and the potential contract must be advertised in OJEU.

Assuming a contract has been advertised and pre-qualified respondents shortlisted as described in Section IV.i, then the shortlisted bidders will be provided with a suite of documents referred to as the 'Invitation to Participate in Competitive Dialogue', or 'Invitation to Negotiate' (as applicable to the chosen procedure). The documents will include: details of the timetable and process for negotiation, including whether it will take place in successive stages and whether bidders may be rejected at each stage; the technical requirements and specification; the draft terms and conditions; the evaluation criteria that shall be applied to each tender and the final tender; and the deadline by which initial tenders must be submitted.

iii Evaluation and grant

Following the receipt of initial tenders, there is a period of negotiation with each bidder. The authority may, in theory, discuss and negotiate all aspects of the tenders but must have regard to the core principles of equal treatment. This means that they cannot agree to change to their requirements with one bidder and not others. However, they must balance this against maintaining the confidentiality of each bidder's technical solutions.

As set out above, the scope of matters that are likely to be negotiated has decreased drastically over the years. Mark-ups of the draft terms and conditions are often not allowed at all and may result in exclusion, be limited to some clauses only, or be heavily penalised in the scoring. As a result of this, public bodies have ensured that by the time final tenders are requested, the contract has been largely accepted and there is minimal negotiation thereafter. Only time will tell whether this will produce long-term contracts that are truly fit for purpose.

Once the final tenders are received, the authority shall apply the evaluation criteria to the tenders. Evaluation criteria must be set out at the outset in the procurement documents and have the objective of identifying the 'most economically advantageous tender'. This means there must be a price-to-quality ratio applied to the weighting of scores. The contract may only be awarded to the bidder that receives the highest-weighted score. Following award, final negotiations may be carried out to finalise details of the contract if the competition dialogue process is used. In practice, it also takes place where the negotiated procedure is used, though this is now prohibited by Regulation 29(13).

Public bodies must notify all bidders of their intention to enter into the contract and refrain from signing the contract until a period of at least 10 days has elapsed from the date of the notification to give unsuccessful bidders an opportunity to issue a claim before the contract is signed.