The landscape in relation to the award of concession contracts by public bodies and utilities has recently fundamentally changed. This Briefing Note highlights what has changed and what to expect. In addition to examining the likely impact on how public bodies and utilities (together "contracting authorities") award concession contracts, this Briefing Note addresses some issues relevant to concession contracts generally.
WHAT IS A CONCESSION?
As the name suggests, a concession is where one party gives (concedes) to another party the right to use an asset to make an economic return. The concessionaire usually pays a percentage of that return to the party offering the concession. An obvious example would be the grant of a concession to run a caf service in a university, an energy manager to reduce energy consumption in a hospital, or a service provider to run a car park in hospital grounds. Generally, the concessionaire takes the risk on whether anyone buys enough of the goods or services to make the concession economically viable.
THE OLD REGIME
By 18 April 2016, Ireland was due to implement the Concessions Directive (2014/23/EU). This has not yet occurred.
Prior to the Concessions Directive, concessions were generally considered to be outside public procurement rules. To the extent that there were tender competitions for the award of concessions by contracting authorities at all, they were conducted on a very informal basis. The Concessions Directive has fundamentally changed that.
WHAT DOES THE CONCESSIONS DIRECTIVE REQUIRE?
- The Concessions Directive (2014/23/ EU) was introduced principally to enhance the transparency under which concession contracts would be awarded.
- Any concession worth over 5,186,000 must be publicly tendered by contracting authorities through OJEU. The 5,186,000 valuation is not the value of the contract to the contracting authority (which generally only takes a percentage of turnover of the concession) but rather the total overall turnover of the concession for its entire term. This means, for example, that a five year service concession to run a caf in a hospital which has an annual turnover of 1.5million, exceeds the threshold and must be tendered through OJEU.
- The Concessions Directive sets out general requirements for the conduct of concession tenders. This includes the obligation to comply with the fundamental principles of equality, transparency, non-discrimination and proportionality. It also requires awarding authorities to set out award criteria, at least in order of importance.
- Concessions cannot be granted on a rolling basis but must have a specified term. Concessions can only last for more than five years where a longer term is required in order for the concessionaire to recoup its investment.
- The minimum time limit for receipt of applications for a concession is thirty days from the date on which the concession notice is published. Where the concession tender process takes place in successive stages, the minimum time limit for the receipt of initial tenders is twenty two days from the date on which the invitation to tender is sent.
- Material amendments to concession contracts are not permissible. Concessions can only be modified during the term of the contract based on the specified grounds contained in the Concessions Directive.
- Concession contracts are now subject to the Remedies Directive meaning that if a challenge to a concession contract is brought, the procurement remedy of "automatic suspension" (preventing the award of the contract until the matter is addressed or the suspension lifted) should be available.
- The Concessions Directive applies to both public sector bodies and utilities.
These new rules mean that any substantive concessions (exceeding the threshold) must be tendered, largely in a manner consistent with the more formal rules applicable under the Public Sector (2014/24/EU) and Utilities Directives (2014/25/EU). We expect to see a significant increase in the number of concessions being offered for tender as a result.
OTHER CONCESSION DEVELOPMENTS
Some would say that for concessions valued at less than 5,186,000 nothing has changed. That is not correct. In February 2016, the European Court of Justice, in a case relating to a service concession (Sebat Ince (Case C-336/14)) held that contract authorities in awarding concessions must act transparently and to disclose all relevant information to bidders in tenders for concession contracts. This is generally referred to as the `RWIND' test in public procurement or the test which obliges contracting authorities to disclose to tenderers information in such a way that a reasonably well informed and normally diligent tenderer would understand. This means that any concession which is likely to have a cross-border interest must clearly set out what is required, in tender documents made publicly available. As a consequence of this decision, we consider that there are significant obligations now on contracting authorities to offer concessions, even at below EU threshold levels, in a manner consistent with EU fundamental principles. Again, this ought to result in a significant increase in volume of concessions being offered for tender publicly.
Concessions can arise in a number of different sectors catering, energy management, car parks, crche facilities, to name a few. Generally, they are service-based rather than works-based concessions but the Concessions Directive applies to both. The recent changes are likely to radically affect the competitive environment for concessions in Ireland.
In addition to the changed environment for procurement of concessions there are some recent developments to be borne in mind, both by bidders and by contracting authorities in structuring concession tenders and concession contracts.
Contracts for concessions are often drafted as licence agreements although they are generally forms of service agreement in return for which a "licence fee" is payable. Characterising the agreement as a "licence" will not necessarily mean the procurement rules in relation to the award of concession contracts do not apply. A typical consideration in relation to any concession agreement is to ensure that the concessionaire is not given tenancy or renewal rights. Such rights can include statutory protection for the tenancy, automatic renewal rights and statutory rights to compensation in some instances. This can be addressed by carefully setting out the terms of the agreement to make it clear that a tenancy is not intended. Particular cases may warrant the use of a statutory renunciation of any renewal rights that might otherwise accrue, if there is a particular risk that a concession agreement might be characterised by a court as a tenancy.
The characterisation of the concession contract as a licence can have consequences in relation to the VAT treatment of what is being performed under the contract. Currently licenses are treated as taxable supplies of services. If the concession is granted by way of a lease with the concession paying a "rent" to the contracting authority in return for the grant of the concession, then it may (subject to certain requirements and depending on the nature of the concession asset) be possible to avoid a VAT charge
on rental payments. If the nature of the concession is one which would allow the concessionaire full VAT recovery, then VAT may not be an economic cost to the concessionaire in any event.
TRANSFER OF EXISTING STAFF
Often the award of concessions involves the replacement of an existing provider with a new provider. This can give rise to the transfer of staff of the existing provider (with all employment rights maintained) to the new provider under TUPE (SI 131 of 2003). This can arise where assets transfer between the existing provider and the new provider (such as stock, equipment, fixtures, fittings, customer contracts, goodwill etc.) and where the concession operates in the same or similar way following the replacement of the licence holder. The transfer of the licence itself, in the absence of any other tangible or intangible assets, is generally not enough to give rise to the application of TUPE.
In structuring tenders for the award of concession contracts consideration should be given to whether TUPE might arise and how to ensure all bidders can bid on an equivalent basis (the incumbent with the existing staff being in a particular position of knowledge). It is often useful to include express provisions in contracts setting out the extent to which incumbent concessionaires are required to cooperate, prior to any new tender process, regarding employee information.