Public Contracts Regulations 2015 - Regulation 71

Regulation 71 - Subcontracting

Regulation 71 brings specific rules on how to deal with subcontracting situations, a (partial) novelty to the Public Contracts Regulations as the 2006 Regulations already included some rules. Here, they have been very much expanded.

By and large the contracting authority is left with the discretion to require information about the sub-contractors (and sub-sub-contractors...) and also to investigate their compliance with the requirements of Regulations 57, 59, 60 and 61. It may decide not to bother with requesting any information from sub-contractors but if it does check for the mandatory exclusion grounds and they are present, the affected sub-contractor must be excluded from the contract. This makes sense and it is a shame that the same conclusion has not been taken for abnormally low tenders (where even if a tender is found to be abnormally low, the contracting authority retains the discretion of excluding it or not).

The exception to the discretion of meddling into the sub-contracting swamp is for works contracts and some services contracts (paragraph 3), but not for supplies (paragraph 6). In these, the contracting authority must require from the main contractor the identity of the sub-contractors and the registry of sub-contractors needs to be kept up to date by the main contractor (paragraph 4). However, even in these situations, the contracting authority is not under the obligation of checking for grounds for exclusion.

The possibility of "spot checking" sub-contractors does raises the odds for non-compliant economic operators to be found out "hiding" as sub-contractors instead of appearing as main contractors where they would not be able to pass a selection stage. I have no idea how prevalent this is practice or if it is just a red herring but it appears to me that the "nudge" given to contracting authorities to keep on checking sub-contractors is a reasonable way to close a loophole for non-compliant economic operators. The alternatives would be to not have any rules whatsoever or to make the checks mandatory.

Having said that, I somehow doubt that many contracting authorities will bother in undertaking this work during contract performance as there is no incentive for them to do so. What do they have to gain to rattle a contract being performed to check if the sub-contractors are paying their taxes? Contract performance monitoring is spotty at best today and these rules will not change it. Albert?

Edit: I forgot to mentioning something on the original version of my post this morning which Albert mentioned. For all the noise about the benefits of direct payment to sub-contractors I am glad it did not make it to the Regulations. I am usually firmly in the camp of making procurement easier for SMEs and I am well aware that main contractors receive all the cash and then sit on it for quite some time before paying it downstream.

However, paying directly to subcontractors breaks the clear liability nexus that exists on the traditional payment mechanisms with two consequences. One, paragraph 2 would be incompatible with this idea. Two, if and when things go wrong on a project, contractors would always play the blame game against one another. Things get messy really quickly under the direct payment to sub-contractors system with the contracting authority holding the can. There is a reason why back to back liability clauses are so common on construction contracts...

PS: As an anecdote I was once acting as the lawyer for a main contractor whereas my father represented the sub-contractor. Fun times...

Public Contracts Regulations 2015 - Regulation 57

Regulation 57 - Exclusion grounds

Regulation 57 brings us the rules governing the exclusion of candidates from a public procurement procedure, transposing Article 57 of Directive 2014/24/EU into England, Wales and Northern Ireland. This Regulation is divided into six parts: general rules leading to mandatory exclusion; mandatory and discretionary exclusions for non-tax payment; exceptions to mandatory exclusions; discretionary exclusions; exclusions during the procedure; and self-cleaning. In consequence, there is plenty to say about exclusions under the new Public Contracts Regulations 2015 as shown by Albert's long entry on Monday.

General rules leading to mandatory exclusion

Paragraphs 1 and 2 contain a number of general rules regarding the exclusions of candidates during the procedure, referring to a number of national laws such as the Criminal Law Act 1977 the or Public Bodies Corrupt Practices Act 1889 as sources of mandatory exclusions. In comparison with the Public Contracts Regulations 2006 (Regulation 23) it is possible to detect an expansion of these general rules leading to an automatic exclusion. As we shall see this mandatory exclusion may not be mandatory at all.

The content of paragraphs 1 and 2 is similar to what can be found in other countries, but an issue may occur when a foreign based economic operator has committed offences in another Member State as it technically would not have violated any of the national laws (common law included) mentioned here. I am not sure this is a real problem or just me creating problems where they do not exist in practice.

Under paragraph 12 the exclusions under these paragraphs, as the ones of paragraph 3 are valid for a period of 5 years, leaving me to wonder how this will pan out in practice. Is the exclusion valid from the moment the offence was committed, the final decision notified (if applicable) or the first procedure the economic operator subsequently try to enter into?

Mandatory and discretionary exclusions for non-tax payment

Paragraphs 3 to 5 are related to the non-payment of taxes which can be lead to either a mandatory or discretionary exclusion, with the possibility that some mandatory exclusions may not be that mandatory at all.

In a departure from the discretion given under Regulation 23(4)(g) of the Public Contracts Regulation 2006, paragraph 3 states that economic operators shall be excluded when the contracting authority is aware the economic operator is in breach of its obligations relating to payment of taxes or social security contributions by means of a final administrative or judicial decision either in the UK or another country where it is established. It would thus appear that only the entity presenting itself to the procurement procedure would trigger this exclusion and not others within the same group.

The following paragraph gives the contracting authority the possibility to exclude an economic operator if it can demonstrate said operator is in breach of its obligations relating to the payment of taxes or social contributions using "any appropriate means". This looks to me as problematic and I am not sure how it will be used in practice as it appears to be a novelty in comparison with the 2006 regime.

For the benefit of readers based outside the UK, I would add that for the last few years a campaign has been brewing to bar companies from taking part in public procurement unless they pay "their fair share" of tax. This is mostly based on a moral argument that it is unfair to award contracts to economic operators which aggressively avoid tax using schemes which, so far, have proved legal. My views on this are quite simple: exclusions can only occur when their is illegal tax avoidance (ie, violating of tax laws) and that procurement is not to be taken over to pursue interests that do not arise from legal obligations. In other words, said campaigns should focus instead in changing the tax laws (and treaties...) but that, of course, implies a political cost which some pulpit politicians are not keen to incur. I have the feeling that this new paragraph 4 may be used for those purposes.

Both exclusion grounds of paragraphs 3 and 4 however cease to apply (meaning they are no longer legitimate exclusion grounds) once the economic operator enters a binding agreement to pay the tax due. Note the reference to "entering an agreement" and not "actual payment"...Doubling down on my argument above: if politicians really wanted to increase tax compliance this should only occur when the tax debt was fully paid up. But those political costs...

The exclusions under paragraph 4 and 8 (see below) are valid for 4 years and the same comments as above apply.

Exceptions to mandatory exclusions

Paragraphs 6 and 7 undo all the good compliance work demanded by paragraphs 1 and 3 by transforming what were mandatory exclusions into discretionary ones based on grounds of public interest (public health or the environment). Call me a cynic, but I am sure any agency other than the HMRC is more interested in getting the best economic operator for its contract than the one with the best tax/criminal compliance record. Furthermore, mandatory exclusions under paragraph 3 can also be set aside when they are disproportionate, which seems reasonable as it can help economic operators going through difficult times.

Discretionary exclusions

Paragraph 8 includes a laundry list of situations whereby the contracting authority may decide to exclude an economic operator, but is under no obligation of doing so. Most of them were already present in Regulation 23 of the Public Contracts Regulations 2006. I find it interesting however that the lawmaker (and the Directive) qualify the exclusion due to a conflict of interest situation under Regulation 24 as a last resort but not as a mandatory exclusion when that happens. Therefore, even if the conflict of situation exists and could not be corrected by other means the contracting authority is still not under the obligation of excluding the economic operator. How this provision is compatible with the principle of equal treatment is beyond me...

Exclusions during the procedure

Under paragraphs 9 and 10 establish the principle that any exclusion ground can be used against an economic operator during the public procurement procedure and not only during the selection stage or whenever the grounds are first checked.

Self-cleaning

Finally, paragraphs 13 to 17 introduce the novelty of self-cleaning, or the possibility that economic operators can pro-actively solve the issues that would otherwise lead to the application of exclusions during a certain period of time. The leading case on this topic is the Siemens one from 2008 I think. Simone Davina from Siemens Netherlands gave an excellent talk in this year's Procurement Week about Siemens example. There is also a book from various authors on self-cleaning which came out in 2009.

The self-cleaning rules from Regulation 57 allow an economic operator falling under any of the circumstances of paragraphs 1 and 8 to show that it has taken measures to demonstrate its reliability. This may make sense when criminal offences were committed such as bribing, but extending these self-cleaning rules to other failings such as (real) tax avoidance appears to me to be a step too far. Having said that, the examples provided in paragraph 15 appear geared towards the first scenario and not the second. We will see how this will pan out.

Self-cleaning does not provide with a free and automatic "get out of jail" card to the economic operator. According to paragraphs 16 and 17 it is up for the contracting authority to decide (within its margin of discretion) if the self-cleaning is enough to guarantee the "reliability" mentioned above. In case the authority considers the cleaning insufficient it will have to justify its decision.
 

Public Contracts Regulations 2015 - Regulation 34

Regulation 34 - Dynamic purchasing systems

Regulation 34 transposes to England and Wales the rules contained in Article 34 of Directive 2014/24/EU on dynamic purchasing systems. Dynamic purchasing systems constitute another type of two-stage "system" for awarding contracts the other being the framework agreements we discussed yesterday. The major difference between a dynamic purchasing system and a framework agreement is the freedom with which suppliers can enter the first at any time, whereas in the second, suppliers are admitted only at the start. Up to this moment, framework agreements are by far more popular, particularly in the UK.

Albert has already given a fantastic overview of dynamic purchasing systems and how they are supposed to operate, so I will focus my commentary in a couple of more specific points: the need to use the restricted procedure, its electronic nature, the need to invite all participating tenderers and speculating why it has not been used more widely.

1. The need to use the restricted procedure

Regulation 34(5) establishes the obligation to adopt the restricted procedure with the necessary adaptations to undertake procurement of contracts under dynamic purchasing systems (DPS). This can be interpreted in two different ways: the first that for establishing the DPS a restricted procedure of sorts needs to be followed. The second, that the call offs themselves need to follow a restricted procedure. An interpretation by analogy with framework agreements would indicate that the first interpretation is right (and I suspect that is the most common one), but I struggle to make it compatible with the actual wording of paragraph 5 "In order to procure under a dynamic purchasing system, contracting authorities shall follow the rules of the restricted procedure[...]." (emphasis mine) The killer word for me is "procure".  Neither the Directive nor the Regulations used "establish", which would emphasise the creation of the system, but the actual procurement being undertaken.

Paragraph 6 however refers to the selection of candidates to be admitted to the system, moving the discussion back to the system creation in itself. However, there is another clincher in this discussion: although participation limits are a key feature of the restricted procedure, there are no limits to the numbers of candidates that can participate in a DPS. As such, even though the Regulations state that a restricted procedure needs to be followed, in effect the defining element of that procedure (limitation of candidates) is actually not present at all.

Would it not have been preferable no refer to the open procedure instead? The reference could limited to the traditional open procedure, ie the one with a selection/qualification stage for all participants. The irony of course is that Regulation 20 of the Public Contracts Regulations 2006 made reference to said procedure instead...

2. Electronic nature

Another key feature of the DPS is that it needs to be done entirely electronically. It makes sense: the logic underlying DPS is to allow for common repetitive spend to be done with reduced transaction costs for everyone involved. Although e-procurement is widespread in the UK it is not yet mandatory nor are all contracting authorities geared up to use it. It may be that in the coming years as procurement officers become more comfortable with e-procurement, better tools are made available and the relentless pressure to reduce transaction costs applied may lead contracting authorities to adopt this procedure more widely.

3. The need to invite all tenderers

In a DPS, all admitted tenderers are to be invited to take part in every call off for contracts that they have been qualified for (the DPS can be divided into lots/areas). This is a clear difference from multi-supplier framework agreements where effectively contracting authorities have free reign to invite whomever they feel like for any specific contract. If some practices such as "cherry picking" participants (pun intended), rotating opportunities or effectively always using the same supplier are compatible with the principles of equal treatment/non-discrimination and competition, that is a different matter.

But this change is a nice segway for the section on why DPS are no more popular in the UK and eventually elsewhere.

4. DPS lack of popularity

Over the last decade, framework agreements have been used a lot more widely than DPS in European public procurement. One reason for this state of affairs may be that all participating suppliers must be invited all the time. Experience tells us that contracting authorities (particularly in the UK) do not like to receive lots of bids or even to have the risk that multiple bids are submitted. Over the years we have seen plenty of practices with this objective in mind such as charging for tender documents, detailed PQQs or establishing high turnover requirements: the objective of all was to raise barriers to supplier participation. Therefore, under this light the DPS is a lot less compelling than a framework agreement for a contracting authority as the latter "allows" for more fine-grained controls.

The second potential reason is mentioned by Abby Semple in her new book (para 3.50): DPS have higher administration costs than framework agreements. This is due to another key difference between both, as in the DPS suppliers can apply to join at any time during the lifetime of the system. In consequence, contracting authorities must have someone responsible for reviewing the requests periodically and as mentioned by Albert, the deadlines for admissions are only 10 working days, a very short time window for public administration in general. Each admission does not need to incur in a lot of work, but is certainly more burdensome (yet another task to keep track of) than simply "setting and forgetting" as can be done with framework agreements. In addition, DPS traditionally required a number of notices to be sent for official publication. Those have now been reduced and could easily be automated with the right systems in place.

The third reason is the mandatory use of electronic means. This was already present in the Public Contracts Regulations 2006, so it is not unfathomable to consider that if most contracting authorities are not e-procurement experts today, they certainly were not in 2006. At least in other Member States like Portugal where framework agreement is incipient and e-procurement mandatory for all contracts, I suspect this will not be seen as a hindrance for DPS take up.

The final reason I can think of is the competition with framework agreements. Both can be used for pretty much the same areas/contracts, so they compete with one another for "market share." It is  clear to me that from the eyes of a contracting authority, framework agreements have a number of benefits in comparison with DPS. And as procurement officers are not measured on the impact they have on the market or respect for the principle of competition...

I would add a final note that there is so much experience in the UK using framework agreements (and they are an accepted practice) that I see it difficult for contracting authorities to change wholesale in the UK, particularly if there is no guidance or a clear policy giving them preferential status over framework agreements.

 

Public Contracts Regulations 2015 - Regulation 32

Regulation 32 - Negotiated procedure without prior publication

In the previous legal regime the negotiated procedure was divided into procedures with or without publication. The old negotiated procedure with publication has been effectively upgraded to competitive procedure with negotiation we analysed in Regulation 29. In Regulation 32 we can find the rules regulating the negotiated procedure without prior publication instead.

As argued by Albert earlier today, Regulation 32 transposes Directive 2014/24/EU Article 32 by reshuffling the paragraph or section order but without really changing the content significantly. This procedure is still an exceptional procedure, to be used only in the specific circumstances set for by Regulation 32, and the whole draft emphasises this exceptional nature. Personally, I think that the grounds for use should have been included in Regulation 26 and do not understand neither the cross-reference of Article 26(6) to Article 32, nor the idea of including most but not all grounds for use in Regulation 26. For consistency sake, it would have been preferable for all grounds for use for all procedures to be in the same place (Regulation 26/Article 26) or with each procedure.

In general, the negotiated procedure can be used in case of preceding failure by a more transparent procedure or more substantive grounds: urgency, production of art, lack of competition for technical reasons or protection of intellectual property rights. Except for the first case, all others require a bullet proof justification by the contracting authority that this procedure needs to be used and not any other. It is tempting for contracting authorities to claim lack of competition or protection of intellectual property rights (particularly if a competitive dialogue or innovation partnership were used successfully in the past), but as Albert cautioned, please check the Fastweb case (C-19/13) for the Court of Justice's view on the use of this procedure.

Sections 5, 7 and 9 extend the grounds for use of the procedure to other situations such as additional deliveries of supplies (maximum of three years), after design contests or additional works and services that are similar to the original one (maximum of three years). They do not provide particular difficulty as they were already included in the 2006 version of the contract regulations albeit they are now much clearer and easier to understand. Regulation 16 of the Public Contracts Regulations 2006 was convoluted to say the least.

How do you run the procedure itself?

Well, that is for contracting authorities to find out by themselves. Regulation 32 contains a grand total of 0 words about running the procedure. Just remember that the principles of transparency, equal treatment and non-discrimination are still applicable.