Thoughts on the Concession Contracts Regulations 2016

We welcome this post from Ammar Al-Tabbaa, partner at gunnercooke, and a procurement law specialist. Here he shares some expert thought on the new concession contracts regulations as part of the EU Directives transposition. 

The coming into force of the Concession Contracts Regulations 2016 (“CCR16”) on 18 April has brought with it two significant changes to how we think about concessions.

The first is around the traditional difference in treatment between works and services concessions. Under the Public Contracts Regulations 2006 (“PCR06” and “the old rules”), works concessions fell within the scope of the public procurement rules but were subject to relatively light-touch regulation compared to works contracts. Services concessions, on the other hand, were exempt from the provisions of the regulations. The award of services concessions remained subject to the general principles of EU law such as transparency and non-discrimination, but only where the concession in question was of cross-border interest.

Under the CCR16 this difference in treatment has been abolished, such that both works and services concessions are now regulated in exactly the same way. Both need to be advertised in the Official Journal where their value is estimated to exceed £4,104,394M (the same threshold as for works contracts). This has both positive and negative effects. The positive is greater legal certainty since many awarding authorities struggled to determine exactly what was required in order to satisfy general EU law principles when awarding a services concession. Greater consistency is also of help to contractors looking to bid for these opportunities as the applicable rules are now set out in regulations rather than having to be deduced from case law.

The negative, at least from an administrative burden perspective, is that the scope of the procurement rules has now been extended to services concessions where they did not apply before. Entering into such arrangements may therefore require more robust and labour-intensive processes than those which authorities have perhaps tended to follow previously. The fact that both works and services concessions are now subject to the same constraints as regular public contracts as regards substantial modifications, and are now subject to the same remedies procedures (standstill, automatic suspension, ineffectiveness), would also indicate that greater rigour will be required going forwards. The CCR16, just like the old rules, remain silent on how supply concessions are to be treated.

The second important change is in the definition of what constitutes a concession. By way of recap, a concession is essentially a contract under which the contractor acquires the right to exploit a physical asset (works concession) or the provision of a service (services concession) and in doing so assumes the operating risk. Traditionally, concessions have been characterised by a situation where the contractor is remunerated by sums received from third parties, for example, charging the public for use of a toll road or a car park, and by the exposure to supply risk inherent in such arrangements. By extension, a situation where the awarding authority was responsible for all the revenue generated by the contractor would be difficult to categorise as a concession.

The new provisions contained in the CCR16, reflecting recent judgments of the European Court, clearly move away from source of revenue as a defining characteristic of concessions towards more precise requirements around the nature and extent of the operating risk transferred to the contractor. The CCR16 make clear that in order for the arrangement to be categorised as a concession, the contractor must assume “an operating risk in exploiting the works or services encompassing demand or supply risk or both”, and that “the risk transferred to the concessionaire shall involve real exposure to the vagaries of the market”. What this essentially means is that there must be a real possibility that the contractor might make a loss due to the absence of a guarantee that it will recover its capital investments and operating costs.

This amendment has the effect of making the definition simultaneously both narrower and wider. The introduction of greater sophistication around the nature and extent of the risk assumed by the contractor means that a more detailed economic assessment is now required before one can be certain that the arrangement amounts to a concession (since it can no longer simply be assumed that payment by third parties is sufficient). This is likely to have the effect of taking outside the definition arrangements which provide for the contractor to break even or at least cap their losses to a minimal or nominal amount, meaning that they would be considered to be works or services contracts going forwards and subject to the more demanding provisions of the Public Contracts Regulations 2015.

On the other hand, the new rules are now clear that you can have a concession even where the authority is the only source of revenue and the public is not charged for use of the asset or service in question (provided, always, that sufficient risk is assumed). This could serve to actually widen the category in certain cases to arrangements which previously would have probably been considered to be public contracts, such as where remuneration takes the form of shadow tolls in the PFI context.

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