A concession contract can either be:
- A works concession contract — where a contracting authority or utility entrusts the execution of works to one or more economic operators, the consideration for which consists either solely in the right to exploit the works that are the subject of the contract, or in that right together with payment; or
- A services concession contract — where a contracting authority or utility entrusts the provision and management of services to one or more economic operators, the consideration of which consists either solely in the right to exploit the services that are the subject of the contract, or in that right together with payment.
Examples of concession contracts range from leisure concessions such as the running of cafes or boating concessions, to major contracts for rail services or airport facilities.
In this latest insight in our Public Sector Outsourcing Survival Guide, we look at concessions in the public sector. We outline the current regulatory position and share our thoughts on how the public sector can change their strategy to maximise the value of their assets through concessions.
What is the latest regulatory position?
Concessions in the UK are regulated by the Concession Contracts Regulations 2016 (as amended) ("CCR"), which requires advertisement and a competitive selection process analogous to public sector procurement procedures. Contracting authorities and utilities must treat economic operators equally and without discrimination and must act in a transparent and proportionate manner. It follows that contracting authorities wishing to appoint a concession operator must publish an advertisement (a "concession notice") and must set out clear evaluation criteria.
As we explored previously in our webinar on the Government's green paper on "Transforming Public Procurement", it is proposed that the CCR, Public Contracts Regulations 2015 and Utilities Regulations 2016 will be merged into a single procurement regime to help deliver its new priorities. Current timescales anticipate that the new regulations are likely to come into effect in early 2023.
From a concessions perspective, the new regulations will adopt a radically different approach to value for money. Under the current rules, the criteria used to determine the preferred bidder must relate to the subject matter of the contract. However, the focus on quality and price in the selection process is set to broaden to include more progressive economic, social and environmental outcomes in line with the Government's levelling-up agenda. Some of the examples used in the green paper include creating new jobs and skills in the UK, improving supplier diversity and meeting environmental targets such as reducing waste. For the most part, however, the concessions regime will be incorporated into the new regime without radical change to its principles.
Concessions opportunities in the public sector
Public works and services concessions can span numerous sectors:
Natural resources and energy
Concessions to energy companies for the exploration of oil and gas fields continue to provide a significant income stream. However, the Government hopes that the wider selection criteria will empower public bodies to take a more prominent role in the transition to renewables by granting concessions to operate wind farms, for example. To mitigate against the commercial risks associated with natural resource exploitation, it is vitally important for the public body to:
- provide greater transparency on the selection criteria and contract award;
- consult local communities and invite key stakeholders to participate in the decision-making processes; and
- include contractual mechanisms for independent, ongoing monitoring of the concession – this may include parliamentary oversight, audits and civil society monitoring.
Transport and infrastructure
The recently published Government white paper on "Levelling Up" presents a fantastic opportunity for regional concessions in the transport and infrastructure sectors, including:
When granting motorway concessions, public authorities give an operator broad rights to construct and maintain road infrastructure. The aim of the authority is to provide a public service by improving transport links and the financial benefit for the operator mainly derives from the collection of tolls paid by road users. Commercial risks include public acceptance of the toll charges and this should be controlled by contractual mechanisms such as formulas to determine toll charges. However, authorities should be careful not to eliminate incentives in order to maximise the value of the concession.
The Government's recent white paper on rail industry reform sets out plans to overhaul the current franchise system in favour of a concession system. From 2023, this will be run by a new public body called Great British Railways ("GBR"). Train operators will be awarded licences by GBR to run individual lines in return for a fixed fee. The selection criteria should require private companies to meet strict safety standards and to operate a reliable and affordable service. The contracts will also need to afford greater commercial flexibility on marketing and ticket prices on inter-city routes to fend off competition from airlines.
Other concession opportunities in the public sector include:
- Development and operation of ports
- Boating and fishing concessions
- Providing airport services
- Operating water distribution networks
In addition to the larger-scale concessions listed above, the public sector should look to maximise the value of its smaller assets by granting concessions to:
- Operate cafes and other catering facilities in parks and crematoria
- Grant retail concessions in hospitals and train stations
- Host events and advertise at sports stadia
Time to refocus your strategy on concessions?
Establishing an appropriate selection criteria on launching a tender process can be difficult. Much will depend on the type of asset involved, however guidance should be sought from the new social and environmental outcomes in the reformed procurement regime. The shift towards a principles-based regime should afford greater flexibility when evaluating bids. In turn, a reduced risk of challenges should encourage public bodies to consider new concession opportunities with a higher risk profile.
Choosing an appropriate payment mechanism
For a concession to work well, the concessionaire must have flexibility to determine how best to exploit an asset. Removing unnecessary restrictions will help maximise the return and consequentially, the concession fee to the concession owner. Irrespective of whether payment constitutes a fixed fee or a percentage of income made by the concessionaire, payment adjustment mechanisms should be built into the contract to mitigate against commercial risks. For example, periodic fixed fee payments can be used in long term contracts to lessen the impact of fluctuating trading performance.
The recent white papers on levelling up and rail reform should incentivise public bodies to put concessions at the forefront of their strategic commercial objectives. As part of a decade-long project, the Government has committed to a range of radical policy changes such as devolving power to local decision-makers and increasing public investment in the regions. The public sector must capitalise on these changes and re-visit their strategies on concessions if they want to maximise the value of their assets.
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You can also read the previous articles in the series: