Procurement Act 2023 changing landscape, issue 3: concession contracts

Welcome to the third bulletin in our changing landscape series where we examine the incoming changes to the public procurement regime in England, Wales and Northern Ireland by the Procurement Act 2023 (the Act).

Our last changing landscape bulletin covered the Act's coverage of utilities procurement. On this occasion, we will be examining the change of procurement law in relation to concession contracts.

As a recap, there are currently four different Statutory Instruments that regulate the procurement of public contracts. However, these are all set to be repealed in October, including the Concession Contracts Regulations 2016, and are to be replaced by the Act. This means that the law relating to concession contracts is set to change soon.

What are concession contracts?

Concession contracts are split into two categories:

• Works concession contracts; and
• Services concession contracts.

Under the Act, such a contract means a contract for the supply for pecuniary interest (this generally refers to consideration – whatever its nature) to a contracting authority. Such contracts have two key elements:

1. The supplier will gain the right to derive revenue from the works or services as at least part of its consideration; and
2. There is a transfer of real operating risk from the authority to the supplier.

The parties will include at least one contracting authority and at least one economic operator. 'Operating risk' means that there is a risk that the supplier will not be able to recover its costs in connection with the supply and operation of the work or service. The factors that give rise to this risk will be reasonably foreseeable at the time of award and arise from matters outside the control of the contracting authority.

As there is a 'transfer' of real operating risk, this means that for the contract to be a concession contract, the operating risk must be transferred from the contracting authority to the supplier.

Conceptually, there is no real difference in the nature of a concession contract as envisaged by the Act, and a concession contract as envisaged by the current regime. While there are some differences in how the respective definitions are formulated, both in substance envisage a contract where there is a transfer of real operating risk to the supplier, such that the supplier is exposed to market vagaries and must therefore make the contract "pay" by exploiting its subject-matter in order to derive revenue. The revenue arising from this exploitation need not be the supplier's only income stream from the concession contract; part of the consideration can come from payment by the contracting authority just as it would in an ordinary public contract. However, a contract will only be a concession if there is a transfer of real operating risk to the supplier.

Typically, contracts which are procured as concessions include contracts to run assets to which the paying public have access – such as swimming pools, leisure centres and sporting events in which the public can pay to participate – and also contracts to operate publicly exploitable infrastructure such as toll roads or bridges.

Threshold value

However, the Act will not apply to all concession contracts. There is a value threshold that needs to be met before a contract must be procured in accordance with the Act. For concession contracts, the value threshold is expected to be £5,372,609 (inclusive of VAT). This will be the same as the value threshold of (inclusive of VAT) that applied under the Concession Contracts Regulations 2016. Schedule 1 to the Act currently sets the threshold at £5,336,937, which applied to concession contracts prior to the revision of thresholds on 1 January 2024; the Act will therefore require updating. In any event, the threshold means that only sizeable concession contracts will be caught by these rules.

Those concession contracts that do not meet this threshold are called below-threshold contracts. Unlike some other forms of contracts, below-threshold concession contracts are excluded from the category of 'regulated below-threshold contract.' This is rather advantageous when it comes to awarding a concession contract whose expected value is under the threshold, because regulated below-threshold contracts must comply with additional rules such as:

• a prohibition on restricting submissions of tenders based on the supplier's suitability to perform the contract.
• the requirement to consider whether to remove or reduce such barriers that small and medium size businesses may face in competing for such a contract.
• certain payment rules being implied into the contract.
• a prohibition on contracting authorities from advertising for the purpose of inviting tenders in relation to the award of a notifiable below-threshold contract without first publishing a below-threshold tender notice.

Light regulation

Another key takeaway is that concession contracts are not tightly regulated by the Act. The light regulation in this area is highlighted by the number of times that the Act states that certain rules do not apply to concession contracts. The following points are worth noting:

• Key performance indicators: concession contracts are exempt from the requirement that before entering into public contracts with an estimated value of over £5 million, a contracting authority has to set at least three key performance indicators in respect of the contract. This also removes the consequential requirement to assess performance against the indicators and then publish the results at least once a year.^[1]
• Payment terms: Certain terms relating to payment are implied into public contracts and into subcontracts. Concession contracts are exempt from this requirement.^[2]
• Frameworks: A concession contract cannot be awarded by a contracting authority in accordance with a framework. Frameworks provide for the future award of contracts, in some cases without any competition between suppliers.^[3]
• Payment compliance notices: An awarding authority must publish a payment compliance notice on certain occasions but there is no such requirement concerning concession contracts.^[4]

If a comparison is made between the Concession Contracts Regulations 2016 and the Act, it is evident that concession contracts continue to be regulated less strictly than other forms of public contract and, arguably, even less heavily than concessions under the existing regime. The Act's approach to concession contracts should therefore be broadly welcomed by contracting authorities and by would-be concessionaire suppliers.

If you have any questions or need support with navigating these latest developments, contact Christopher Brennan, Alison Richards, Alexi Markham or Robert Breedon.

Thank you to Athar Mirza for his assistance in preparing this article.

Footnotes

1 S 52
2 S 68 + S 73
3 S 45
4 S 69