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Public procurement rules and development agreements

This guide was last updated on September 2011.

The Office of Government Commerce has published guidance on whether public procurement rules should apply to development agreements. The guidance makes it clear that the rules will apply to many development agreements involving public bodies. Although the guidance considers when development agreements will be caught by the rules, it does not indicate which procurement route should be used.

This guide considers the routes available for public procurement projects. For more information about the OGC guidance, please see our separate Out-Law guide.

Procurement options

It is important to decide whether you are dealing with a public works contract or a public works concession. Most development schemes involve the delivery of some public works. For this reason, development agreements may be categorised as public works contracts. However, it could be beneficial to consider whether a scheme can be categorised as a concession – although note this route did not receive endorsement in the Müller case. Although public works concessions must be brought to the attention of interested parties by being advertised in the Official Journal of the European Union (OJEU) in the same way as contracts, the tender process is less restrictive. This means the contracting authorities will have greater freedom to devise a process that suits their requirements.

Put simply, a public works concession is a form of public works contract under which the consideration given by the contracting authority consists of, or includes, the grant of a right to exploit the work to be carried out under the contract - for example, a toll bridge. It could be argued that a contracting authority is granting a public works concession where a developer constructs the scheme and sells it on to an investor or lets it while the contracting authority continues to own the land on which it was built.

Public works contracts

Contracting authorities must select one of the following procedures to procure a public works contract:

  • the restricted procedure;
  • the negotiated procedure;
  • competitive dialogue.

All must be advertised in the OJEU and the contracting authority must follow a detailed set of rules until the contract is awarded.

The restricted procedure does not allow for negotiations with bidders, so it is suitable only for straightforward development agreements where the end product has been specified. Both the negotiated procedure and competitive dialogue can be used to negotiate complex contracts with bidders, but strict conditions must be followed. The key difference between them lies in when negotiations can take place.

A negotiated tender procedure has no fixed requirement for a final tender, so contracting authorities can continue to negotiate under the project is completed. However, the public procurement rules state that this procedure should only be used in exceptional circumstances where competitive dialogue is not appropriate.

Competitive dialogue was introduced to reduce reliance on the negotiated tender procedure. It requires that negotiations take place before the developer submits its final tender. After the tender is submitted, clarification or fine-tuning will be permitted only where modifications are insubstantial and there is no risk of distorting competition or discriminating between bidders. In practice, this means that contracting authorities will expect all the key terms of a transaction to be settled – or, at the very least, for there to be clear mechanisms to settle any outstanding issues - before closing the dialogue.

Competitive dialogue

Competitive dialogue is proving unpopular as developers dislike taking part in a lengthy and costly procedure with no certainty as to the outcome. The challenge for contracting authorities and developers alike is to work within the rules while streamlining the process to reduce costs and timescales.

Contracting authorities need to prepare extensively to make dialogue as streamlined and efficient as possible. They must also make it clear to potential bidders that they will retain control of the process, rather than being controlled by it. This will require site investigation and being able to provide the information developers will need to assess their potential costs and price their bids accordingly. Contracting authorities will also need to clarify which terms are non-negotiable. If all aspects of a transaction are negotiable, it will make the tender process unnecessarily complicated.

Competitive dialogue is often used to procure major public schemes - for example, hospitals and schools. Standardised documentation is available for such developments and bidders have become familiar with the process and with their obligations under it. Moreover, the end product is always easily recognisable since the project will result in a particular type of building for a public body. However developers continue to have problems with competitive dialogue as their schemes differ widely, and in many cases the public body will not be using or occupying the scheme.

On a positive note, competitive dialogue allows contracting authorities to negotiate with bidders to reach innovative solutions. It also promotes competition and can introduce an element of certainty with regard to timescales, which might otherwise run unchecked.

Future of competitive tendering

The Treasury has announced that it plans to review the use of competitive dialogue in the UK. It hopes to obtain a better understanding of how competitive dialogue is used, how well it works and how it compares with the negotiated procedure. The latter is more widely used in mainland Europe, reflecting a growing view that competitive dialogue may have been implemented more stringently in the UK - resulting in additional costs and delay.

Competition is desirable, but competitive dialogue is seen to be uncompetitive. One view is that it will become self-selecting, with bidders deciding to leave the process rather than risk the cost of negotiating a transaction to the bitter end when selection is uncertain. In a number of schemes, only one bidder remains at the end of the process.

Offer encouragement

Before embarking on competitive tendering, contracting authorities must consider whether the contract has to be tendered. Consideration should be given to outright sales, sales conditional on planning and buy-back options. All these give a lesser degree of control to contracting authorities over the end product but may encourage more developers to submit a bid.