Practical Law

In the UK, we tend to talk more about PFI and PPP than about concessions. In the EU, a consultation on concessions closed in September 2010, but the results have not yet been published. We can only assume that the Commission has been waiting for the outcome of its Green Paper consultation on the modernisation of EU public procurement policy (the results of which were published in June this year) before concluding its findings on concessions.

Although the topic of concessions was excluded from the consultation on the Green Paper, the outcome of the consultation will undoubtedly affect the future of concessions. This post considers what a concession is and what the future holds for concessions in the UK.

What is a concession?

In a basic public concession, a contracting (public) authority grants a private entity a right to provide an asset or service. Rather than pay for providing the asset or service, the contracting authority transfers the opportunity to exploit the market to the private entity, along with the demand risk (the risk that there will be little or no market to exploit). Revenue from fees paid by third party users (normally the general public) to the private entity are then used to meet the costs incurred and to make a profit.

How are concessions regulated?

In the EU, concessions are not as strictly regulated as other types of public contract. The Public Sector Directive (Directive 2004/18) defines two types of concessions: public works concession contracts and public service concession contracts, which are each treated differently. In England and Wales, the Public Contracts Regulations 2006 (SI 2006/05) implement the Directive.

Public works concessions above a defined threshold are currently subjected to advertising, timing and sub-contracting requirements under the Directive. There are no restrictions on the choice of procedure or criteria for selection other than the Treaty principles of (for example) transparency, equal treatment and non-discrimination. While service concessions are not formally regulated, the Treaty principles also apply to them.

The current EU initiative focuses predominantly on whether there should be greater regulation of the procurement of concessions.

Do we use concessions?

Since March 2006, the UK has only procured 30 contracts as public works concessions. Compare this to 1,118 in France and 213 in Spain. Due to there being no requirement for the publication of service concessions tenders, it is impossible to say how many service concessions have been procured in the UK in recent years. None of the Cabinet Office, Treasury or Law Society collects such statistics.

A recent study by the Local Government Association estimated that 21% of all local authorities in the UK have procured a service concession. By comparison, in France, there are approximately 5,000 to 8,000 operational service concessions. So, with so few concessions contracts, why would we be concerned if the EU opted for greater regulation?

UK responses to the EU consultation

A quick Google search brings up two UK responses to the EU’s consultation – one from the Law Society (in collaboration with Solicitors in Local Government) and the other from the Procurement Lawyers Association. The general theme that emerges from both of these submissions is that it would not be appropriate to apply the full requirements of the EC Procurement Directive to concessions, because to do so would erode the very flexibility that is inherent in the model. Both organisations also stress that there is a lack of clear and practical guidance surrounding the use of concessions and how the Treaty principles should be applied.

So we are concerned about the outcome of the concessions consultation. And we should continue to be concerned, because the current economic climate is pushing contracting authorities to seek more innovative ways to share risk and costs.

The future: UK competitiveness

If we are to keep up with our European counterparts, who already have the advantage of past experience and successful projects under their belts, we will need to fully understand any guidance or regulation that comes out of this consultation.

As lawyers, we will need to be able to advise clients on the merits and pitfalls of the concessions model.

Furthermore, contractors and funders will need to be open to considering concessions structures where at least part of the demand risk sits with the private sector and remuneration comes directly from the general public, as well as the public sector.