What are our options for major projects?
What is the challenge?
Councils need to choose the best procurement route for high value, high risk projects (‘major projects').
Increasingly, councils are responding to local needs and budget pressures by taking a more commercial approach which involves major projects (‘commercialism').
For example, councils are creating local authority companies and joint ventures and are exploring innovative funding mechanisms.
The formation of property companies to buy-to-rent or build-to-rent is a recent example where councils are seeking new solutions to the problem of homelessness.
When set up to trade, local authority companies and joint ventures can be an important means of generating income to help close the gap in council finances (although risks must be understood and mitigated). Enterprising Councils.
Shared services are being created for a wide variety of functions in order to realise economies of scale (Local Government Shared Services Map).
Services are also being transferred to social enterprises and spun-out ‘public service mutuals' (local government examples) and the financial position of councils may result in further outsourcing or competing of services.
Private Finance 2 (PF2) projects may become an option in the infrastructure area, alongside more conventional construction contracts, although activity is at much lower levels than under the old PFI regime due to the absence of additional government funding to support financing.
In major projects of this kind the agreement of a business case including a procurement strategy is established best practice. In spin out/outsourcing situations it is important that the business case addresses the viability of the services which remain in house as well as those to be transferred out.
The procurement strategy needs to be informed by early market engagement to establish the viability of the project and should determine the procurement route for the project taking account of the EU rules as discussed below.
How can we use the PCR 2015?
Contract with local authority companies and shared services
The PCR 2015 incorporate rules on contracts between public bodies which were first established in European Court cases (i.e. rules on when contracts count as being ‘in house' or ‘public-public' and are therefore excluded from the procurement rules).
In the process of incorporating the rules, certain things have been clarified.
This greater certainty should help clarify the choices available and enable councils to be bolder, for example when setting up local authority companies and shared services arrangements.
The regulations exempt contracts in three situations:
- Contracts with a controlled body (e.g. a local authority company)
- Contracts with a jointly controlled body (e.g. jointly controlled company)
- Contracts concerning cooperation between authorities (no separate controlled body).
However, limits on trading remain. In the first two cases, the controlled body can undertake up to 20% external activity (i.e. not with the controlling authority or authorities).
In a cooperation arrangement the participating authorities can perform up to 20% of the activities concerned on the open market.
Reserve contracts for social enterprises and mutuals
Under the new rules, contracts for certain Light Touch Regime services can be ‘reserved' for organisations with a public service mission, reinvested profits and a degree of employee or stakeholder participation (provided they have not been awarded a reserved contract for the services in the past three years).
Both social enterprises and public service mutuals can qualify for these reserved contracts.
The contracts must be advertised but the council is otherwise free to design the procurement procedure provided that principles such as equal treatment and transparency are observed (see How can we improve the way we buy?).
The contracts can last for up to three years.
Choose the best procurement route for a major project
The PCR 2015 offer a broad range of procurement routes. For complex or innovative projects, councils can now choose any of the following procedures:
- Competitive dialogue (CD)
- Competitive procedure with negotiation (CPN)
- Innovation partnership (IP)
Councils already have considerable experience of using CD. However, there have been some changes.
There is no longer an obligation to specify minimum requirements at the outset and PCR 2015 now expressly allow negotiations to be carried out with the preferred bidder (within certain limits) in order to confirm financial commitments or other terms before contracts are finalised.
CD continues to be the most suitable procedure for highly complex procurements including those which involve third party finance (PF2 and the like).
Alternatively, in the same circumstances councils can choose to use CPN. A version of this procedure has existed for some time but the PCR 2015 have introduced changes.
CPN allows councils to negotiate on initial tenders, including on price. However, councils can choose to reserve the right to award a contract on the basis of an initial tender without negotiation.
CPN has been made available for use in a much wider set of circumstances than before and is therefore likely to be used more frequently for requirements that are not ‘off the shelf'. These need not necessarily be major projects.
The IP is completely new. An IP is set up using a modified version of the competitive procedure with negotiation.
The IP enables the council to develop innovative products, works or services where no suitable solution exists in the market (sharing the risk with suppliers) and to purchase the products, services etc.
An IP could be used to develop new medical or environmental technologies, for example. But it could equally well be used to develop and purchase a new delivery model for a public service.
28 January 2016