Regulation 77 – Reserved contracts for certain services

Commentary

Regulation 77 PCR2015 allows contracting authorities to reserve certain contracts for certain types of organisations. In other words, it is legally possible to close some markets to suppliers of a specific nature, referred to in the Regulation as “qualifying organisations”.

This is an enormous Rubicon being crossed in what concerns equal treatment a non-discrimination and a first for the Public Sector Procurement Directive. It is true that Directive 2004/18/EC already had a provision in Article 19 for sheltered workshops, but this is a completely new ground for discrimination on the basis of the nature of the economic operator. In short, this is fundamentally an anti-competitive legally-tolerated way of advantaging certain service providers in the award of public contracts and we cannot but repeat that we think it is a very bad idea in the long run. At the same time, this is probably the novelty within the light touch regime applicable to the award of contracts for social and other specific services that better suits the regulatory needs implicit in the UK public sector reform strategy, since Article 77 of Directive 2014/24/EU allows contracting authorities to reserve for the participation of given types of organisations (such as ‘public sector mutuals’, for instance) the award of contracts for certain services in the areas of health, social and cultural services, which basically comprise all, or the most relevant, medical services, personal services, educational and training services (including eLearning), sports and cultural services.

The Regulation operates based on a positive list of contracts where discrimination – sorry, reservation – is admitted. These contracts have to exclusively target one or more of those services, which are those comprised in the categories listed in regulation 77(2) PCR2015, which include 75121000-0 (Administrative educational services), 75122000-7 (Administrative healthcare services), 75123000-4 (Administrative housing services), 79622000-0 (Supply services of domestic help personnel), 79624000-4 (Supply services of nursing personnel), 79625000-1 (Supply services of medical personnel), 80110000-8 (Pre-school education services), 80300000-7 (Higher education services), 80420000-4 (E-learning services), 80430000-7 (Adult-education services at university level), 80511000-9 (Staff training services), 80520000-5 (Training facilities), 80590000-6 (Tutorial services), from 85000000-9 to 85323000-9 (fundamentally, all types of medical services), 92500000-6 (Library, archives, museums and other cultural services), 92600000-7 (Sporting services), 98133000-4 (Services furnished by social membership organisations), and 98133110-8 (Services provided by youth associations).

Regulation 77(6) PCR2015 determines that this does not apply in relation to the procurement of health care services for the purposes of the NHS within the meaning and scope of the National Health Service (Procurement, Patient Choice and Competition) (No. 2) Regulations 2013. This exclusion and its meaning is very unclear, particularly in view of the coverage given in regulation 77(2) PCR2015, which includes a significant volume of services that can be procured for the NHS (should those not have been excluded, then?). Furthermore, in view of the special rules applicable to NHS procurement, it seems odd that no attempt to reconcile all these bodies of exceptional, sector-based procurement regimes is attempted [for discussion of the rules applicable to NHS procurement, see A Sanchez-Graells, “New Rules for Health Care Procurement in the UK. A Critical Assessment from the Perspective of EU Economic Law” (2015) 24(1) Public Procurement Law Review 16-30].
The guidance offered by CCS in this regard does not sort out the issue, but seems to defer resolving the need for harmonisation of these competing regimes until after ongoing consultations: “At present, it is not possible to use the reserved contracts provision for healthcare commissioning by NHS England or Clinical Commissioning Groups in England. This is to ensure consistency with the general requirements in regulation 3 of the existing NHS (Procurement, Patient Choice and Competition Regulations) (No. 2) 2013 Regulations, in particular the prohibition on favouring types of provider. This position is subject to further consultation with the sector. Part of the role of the Mutuals in Health: Pathfinder Programme is to consider any potential legislative hurdles to the further development of health mutual in clinical services” (Guidance on the light touch regime, 14). We shall wait for further developments.

In the cases where reserving contracts under Regulation 77 PCR2015 is possible, the contracting authority will need to make sure that the (type of) organisation chosen to be awarded the contract–ie the “qualifying organisation”. For the purposes of this regulation a qualifying organisation needs to comply with a cumulative list of requirements. First, it needs to pursuit a public service mission linked with any of the contracts mentioned above. It does not appear though that they are precluded from bidding for other reserved contracts that are not directly aligned with their public service mission.

Second, their profits need to be reinvested in that social objective and “any distribution of profits is based on participatory considerations” (emphasis added). What are participatory considerations? We have no idea. We also do not understand why it appears that profit-based models are authorised as long as they comply with the “participatory considerations” requirement.

Third, the management and ownership structures need to be “based on employee ownership or participatory principles” (emphasis added) or, in alternative “require the active participation of employees, users or stakeholders”.

The fourth and final requirement is that the organisation has not won a contract under Regulation 77 for the same services and by the same contracting authority in the last 3 years. Therefore they can win contracts with other CPV codes awarded by the same contracting authority or win contracts with the same code but awarded by other contracting authorities.

The main (only) deviation between Regulation 77 PCR2015 and Article 77 of Directive 2014/24/EU concerns the requirement for structures of management or ownership of the organisation performing the contract to be based on employee ownership or participatory principles, or require the active participation of employees, users or stakeholders. Whereas Article 77(2)(c) of Directive 2014/24/EU requires this without any qualifiers, reg.77(3)(c) PCR2015 includes the following possibility: “the structures of management or ownership of the organisation are (or will be, if and when it performs the contract) based on …” (emphasis added)

This seems to aim to allow for entities in the process of becoming “qualifying organisations” to already tender for these reserved contracts, maybe also enabling for brake provisions (of the mutualisation process) linked to an eventual lack of success in being awarded the contract–ie, the government seems to be aiming to be in a position to ensure that mutuals are only created and go ahead if contracts are awarded to them, which would certainly make the mutualisation option much more attractive by reducing the risk undertaken by public officials seeking to spin-off from the public sector.

However, this is not necessarily in line with EU law, particularly because it refers to a future-looking contract compliance clause that triggers access to the competition for the reserved contract–which, in our opinion, is not compatible with the exceptional nature of this set of special provisions [for discussion of this type of requirements, A Sanchez-Graells, Public Procurement and the EU Competition Rules, 2nd edn (Oxford, Hart, 2015) 390].

Last modified: December 5, 2016 by Pedro Telles

77.—(1) Contracting authorities may reserve to qualifying organisations the right to participate in procedures for the award of reservable public contracts.

(2) For that purpose, a contract is a reservable public contract only if it is exclusively for one or more of the services which are covered by CPV codes 75121000-0, 75122000-7, 75123000-4, 79622000-0, 79624000-4, 79625000-1, 80110000-8, 80300000-7, 80420000-4, 80430000-7, 80511000-9, 80520000-5, 80590000-6, from 85000000-9 to 85323000-9, 92500000-6, 92600000-7, 98133000-4, and 98133110-8.

(3) In this regulation, “qualifying organisation” means an organisation which fulfils all of the following conditions:—

(a)its objective is the pursuit of a public service mission linked to the delivery of services referred to in paragraph (2);

(b)profits are reinvested with a view to achieving the organisation’s objective, and any distribution of profits is based on participatory considerations;

(c)the structures of management or ownership of the organisation are (or will be, if and when it performs the contract) —

(i)based on employee ownership or participatory principles, or

(ii)require the active participation of employees, users or stakeholders; and

(d)the organisation has not been awarded, pursuant to this regulation, a contract for the services concerned by the contracting authority concerned within the past 3 years.

(4) The maximum duration of a contract awarded under this regulation shall not be longer than 3 years.

(5) Where a contracting authority exercises the power of reservation conferred by paragraph (1), the call for competition shall make reference to Article 77 of the Public Contracts Directive.

(6) This regulation does not apply in relation to the procurement of health care services for the purposes of the NHS within the meaning and scope of the National Health Service (Procurement, Patient Choice and Competition) (No. 2) Regulations 2013(1).

 

(1) S.I. 2013/500.