COVID-19 has already seen unprecedented state intervention in many economies, including the UK.
Public procurement amounts to approximately 14% of GDP spend in the UK. The outsourcing market in the UK is well developed across a wide range of infrastructure asset classes. A range of critical services are run by the private sector on behalf of the state, from railways through to secure accommodation and hospitals through PFI schemes.
Against the backdrop of a mass suspension of business activity in the UK, many contractors may find that the demand for their services has evaporated. The scale of the UK market means that public sector contracts are frequently amongst the largest that a supplier will deliver, sometimes exclusively.
The UK Government has responded to the risk of supplier insolvency or failure as a result of coronavirus. Two Procurement Policy Notes (PPNs) have just been published by Government: the first highlights potential flexibilities in the current procurement regime, and the second focuses on practical steps that should be taken by the public sector to support their supply chains.
This PPN reminds contracting authorities of the potential to, for example, (1) use accelerated procurement timescales for new urgent awards (2) direct awards under the exemption in regulation 32 Public Contracts Regulations 2015 (PCR 2015), (3) using existing framework agreements and (4) make variations to existing contracts in accordance with regulation 72 PCR 2015. There are corresponding provisions under the utilities regime.
Practically, it is important to remember that the PPN does not change the law. Particularly in the case of material changes to existing contracts, there is considerable case law and a comprehensive set of 'safe harbours' in the procurement rules. Any changes to contracts will need to be lawful and so will need to fall within the safe harbour protections.
Similarly, direct awards without prior publication of an OJEU notice (the regulation 32 PCR2015 exemption) is a narrow exception to the principle of opening up public contracts to competition, currently across the EU. Whilst there may be more scope currently to rely on one or more of the exemptions, there are powerful remedies rules which unhappy other suppliers could use to challenge incorrect classifications. The most common exemption here is likely to be that in regulation 32(2)(c) PCR2015, which allows direct awards "insofar as is strictly necessary where, for reasons of extreme urgency brought about by events unforeseeable by the contracting authority, the time limits for the open or restricted procedures or competitive procedures with negotiation cannot be complied with".
It will be essential for any contracting authorities to keep detailed records of the decision-making on individual contracts and to consider the legal procurement position before making the award. This is in addition to the procurement report which authorities must prepare under regulation 84 PCR 2015.
The second PPN relates to steps which can be taken to support contractors to the public sector which are facing uncertainty.
There are a wide range of action points set out in the PPN. These are:
1.Understanding your supply chain. Many supply chains are international in nature and sub-contractors may be particularly exposed to one client or project. Audits of business critical contracts and identifying any 'weak links' will help to ensure service delivery.
2. Make 'appropriate' changes to contracts to support supplier cash flow. The PPN gives a range of examples including 'forward ordering, payment in advance/pre-payment [or] interim payments'. For performance based contracts, the PPN envisages making contract changes to, for example, excusing cause and relief event clauses or relaxing Key Performance Indicator regimes or extending milestones for delivery. Lower tiers of the supply chain should also be protected.
3. Prompt payment. The procurement rules already require payment within 30 days of an undisputed invoice; this provision goes further in encouraging all parts of the public sector to pay invoices as quickly as possible.
The aim of the guidance is clear; by taking proactive (rather than reactive) steps now, the public sector can support its supply chain and avoid high profile potential contractor failures.
The PPN suggests a wide range of potential changes to contracts. Each of these will need to be assessed against the safe harbours in the procurement regulations. Care will be needed to ensure that variations to contracts are not so material as to amount to a 'new' contract which should be re-procured. It will also be essential to ensure that any new arrangements do not amount to unlawful state aid to suppliers, which can arise where there is an overcompensation to the business paid more for delivering the same or reduced services.
Summary and comment
This is not a 'one size fits all' approach, and, as set out above, the PPNs do not change the law. Whilst public authorities making genuine contract changes due to COVID-19 may feel that they are on safe ground in terms of legal challenges, the PPNs do not, in themselves, relax the rules around contract changes or direct awards.
Each contract should be assessed on its own merits, having regard to any earlier changes in the life of the contract, and changes directly linked to COVID-19 should be as limited as possible. Using these new 'flexibilities' to go beyond the scope of the regulations remains a risk for public authorities trying their best to support their supply chains in the current environment.
For more information or support on any procurement issue your organisation may be facing globally, please contact David Hansom, Partner, on +44 0207 876 4127 / firstname.lastname@example.org or your usual contact at Clyde & Co.
'Construction suppliers at risk of insolvency due to coronavirus should continue to be paid by contracting authorities even if service delivery is disrupted or temporarily suspended'