EU procurement law: the new utilities directive

1. Introduction

In publishing its Green Paper on the modernisation of the EU public procurement in January 2011, the European Commission sought views on a number of issues including whether there was still a need for EU rules on public procurement in respect of the utility sectors regulated under Directive 2004/17 and, separately, whether the profit-seeking or commercial ethos of private companies could be presumed to be sufficient to guarantee objective and fair procurement even where those entities operated on the basis of special or exclusive rights.

Underlying such questions was the possibility that in its next incarnation EU procurement legislation might not have included a separate utilities procurement regime so that perhaps utilities would have been regulated under a new public sector directive only to the extent that they could be classified as contracting authorities. Despite this, almost a year later the Commission published a draft utilities directive to replace Directive 2004/17. In doing so, it explained that, as regards utility regulation, the consensus among the "clear majority" of respondents to the Green Paper was in favour of maintaining the status quo.

The Commission did not disclose the grounds on which this majority view was based. It is of course possible that there might have been some compelling arguments in favour of continuing to regulate the procurement processes of certain utility companies other than those which were contracting authorities. However, the 2014 Utilities Directive that emerged after more than 18 months of negotiations, casts doubt on the need for maintaining a distinct legislative framework for the procurement regulation of utilities.

The reason for this is that the new Utilities Directive resembles the new 2014 Public Procurement Directive much more closely than their respective predecessors ever resembled each other. This is partly a reflection of the fact that the 2014 Public Procurement Directive has become more flexible in certain respects, not least as regards the use of competitive dialogue and the negotiated procedure. At the same time, it is a reflection of the fact that procurement regulation under the utilities regime is now more detailed than ever before—a result which has been achieved, at least party, by the wholesale adoption of a number of provisions from the public sector rules.

This article sets out the key changes and aspects of the 2014 Utilities Directive and comments where appropriate on the choices made by the legislators and their likely effects.

2. Scope

2.1 Regulated activities

Not much has changed in terms of the scope of the new Utilities Directive. As under the current rules, carrying out certain activities in the water, energy, transport and postal services sectors can trigger obligations under the directive. The only change in this regard is in relation to the energy sector where the exploration for oil and gas will no longer be regulated. According to the directive’s preamble, this was deemed appropriate in view of the fact that this activity has consistently been found to be subject to sufficient competitive pressure so that the procurement discipline brought about by EU procurement regulation is no longer needed.

Separately, the preamble to the new directive clarifies that while heat-related activities are subject to regulation, cooling related activities are not. However, the possibility is left open that this might change in the future following an examination of that sector to assess the level of competition, the degree of cross-border procurement and the views of stakeholders.

2.2 Special or exclusive rights

As the under 2004 rules, entities which engage in a regulated utility activity are subject to regulation under the new directive only to the extent that they constitute a "contracting authority" a "public undertaking" or engage in a regulated activity on the basis of "special or exclusive rights".

The definitions of "contracting authority" and "public undertaking" remain the same.

As regards "special or exclusive rights", however, the new directive provides certain important clarifications in relation to the definition of this term.

Under the 2004 Utilities Directive, "special or exclusive rights" are defined as rights granted by a competent authority of a Member State by way of any legislative, regulatory or administrative provision the effect of which is to limit the exercise of regulated utility activities to one or more entities, and which substantially affects the ability of other entities to carry out such activity. The effect of this definition is that special or exclusive rights exist in cases where rights are limited in number. This is because it is only when the number of available rights is limited that it can be said that the effect of granting such rights is to limit the exercise of the regulated activity in question to one or more entities and in doing so to affect substantially the ability of other entities (which do not have those rights) to carry out the same activity. On the other hand, if rights are not limited in number but are freely available to any number of parties meeting certain objective criteria it cannot normally be said that the grant of such rights would have the effect of limiting the exercise of those rights let alone of substantially affecting the ability of other entities to carry out the same activity.

However, clear as this definition might be, the preamble to the 2004 Utilities Directive clumsily offered a different definition undermining in the process the unambiguous definition set out in the legislative part of that directive. According to this, whether or not rights are limited in number is not the only factor in determining the existence of special or exclusive rights: the way in which those rights are granted is also relevant, in that if those rights are granted on the basis of objective, proportionate and non-discriminatory criteria by means of a process that allowed any interested party fulfilling those criteria the opportunity to enjoy those rights then those rights will not be classified as special or exclusive even if they are limited in number and indeed even in circumstances where those rights would otherwise constitute monopoly rights.

This unsatisfactory state of affairs where the non-legislative part of the directive redefined the legislative part of the directive has led to legal uncertainty and inconsistent implementation across Member States with countries such as the UK defining this term in implementing legislation only by reference to the definition provided in the legislative part of the directive while others, such as France, also taking into account the way in which the term was redefined in the directive’s preamble. The Commission itself took a clear stance on the matter with the publication of an explanatory note in which it expressed its support for interpreting "special or exclusive rights" by reference to the preamble to the directive.

The new directive seeks to rectify the legal uncertainty on this point essentially by incorporating into the legislative part of the new directive a reference which is in line with the reference in the preamble to the current directive. Accordingly, as under the 2004 Utilities Directive, the new directive defines "special or exclusive rights" as:

"rights granted by a competent authority of a Member State by way of any legislative, regulatory or administrative provision the effect of which is to limit the exercise of [regulated] activities … to one or more entities, and which substantially affects the ability of other entities to carry out such activity."

However, the new directive goes on to clarify that:

"rights which have been granted by means of a procedure in which adequate publicity has been ensured and where the granting of those rights was based on objective criteria shall not constitute special or exclusive rights …"

This clarification is to be welcomed and its effect will certainly be felt in a number of regulated utilities sectors in the UK. Within the transport sector, for example, train operating companies win the right to offer rail passenger services on parts of the UK rail network following the conduct of advertised competitive tender processes which are based on objective criteria. Under the current domestic legislation, those companies are deemed to be subject to procurement regulation. This is unlikely to be the case under the 2014 Utilities Directive.

2.3 Obtaining an exemption from procurement regulation

Article 30 of the 2004 Utilities Directive provides for a mechanism which allows the Commission to exempt the carrying out of a particular regulated utility activity in a Member State from the scope of the directive. Such an exemption is only possible where the Commission is satisfied that the activity in question is directly exposed to competition on markets to which access is not restricted.

The new directive retains the possibility of obtaining an exemption from the scope of the legislation on the same basis and sets out the factors which the Commission will take into account in determining the relevant product and geographical markets for the purposes of carrying out its assessment. At the same time the new directive provides certain additional clarifications and introduces certain changes to the procedural rules that apply to the seeking of such an exemption.

For example, the new directive clarifies that an application for an exemption may relate to an activity which is part of a larger regulated sector. For instance, a Member State may seek an exemption for seaports but not inland ports or for electricity production but not electricity distribution. A request for an exemption may also concern an activity carried out in certain parts of a Member State rather than the Member State as a whole.

As regards procedural changes, under current rules the Commission has three months within which to make its assessment as to whether an activity meets the relevant conditions that would justify an exemption from the scope of the directive. That period may be extended by a maximum of another three months. The new directive provides for the possibility of longer investigation periods. For example, the Commission must now carry out its investigation within 90 working days in cases where free access to a given market may be presumed (because EU legislation which provides for market liberalisation has been implemented in the Member State where the activity is carried out) or 130 working days in all other cases. These periods will be extended by 15 days in cases where the request for exemption is not accompanied by a "reasoned and substantiated" analysis of an independent regulatory body as to the applicability of the conditions for the grant of an exemption. Ultimately it will also be possible for the Commission to extend further all of these deadlines with the agreement of the Member State concerned.

Another procedural change is that it would now be possible for the application for an exemption to be "substantially" modified, with the Commission’s consent, "in particular as regards the activities or the geographical areas concerned". This option might be useful, for example, in circumstances where the Commission’s initial investigation indicates that it is unlikely that an exemption would be granted to a Member State’s original application but that this might be possible if the geographical area or the activity for which an exemption was sought was amended in some way.

No doubt these procedural changes reflect "lessons learnt" from the experience of dealing with this type of applications under the 2004 Utilities Directive.

2.4 Contracts between contracting authorities

As under the 2014 Public Procurement Directive, the new 2014 Utilities Directive codifies, develops or, in certain cases, departs from, the principles which the court first established in the Teckal and Hamburg cases and which relate to the circumstances in which certain arrangements between contracting authorities fall outside the scope of procurement regulation.

For example, in Teckal the court established that a call for tenders is not necessary where:

• a contracting authority awards a contract to an entity over which it exercises control similar to that which it exercises over its own departments (the "control" condition); and
• the controlled entity carries out the essential part of its activities with the controlling contracting authority (the "essential part" condition).

The court has subsequently clarified a number of issues in relation to the above two conditions. For example, as regards the control condition, the court has indicated that the required level of control over the controlled entity can be exercised by contracting authorities jointly but that any private sector interest in the controlled entity renders the exemption inapplicable.

A detailed consideration of the manner in which these exemptions have been incorporated into the procurement legislation is outside the scope of this article. However, the following points highlight certain key aspects of the legislator’s approach in this context.

First, the new legislation codifies the key principles that underlie the Teckal exemption but qualifies the prohibition on private sector involvement by providing for the possibility of having non-controlling and non-blocking forms of private capital participation in the controlled entity under certain conditions.

Second, as regards the question of what would constitute the "essential part" of the controlled entity’s activities for the purposes of Teckal ’s "essential part" condition, the court had previously rejected as inappropriate the idea of applying by analogy the turnover condition which applies to the "affiliated undertaking" exemption under the 2004 Utilities Directive. This essentially provides that the 2004 Utilities Directive does not apply where a utility awards a contract to an affiliated undertaking, where at least 80 per cent of the three-year average turnover of that undertaking, in respect of the goods, works or services which are the subject of the contract, is derived from the provision of such goods, works or services to that undertaking’s affiliates. The new directive essentially rejects the court’s approach on this point and introduces rules which are clearly based on the turnover requirements under the "affiliated undertaking" exemption. Accordingly, the "essential part" condition of the Teckal exemption is incorporated into the legislation by reference to the requirement that more than 80 per cent of the activities of the controlled entity be carried out in the performance of tasks entrusted to it by the controlling contracting authority (or by other legal persons controlled by that contracting authority). This percentage is to be determined by reference to the controlled entity’s turnover "or an appropriate alternative activity based measure" over the preceding three-year period or, where this is appropriate, by reference to other credible measurements such as by means of business projections.

The new directive also develops further the Teckal principles by providing that the exemption also applies in cases where the controlled entity, which is a contracting authority, awards a contract to its controlling contracting authority or to another legal person controlled by the same contracting authority, under certain conditions.

As regards the Hamburg exemption, this provides that the award of a contract for the purposes of establishing a co-operative arrangement between public bodies for the performance of a public interest task are, under certain conditions, outside the scope of procurement regulation.

The new directive develops further these principles, not least by introducing a requirement that the participating contracting authorities perform on the open market less than 20 per cent of the activities concerned by the co-operation. At the same time, what was arguably a key aspect in the court’s decision that established this exemption, namely that consideration for the performance of the contract is limited to the reimbursement of actual costs, is not incorporated in the legislation (although it featured in earlier drafts).

2.5 Social and other specific services

As under the 2014 Public Procurement Directive, the non-priority services category (commonly referred to as "Part B" services in the UK) is being abolished. In its place there will be a narrower category of services contracts which will be subject to a "light-touch" procurement regime. This will be determined by each Member State in compliance with the principles of transparency and equal treatment as well as certain other basic obligations set out in the new legislation.

The value threshold for the application of this light-touch regime will be relatively high at €1 million. At the same time, this new category of services will not contain—as "Part B" services currently do—the residual "other services" category, thereby rendering the category of services contracts which are subject to full regulation broader. However, it should also be noted, that in abolishing the "Part B" services category, the legislators have also moved certain "Part B" services contracts entirely outside the scope of the new legislation. For example, public passenger transport services by rail or metro are now completely outside the scope of both the new directive and the 2014 Public Procurement Directive, as are certain legal services.

3. Procedures

3.1 The introduction of new procedures

The 2004 Utilities Directive allows contracting entities to choose freely between the various available procedures. This means that unlike under the 2004 Public Sector Directive, contracting entities are able to use the negotiated procedure without having to justify its use on any particular grounds. This does not change under the new Utilities Directive. What does change is the fact that the new Utilities Directive now requires Member States to allow contracting entities also the option of using the competitive dialogue and innovation partnership procedures. The competitive dialogue, first introduced in the 2004 Public Sector Directive, has been amended in some important respects (discussed below). The innovation partnership procedure is a new procedure (also discussed below) which is also being introduced in the 2014 Public Procurement Directive.

It is worth noting that earlier drafts of the new Utilities Directive allowed Member States the option of legislating so as to provide for the possibility of using these two procedures alongside the open, restricted and negotiated procedures. That in itself raised questions, given that neither of these two procedures provides any additional flexibility which is not already available through the negotiated procedure. Accordingly, it seemed plausible that a number of Member States would have chosen not to incorporate these into their implementing utilities legislation. As explained below, the subsequent decision to make the introduction of these procedures compulsory defies any obvious plausible explanation and has the effect of adding unnecessarily to the body of regulation.

In this context it is also relevant to note that the negotiated procedure retains the flexibility which it has under the 2004 Utilities Directive so that, for example, the new Utilities Directive does not introduce any specific obligations as regards the conduct of negotiations. This contrasts favourably with the situation in the 2014 Public Procurement Directive, under which the "competitive procedure with negotiation" does not envisage the conduct of any type of negotiations following the submission of final tenders.

3.2 Competitive dialogue

As regards the introduction of the competitive dialogue, the justification given in the preamble to the new Utilities Directive is that experience has shown that the competitive dialogue:

"has been of use in cases where contracting authorities are unable to define the means of satisfying their needs or of assessing what the market can offer in terms of technical, financial or legal solutions."

This situation—the preamble continues—may arise in particular with "innovative projects, the implementation of major integrated transport infrastructure projects, large computer networks or projects involving complex and structured financing." "Member States should therefore be allowed to place this tool at the disposal of contracting entities" [emphasis added].

Leaving aside the fact that this reference pre-dates the subsequent decision to make the introduction of the competitive dialogue compulsory, the justification which the preamble provides is in truth more akin to rationalisation. This is because, certainly in the UK, before the introduction of the competitive dialogue procedure, contracting authorities had relied almost exclusively on the use of the negotiated procedure for the procurement of major contracts. The primary, if not the only, reason why they stopped doing so was not because they considered the competitive dialogue procedure a better means of procuring but because the introduction of the competitive dialogue in the 2014 Public Procurement Directive made it much more difficult to justify the use of the negotiated procedure.

Indeed, it is relevant to recall that the actual motivation behind the introduction of the competitive dialogue procedure in the 2004 Public Sector Directive was the Commission’s concerns over what it considered as over-reliance on the less transparent negotiated procedure in certain Member States (including the UK) in the award of major contracts. The introduction of the competitive dialogue procedure was, therefore, meant to bridge the gap between the restricted procedure which was inflexible, in that it did not allow for any substantive discussions with bidders, and the negotiated procedure which did but—as the Commission was keen to remind Member States—was "exceptional" in that its use was only permitted in certain specific and narrowly-construed circumstances.

The introduction of the competitive dialogue procedure in the 2004 Utilities Directive was not an issue at the time, given that contracting entities were (and still are) able to use the negotiated procedure without the need for any justification.

In fact, originally, the competitive dialogue procedure—a more structured and less flexible procedure than the negotiated procedure—was meant to be introduced in the Public Sector Directive as a "regular" procedure in that like the open and restricted procedures its use would not have required any special justification. However, in the course of the protracted intergovernmental negotiations that led to the finalisation of the 2004 Public Sector Directive, the competitive dialogue emerged as yet another "exceptional" procedure, the use of which was only permitted on the basis of specific grounds which, in certain respects, overlapped with the grounds for the use of the negotiated procedure.

From the beginning, the use of the competitive dialogue was fraught with difficulties. This was so not only because of the restrictions which the legislation imposed on contracting authorities following the call for final tenders, but also because the need to reconcile the conflicting views of Member States saw to the drafting of some particularly opaque provisions which were capable of divergent interpretations.

Thankfully, it seems that the legislators have now taken the opportunity to amend and clarify some of the more unsatisfactory competitive dialogue provisions. Accordingly, the competitive dialogue procedure being introduced in the new 2014 Utilities Directive would seem to be a more flexible version of the procedure that was originally introduced in the 2004 Public Sector Directive.

For example, the new Utilities Directive specifies that in the context of the competitive dialogue, final tenders may be:

"clarified, specified and optimised at the request of the contracting entity. However, such clarification, specification, optimisation or additional information may not involve changes to the essential aspects of the tender or of the procurement, including the needs and requirements set out in the call for competition or in the descriptive document, where variations to those aspects, needs and requirements are likely to distort competition or have a discriminatory effect." [emphasis added]

It should be recalled that in the 2004 Public Sector Directive, a very similar provision only permits the clarification, specification and fine-tuning of final tenders. It is to be hoped that the replacement of the concept of fine-tuning with the concept of optimisation, will allow for greater flexibility and room for manoeuvre at this "final tenders" stage of the competitive dialogue. Arguably, it should now be possible to seek changes to the final tenders (rather than mere fine-tuning) in a way which leads to their improvement (optimisation) from the contracting authority’s perspective on condition that such improvements (whether or not they involve changes to the essential aspects of the tender or the procurement) are unlikely to distort competition or be discriminatory.

Another important change in the context of the competitive dialogue procedure is in relation to what is permissible following the selection of the preferred bidder. The 2004 Public Sector Directive provides that the preferred bidder may be asked to "clarify" aspects of the tender or "confirm" commitments provided that this does not have the effect of modifying substantial aspects of the tender or of the call for tender and does not risk distorting competition or causing discrimination.

On the other hand, the new Utilities Directive now permits "negotiations" with the preferred bidder so as to:

"confirm financial commitments or other terms contained in the tender by finalising the terms of the contract provided such negotiations do not have the effect of materially modifying essential aspects of the tender or of the procurement, including the needs and requirements set out in the call for competition or in the descriptive document and does not risk distorting competition or causing discrimination."[emphasis added]

Again, the references to negotiations with the preferred bidder with a view to, among other things, confirming terms so as to finalise the contract, certainly suggest greater flexibility following the selection of the preferred bidder than under the 2004 Public Sector Directive. It is said that such negotiations cannot have the effect of "materially modifying essential aspects of the tender or of the procurement". This limitation is to be expected and is consistent with principles which—although not prescribed in the legislation—would in any event also apply in the context of the more flexible negotiated procedure.

Increasing the flexibility of the competitive dialogue procedure brings it even closer to the negotiated procedure. This might have been important in the context of the 2004 Public Sector Directive where—as discussed earlier—the use of the negotiated procedure is difficult to justify so that (by necessity) contracting authorities tend to rely on the use of the competitive dialogue procedure for the procurement of major contracts. However, ultimately, it is not that important in the context of the current or new Utilities Directive where the negotiated procedure remains significantly less prescriptive and available without any need for justification. Accordingly, even in this more flexible guise, it would be surprising if any UK contracting entities were to opt for the competitive dialogue procedure instead of the negotiated procedure under the new Utilities Directive.

3.3 The innovation partnership

The motivation behind the introduction of this new procedure is said to have been the desire to allow contracting entities to establish long-term partnerships for the development and subsequent purchase of new, innovative products, services or works without the need for a separate procurement procedure for the purchase - provided that the final products, services or works correspond to pre-agreed performance levels and maximum costs.

The innovation partnership must be structured in successive phases that follow the sequence of steps in the research and innovation process and may include the manufacturing of the products, the provision of the services or completion of the works.

It involves the setting of intermediate targets that the partner (or partners) must attain and provides for payments in instalments. Based on those targets, the contracting entity has the option of terminating the innovation partnership or, in in the case of a multi-party partnership, to reduce the number of partners by terminating individual contracts, provided this option was specified in the procurement documents.

The choice of a partner or partners must be made on the basis of the negotiated procedure, which at the option of the contracting entity, may be structured in successive stages so as to reduce the number of tenders being negotiated. The award decision must be based on the "best price-quality ratio"—the new name for the most economically advantageous tender (discussed further below).

As noted earlier, it is not obvious why it was necessary to introduce this procedure. This type of requirement can readily be achieved by the use of the negotiated procedure for the procurement of research services with the option of purchasing the final product, services or works if the final product, services or works meet the requirements of the contracting entity.

3.4 Means of communication

Again, as under the 2014 Public Procurement Directive, the new Utilities Directive creates an obligation for the use of electronic means for all communications and information exchange at all stages of a procedure, including as regards the transmission of requests for participation and the transmission of tenders.

However, there are a number of exemptions available such as for technical reasons to do with the specialist nature of the procurement or where it is necessary due to security considerations and in view of the sensitive nature of the information.

The new Utilities Directive allows Member States to postpone the application of this requirement for a transitional period of 12 months in the case of central purchasing bodies and 30 months for all other cases following the expiry of the deadline for the implementation of the new directive.

Separately, it is also worth noting that for the first time EU procurement legislation will include provisions in relation to the use of oral communications in the conduct of a tender procedure. More specifically the new directive provides that oral communications are permitted in respect of communications "other than those concerning the essential elements of a procurement procedure" and provided that the content of the oral communications is documented "to a sufficient degree". The legislation states that, in particular, oral communications with tenderers which could have a substantial impact on the content or assessment of the tender must be documented to a sufficient extent and by appropriate means such as written or audio records or summaries of the main elements of the communication.

4. Framework agreements

It can be recalled that under the 2004 Utilities Directive (and unlike the 2004 Public Sector Directive) framework agreements are only subject to limited regulation. For example, the term of a framework agreement is not regulated nor are there any specific provisions as to how to conduct a competition for the award of a contract in the context of a multi-party framework. The key requirement under the current rules is that contracting entities must not misuse framework agreements in order to hinder, limit or distort competition.

This general requirement remains but, in addition, the new Utilities Directive expands the regulation of framework agreements by providing, among other things, that the term of a framework agreement may not exceed eight years (other than in exceptional duly justified cases). This still compares favourably with the equivalent provision in the public sector regime which provides (and will continue to provide under the 2014 Public Procurement Directive) for a maximum four-year term in normal circumstances.

It is worth noting that under the 2004 Utilities Directive, one of the grounds which justifies the award of a contract without a prior call for competition is the carrying out of a "mini competition" in the context of a framework agreement. This provides for a lot of flexibility so that it may be possible, for example, to award contracts on the basis of an iterative bidding process which involves negotiations with parties to the framework agreement, before a final bidding round. By comparison, the rules under the public sector regime are prescriptive. These essentially require contracting authorities to award contracts by inviting in writing the parties to the framework agreement which are capable of carrying out the contract to submit tenders. These must then be evaluated on the basis of pre-established award criteria.

The new Utilities Directive continues to allow for greater flexibility than the 2014 Public Procurement Directive as regards the process which must be followed in awarding contracts under a framework agreement. It is true that the new utilities rules introduce some changes in this context. However, these are arguably non-substantive in nature. For example, the new Utilities Directive no longer provides explicitly that the award of contracts under a framework agreement may be made on the basis of a procedure which does not involve a prior call for competition. At the same time, it includes new provisions which require that contracts based on a framework agreement are awarded on the basis of objective pre-disclosed rules and criteria, which may include reopening the competition among the (original) members of the framework agreement. In truth, this is no more than a description of the conditions which always had to be met in awarding contracts under a framework agreement, if that process were to be compliant with the underlying principles of transparency and equality of treatment and the explicit requirement not to misuse framework agreements. As long as a utility complies with these principles it still has the flexibility to decide what process to follow in awarding contracts under a framework agreement. In contrast, the equivalent rules under the 2014 Public Procurement Directive remain substantively the same as under the 2004 regime and therefore are much more prescriptive.

5. Division of contracts into lots

As in the 2004 Utilities Directive, the new Utilities Directive of 2014 provides for the possibility of awarding a contract in the form of separate lots. What is new is the possibility of limiting the number of lots which a single bidder may be awarded, even if the rules of the competition permit the submission of tenders for several or all lots. This is on condition that the contracting entity makes clear (normally, in the contract notice) the maximum number of lots which a bidder may be awarded. In addition, the contracting entity must disclose the objective and non-discriminatory criteria or rules on the basis of which it will determine which lots to award where the application of the award criteria will result in one tenderer being awarded more lots than the maximum number permitted.

Similar provisions apply in the 2014 Public Procurement Directive. As in that context, it seems that their introduction was designed to encourage participation by small and medium-sized enterprises (SME) in regulated contract award procedures and to address possible concerns over the risk of overdependence on a particular supplier.

One potential problem with the possibility of not awarding a lot or lots to the bidder which would have won had the award criteria been applied alone, is that this might give rise to state aid issues at least where the procurer is a contracting authority. This would be on the basis that the outcome of the competition would no longer represent the lowest-priced offer (or the lowest-priced offer which corresponds to particular quality requirements) so that the difference in price between the winning bidder and the otherwise leading bidder might amount to a subsidy. At the very least, it will not be possible for this kind of arrangement to feature in the context of a contract award process for the provision of services of general economic interest, where demonstrating compliance with relevant state aid principles involves ensuring that the process has led to the provision of the service at the least cost to the community.

Separately, it is worth noting that, as in the public sector context, the new rules provide for the possibility of Member States introducing rules that make it compulsory to award contracts in the form of separate lots in certain circumstances. This possibility is again designed to facilitate SME participation in regulated contract award procedures.

6. Criteria for qualitative selection

The rules as to the type of criteria that may be used for qualitative selection in the new directive are similar to the 2004 rules in that exclusion and selection of bidders must be made on the basis of objective rules and criteria.

Again, in line with the approach in the current legislation, such objective rules and criteria may include the exclusionary grounds that are set out in the 2014 Public Procurement Directive and which, for example, relate to grave misconduct or breaches of certain specific legal obligations, as well as all of the other selection criteria set out in that legislation. Where the contracting entity is a contracting authority then it is required to apply the mandatory exclusionary grounds set out in the 2014 Public Procurement Directive.

The new legislation provides certain clarifications in the context of qualitative selection, including as regards reliance on the capacities of other entities in demonstrating compliance with selection requirements.

What is noteworthy in this context is the fact that in the new Utilities Directive the requirement under the 2004 Utilities Directive that the rules and criteria for qualitative selection be made available to interested economic operators remains. This probably means that there is no obligation to make these rules and criteria available to economic operators other than in circumstances where an economic operator expressly seeks their disclosure. Certainly, this is the interpretation given currently to this requirement in the UK implementing legislation.

It should be recalled that, by contrast, under the public sector rules, contracting authorities have an obligation to set out in the contract notice any minimum requirements in relation to economic and financial standing or technical and professional ability as well as the rules and criteria on the basis of which they will reduce the number of qualified bidders which they will invite to the next stage of the competition. These obligations remain essentially the same under the 2014 Public Procurement Directive.

Over the years, the limited extent of disclosure obligations in the context of qualitative selection under the utilities regime seemed increasingly at odds with the broad manner in which the Court of Justice had generally been interpreting the obligations which arise under the core EU law principles, including that of transparency. Accordingly, it is surprising that in the context of updating the legislation this limited disclosure requirement has made its way into the new directive essentially unamended. This is all the more striking given that, overall, the new directive has increased regulation and is therefore more prescriptive than any of its predecessors.

7. Award criteria

As in the 2014 Public Procurement Directive, there have been some changes in the provisions which relate to the award criteria. It is now possible to award a contract on the basis of one of the following:

(a) price;

(b) cost;

(c) best price-quality ratio.

First, a number of basic clarifications: the reference to price and cost should be construed as a reference to the lowest price and lowest cost. No other interpretation would be consistent with general public procurement law principles. Also, the reference to "best price-quality ratio" is a reference to what the 2004 Utilities Directives refers to as the "most economically advantageous tender" criterion. Under the new directive, the reference "most economically advantageous tender" is now used to describe all three possible bases for the award of a contract. The change in the terminology was reportedly introduced at the request of the European Parliament with the intention of making it clearer that whichever of the three permissible bases is used to award the contract, the outcome will still constitute the most economically advantageous solution.

7.1 Best price-quality ratio

Although the reference in the ratio is to "price", the preamble to the new directive makes it clear that the best price-quality ratio may include a cost element instead. Also, while it is true that a price or cost element is always required in the determination of the best price-quality ratio, the legislation also provides for the possibility of this taking the form of a fixed-price or cost on the basis of which bidders then compete on quality criteria only.

As to the "quality" criteria that may be taken into account, the basic tenet remains the same as under current rules in that these must be linked to the subject-matter of the contract. However, the new legislation provides a number of additional clarifications so as to reflect the court’s more recent jurisprudence or so as to interpret or indeed, depart from, certain aspects of that jurisprudence.

The explicit reference in the legislation to the fact that the criteria may include not only qualitative and environmental but also social aspects falls into the first category. The same is also true as regards new provisions which clarify the circumstances in which award criteria will be considered to be linked to the subject-matter of the contract.

As to the second category, it can be recalled that the court in Lianakis indicated that experience was not a permissible criterion at the award stage of a tender process on the basis that "award criteria" did not include criteria which were essentially linked to the evaluation of the bidders’ ability to perform the contract. This interpretation of the law proved problematic not least because there are legitimate reasons for taking into account this type of considerations at the award stage, in an appropriate manner. This issue is now being settled with an explicit reference in the new legislation to the possibility of using as an award criterion, the organisation, qualification and experience of staff assigned to performing the contract, where the quality of the assigned staff can have a significant impact on the level of performance of the contract.

As regards the disclosure obligations that arise in relation to the weightings of the award criteria, the new legislation essentially adopts the same approach as under the 2004 Utilities Directives so that there is still a general obligation to disclose these or express them as a range with an appropriate maximum spread. Only when this is not possible for objective reasons may the criteria be set out in descending order of importance.

7.2 Cost

The new legislation provides that the most economically advantageous tender may be determined on the basis of cost, using a cost-effectiveness approach, such as life-cycle costing in line with the legislation’s provisions. These explain, among other things, that life-cycle costing must, to the extent relevant, cover costs over the life cycle of a product, service or works borne by the contracting authority or other users, and certain environmental-related costs, provided their monetary value can be determined and verified.

The legislation also imposes certain transparency obligations in relation to the assessment of costs on the basis of a life-cycle costing approach.

8. Modification of contracts during their term

It can be recalled that the key concern with the amendment of a concluded contract is that if the amendment is substantial this has an effect on the character of the contract, rendering it materially different to the one which was originally advertised, tendered and ultimately concluded. Normally, therefore, the substantial amendment of a concluded contract triggers new advertising and competitive tendering obligations so that a direct award in these circumstances breaches procurement law requirements.

By relying heavily on the court’s judgment in pressetext, the new legislation codifies these principles for the first time. At the same time, the new legislation provides certain other clarifications which are meant to provide legal certainty as to the circumstances in which an amendment will not be considered to be substantial.

According to the new Utilities Directive, an amendment will be construed as substantial when it renders the original contract materially different in character. The legislation then lists four sets of circumstances where this will be the case. These are essentially where:

(i) the modification introduces conditions which had they been part of the original tender process would have led to additional parties expressing an interest in the competition or the selection of different candidates or a different contract award decision;

(ii) the modification changes the economic balance of the contract in favour of the contractor in a way which was not provided for in the original contract;

(iii) the modification extends the scope of the contract considerably;

(iv) a new contractor replaces the one to which the contracting entity had originally awarded the contract (other than in certain cases as set out in the legislation).

Separately, the legislation sets out certain circumstances in which modifications will not constitute substantial amendments ("specifically exempt circumstances"). These are where the modifications:

(a) have already been provided in the original procurement documents in clear, precise and unequivocal review clauses and provided these do not alter the overall nature of the contract;

(b) relate to the provision of additional goods, works or services by the original contractor which are outside the scope of the original procurement but where a change of contractors is not possible for economic or technical reasons and in addition it would cause significant inconvenience or substantial duplication of costs for the contracting entity;

(c) have become necessary as a result of circumstances which a diligent contracting entity could not foresee and the modification does not alter the overall nature of the contract;

(d) are limited to the replacement of the original contractor with a new one in certain specific circumstances, including where this is the result of corporate restructuring, and the new contractor meets the original qualitative selection criteria;

(e) are of a value which is below the relevant value threshold for the application of the directive and also less than 10 per cent of the value of the original services or supply contract or 15 per cent of the original works contract (calculated cumulatively and provided there is no change to the overall nature of the contract);

(f) are not "substantial" within the meaning of the legislation.

Where circumstances (b) and (c) above apply, the legislation also imposes a requirement for the contracting entity to publish a special notice in the Official Journal of the EU, essentially providing certain information about the original procurement and the subsequent amendments to the awarded contract.

Separately, it should be noted that the circumstances described in (b) and (c) above, are more flexible than the circumstances set out in the equivalent provisions in the 2014 Public Procurement Directive. More specifically, the 2014 Public Procurement Directive provides that for an amendment not to be construed as substantial in these circumstances, it must also be the case that the amendment in question will not lead to an increase in the value of the amended contract by more than 50 per cent.

Despite this additional flexibility, the legislators’ general approach as regards contractual modifications is problematic for reasons which are discussed below.

8.1 Flexibility up to a point

In earlier drafts of the new legislation, the intention in describing the circumstances in which amendments would not constitute substantial amendments was so as to create "safe harbours". In other words, while there would have been legal certainty that if an amendment was within the scope of a "safe harbour" it would not be construed as substantial and would be permissible, it would have also been possible to justify an amendment which was outside the "safe harbour" provisions as not substantial.

However, this is not how the new legislation operates. This is because the final draft of the legislation expressly provides that, other than in the specific circumstances which it describes, any other contractual modifications require a new tender process. In other words, the specifically exempt circumstances set out in the legislation are the only circumstances in which an amendment will not be construed as substantial.

It is true that even within this strict framework there might be some flexibility in that the specifically exempt circumstances include the generic category of cases when a modification is not "substantial". In theory, therefore, any modification which does not meet the conditions set out in the legislation for it to be construed as "substantial" will be permissible. However, in practice, it is likely to prove difficult to demonstrate that an amendment is not substantial other than in the specifically exempt circumstances described in a (a)-(e) above. This is due to the way in which the legislation defines what constitutes a substantial modification and which, as noted above, includes cases where a modification leads to a change in the economic balance of the contract in favour of the contractor which was not provided for in the original contract. The effect of this provision is that any amendment which leads to an increase in the value of the contract outside the limits of the specifically exempt circumstances described in (e) above, will constitute a material amendment, unless the specifically exempt circumstances described in (a)-(d) above, apply.

This is aptly demonstrated by the following example. The value of a contract for the provision of engineering services in relation to a major infrastructure project may run into tens of millions of euro. In this context, an amendment the value of which is €414,000 (or a mere €134,000 under the 2014 Public Procurement Directive, where the procurer is a central government authority) will not meet the conditions for the application of the specifically exempt circumstances described in (e) above. As a result, the only possibility for the amendment not to be construed as material for the purposes of the new legislation is for it to come within the scope of the specifically exempt circumstance described in (a)-(d) above.

This approach can be criticised for not being sufficiently flexible and for not permitting the consideration of other, arguably relevant, factors in reaching a view as to whether or not an amendment should be construed as material. For example, previously, in the context of the Commission’s state aid London Underground decision, it was argued that the complexity and innovative nature of the contract as well as the length of its term were relevant factors in determining what type of amendments should be considered as material. Nuanced considerations of this kind are unfortunately absent from the new legislation. Accordingly, under the new rules, it makes no difference whether the amendments relate to a small value supply contract or a complex infrastructure project of national importance. In both cases what would constitute a material amendment will be determined by reference to the same set of rules.

8.2 New legal uncertainties

In codifying and clarifying the court’s jurisprudence the legislators’ intention would have been to increase legal certainty. However, the extent to which this has been achieved is debateable. First, the court’s jurisprudence as regards a number of issues that relate to contractual modification is still developing. For example, issues such as whether additional considerations might be relevant in assessing the materiality of an amendment or the specific circumstances in which an amendment should not be construed as material have yet to be addressed adequately by the court.

In seeking to clarify some of these issues, the legislators have introduced concepts which are themselves unclear. For example, as noted earlier, the legislation now provides that a modification will not be construed as material in circumstances where, among other things, a change of contractor would not be possible for "economic" reasons and in addition such change would cause "significant inconvenience" or "substantial" duplication of costs. Are the economic reasons referred to here separate from the duplication of costs and would demonstrating the existence of economic reasons depend on the financial strength of the utility? Separately, what does "significant inconvenience" or "substantial" duplication mean? In the absence of any legislative guidance the correct interpretation of such provisions will require judicial clarification.

8.3 Unresolved issues

Separately, the legislation does not address other more complex issues. For example, what if despite the existence of an otherwise "substantial" modification, as a matter of fact it can be demonstrated that:

(i) none of the other bidders would have been able to win the amended contract (because their evaluation scores were substantially lower); and

(ii) there were no other parties on the market that would have been interested in expressing an interest in a competition for the amended contract at the time?

Would it not be the case that, in these circumstances, even if the modification had been part of the initial tender process, it would not have allowed for the admission of candidates other that those initially selected or the acceptance of a tender other than that which was originally accepted and it would not have attracted additional participants in the tender process? Accordingly, should the "substantial" amendment still be prohibited even if in these circumstances no party has actually suffered loss or damage as a result?

Given the complexity of this subject and indeed, the fact that material amendments may not only occur during the term of a contract but also in the context of an on-going procedure—which again, it is an issue not addressed in the legislation—it might have been preferable for the issue of material amendments to have been dealt with in the context of a communication or set of guidelines by the Commission. These would have provided for the possibility of dealing with the various aspects and ramifications of material amendments in more detail. In addition, adopting such an approach would have meant that it would have been easier to update this document in the light of further judicial clarifications on the matter.

9. Termination of contracts

The new legislation also includes provisions which require Member States to ensure that contracting entities "have the possibility" under conditions to be determined by the national law to terminate regulated contracts during their term, at least where:

• the contract has been subject to a substantial modification (as this is defined in the relevant provisions of the legislation);

• the contractor should have been disqualified from the competition because the new Public Sector Directive mandatory exclusion grounds applied and the contractor had been in one of the situations which they describe at the time of the contract award;

• the contract should not have been awarded to the contractor in view of the court finding, in the context of infraction proceedings, that there has been a serious infringement of EU law.

Earlier drafts of the new legislation also mandated that termination should be possible in the context of contracts between contracting authorities (the Teckal and Hamburg type of arrangements) when due to the subsequent involvement of a private undertaking, the conditions that rendered the arrangement outside the scope of the new directive no longer applied. However, this provision was deleted from the final draft. It seems that this was so as to reflect the softening of the position as regards an absolute prohibition on "private capital participation" in such arrangements and to allay concerns about the possibility of pre-existing arrangements being affected.

It can be recalled that the 2004 legislation sets out three separate sets of circumstances in which a contract may be terminated, or—to use the correct terminology—be declared ineffective. Whether the new termination of contracts provision is implemented by means of an obligation on contracting entities to incorporate in their regulated contracts a condition that allows them to terminate such contracts if any of the grounds for termination is found to apply, or by some other way, the end result will be the same. More specifically, this will lead to the extension of the grounds on which the termination of contracts might be possible under procurement law.

For example, these new provisions are likely to capture situations such as those which the High Court considered in Alstom Transport v Eurostar International. In that case, Alstom was challenging the award of a contract by Eurostar to Siemens and sought, among other things, a declaration of ineffectiveness on the basis that Eurostar awarded a contract which was materially different from the contract which had been advertised originally so that, according to this argument, the amended contract was a new contract which had been awarded without an advertisement, thereby triggering ineffectiveness.

However, the court disagreed. It noted that in order for the relevant ground of ineffectiveness to be triggered the contract must have been published without a notice. In this case the scope of the original notice was wide enough to be capable of being related to the procedure and the amended contract that was ultimately awarded. Accordingly, the ineffectiveness remedy under the first ground was not available.

The reason why the original notice was wide enough to cover the amended contract was that the utilities rules applied and the contract was published by means of a qualification system notice which by its nature is a much more generic document and can cover a variety of requirements.

Presumably, the introduction of the termination of contacts provision under the new legislation closes this "loophole". This is because, under the new rules, it might be possible to terminate a contract simply by demonstrating that the contract had been materially amended (and irrespective of whether there was a notice which was wide enough to encompass the materially amended contract) and by seeking an order from the court directing the contracting entity to terminate the contract.

In essence, therefore, the only difference between a challenge on the basis of the termination provisions and by means of seeking an ineffectiveness order is that under the latter, if the court were to grant that order the contracting entity would also be exposed to a requirement to pay a fine.

As regards the provision which would make possible the termination of a contract following a court finding of a serious infringement of EU law, it would be recalled that this has been a long-standing bone of contention between the Commission and Member States with the Commission insisting that Members States are obliged to terminate contracts which have been awarded in breach of EU rules. On the other hand, some Member States had sought to argue that such obligation did not arise and that their national law did not permit the termination of valid contracts.

The court itself was finally required to step into the debate. Although the court’s decision in this context is open to interpretation, at the very least it supports the view that, in certain circumstances where a contract has been awarded in breach of EU law requirements, it must be terminated, because as along as the contract remains the breach continues.

Ultimately, the provision that has been agreed is a compromise as the Commission had wanted this to create an unambiguous obligation on Member States to terminate contracts which the court determined that they had been concluded in breach of EU law requirements. Indeed, the reference to "serious infringement" of EU law might mean that it would only be on limited occasions that, in practice, such an obligation would arise.

10. Conclusion

Two of the chief aims of the modernisation process of EU procurement were said to be the simplification of the legislation and rendering it more flexible (the latter being a process to which various EU documents inelegantly refer to as "flexibilisation"). Have these aims been achieved? The conclusion might be more nuanced in the context of the public sector regime where it is clear that certain aspects of the previous legislative framework have been simplified and rendered more flexible, with the ability to use negotiations more easily in awarding contracts being a prime example in that regard.

However, the starting point in the utilities sector is different given that the utilities procurement legislation has always been more flexible than that of the public sector regime. As a result, instances of real simplification or indeed, "flexibilsation" in the new directive are limited. For example, changes such as the introduction of full electronic procurement are in reality no more than adjusting the legislation to what is for many contracting entities a common practice—and a trend which is likely to continue to grow irrespective of the requirements of the legislation. Similarly, changes as regards the regulation of "non-priority" services are useful but unlikely to be a key factor in the simplification of utility procurement.

At the same time, it is true that there have been some useful changes that have led to the clarification of the law. The new definition of "special or exclusive rights" is an obvious example in this regard, as are the provisions that deal with the nature of the award criteria and the ability to use "experience" in that context.

However, ultimately, useful changes such as these are lost in the midst of a more detailed regulatory regime which has rendered the legislation more complex and more voluminous. For example, what aim does it serve to require Member States to enable the use of the competitive dialogue procedure and the new innovation partnerships in the context of a regulatory regime that has for years enabled free access to the more flexible negotiated procedure? Some might argue that this step increases flexibility by making more options available to utilities. In reality, it is more likely that these new provisions simply add unnecessarily to the complexity of the legislation and that the negotiated procedure will remain the procedure of choice under the new utilities regime.

Another culprit in rendering utilities rules more complex has been the attempt by the legislators to codify the court’s case law. While some of the codifying provisions are indeed useful and will increase legal certainty, such certainty comes at the price of sacrificing flexibility. Indeed, the argument against codification in this context is that in codifying the court’s jurisprudence, the legislators might have clarified certain of its aspects but in the process have created a more complex set of rules that is inflexible and ill-equipped to deal with the nuanced and complex scenarios of utility (and indeed, public sector) procurement. In the end, such provisions are also bound to require judicial clarification.

Ultimately, therefore, the question is whether the benefits of clarifying and simplifying certain aspects of the law could not have been achieved by different, more efficient means. Means such as the adoption of a more targeted approach which paid due regard to the objective of simplifying legal obligations in the context of keeping regulation to a minimum. The answer must surely be in the affirmative.

This article was first published in the Public Procurement Law Review (P.P.L.R. 2014, 4, 169-187). The reader is directed to that publication for a fuller version of this article which includes footnotes.