14/09/2020
In June this year, the judgment in the 2019 Rail Franchising Litigation was published. A case that involved so many parties that it got its own shorthand title was always going to raise a significant number of issues, and the 601-paragraph judgment confirms that this is exactly what the judge was required to determine. Over a series of articles, we are going to look at what this judgment means for bidders and contracting authorities involved in public procurement, breaking down what may appear to be an impenetrably detailed document into four topics that are of general relevance.
This first article deals with the question of whether contracting authorities are required to neutralise the commercial risks that are often inherent in public procurements in order to level the playing field. First, though, we aim to summarise what this case was all about.
Summary of facts
The claim covered three separate competitions for rail franchises run by the Department for Transport (DfT). It is important to note that rail franchise competitions are not subject to the provisions of the Public Contracts Regulations 2015 or the Concession Contracts Regulation 2016. They are governed by the EU Railway Regulation[1], and also remain subject to the provisions of the Treaty on the Functioning of the EU and general EU principles – specifically the principles of non-discrimination, proportionality, transparency, equal treatment, the protection of legitimate expectations, the requirement to act without manifest error, and good administration – which underpin our UK procurement rules.
In each competition, the Claimants had been disqualified on the basis that their tender submissions expressly rejected the DfT’s allocation of risk for pensions liabilities and proposed alternative solutions to the management of pensions risk. On the other hand, other bidders chose to accept this risk and submitted compliant bids. The DfT, in reliance on the provisions in the tender documents that reserved it the right to exclude non-compliant bids, rejected the bids on this basis. In each case, the disqualified bidders challenged the DfT’s decision to reject them, and the individual claims were rolled up by the TCC into a single set of proceedings that were heard over three weeks in January and February 2020.
The pensions issue was, in brief summary, that the Pensions Regulator was in the process of conducting an investigation into the railways pensions scheme, the recommendations of which would be implemented during the life of the franchise agreements being procured. This meant that over the entire period that the procurements were conducted, there was uncertainty both within the DfT and the bidder organisations as to what the impact of the Regulator’s eventual decision would be on the franchise agreements that were awarded. The judgment notes that various parties had assessed the potential financial impact on the winning bidder of anywhere between some £100m and £1bn, and that there was a significant degree of uncertainty as to which end of this scale the liabilities would fall.
A number of other, related issues arose during the procurements, which we will touch on in more detail in future articles. In this article, we consider what this judgment says about how far contracting authorities have to go to neutralise commercial uncertainty in a procurement process.
How far does a contracting authority have to go to neutralise commercial risk in a procurement?
In this case, the commercial risk was the liability imposed by the rail pension scheme, which was under review at the time the procurement was run and which could have increased pensions costs by a significant, unknown variable. The Claimants’ complaint was that this degree of uncertainty as to how much the pensions liability could cost meant that bidders were not able to bid on a fair basis and that the ITT was not capable of uniform interpretation by reasonably well-informed and normally diligent tenderers (RWINDTs).
The judge held that the terms of the ITT were clear, and that what was uncertain was how the pensions risk would play out in public. He noted that “it is inherent in any substantial procurement that there will be areas of uncertain outcome that generate commercial risk for bidders” and rejected “the submission that it was not possible to reach a commercial estimate of that risk” despite the evidence confirming that different bidders’ and the DfT’s assessment of that risk would inevitably differ. He noted that the bidders who had positively accepted the DfT’s terms in relation to pension risk must have been able to reach their own commercial assessment of the degree of that risk, and that “different (major) commercial entities may have a different appetite for risk and different approaches to catering for such risks in a complex bid”. He summarised the commercial choice facing the Claimants as “clear-cut… although not necessarily straightforward”, being “whether to bid compliantly, or non-compliantly, or not at all”.
While the future application of an unknown change to industry pensions rules may appear quite a niche risk profile for bidders to have to allow for, the need for bidders to account for unquantifiable risk in their bids is present in many public procurements. For example, TUPE costs are often unknown, even with information from the incumbent being provided. Similarly, property dilapidations liabilities, the exposure under contractual indemnities and even the cost base to deliver the service or works are ultimately commercial unknowns, albeit probably more within the bidders’ field of expertise.
The principle that a contracting authority needs to ensure a level playing field so far as reasonably practicable is well established. In taking this step, a contracting authority does not have to go extreme lengths practically or economically, but should do what it can to neutralise any competitive advantage that one bidder may have over another[2]. So, it is for this reason that contracting authorities are advised where possible to provide bidders with information to which the incumbent provider is automatically allowed access to – for example, staff lists, and data and technical information underlying the service delivery requirements.
This case confirms that there is no obligation to level the playing field in relation to situations where no one party has more information or knowledge than the other, but where commercial risk applies equally to everyone involved and is not able to be quantified with any certainty (even by the contracting authority). The judge held that “there is no principle of EU or UK law that a procurement must be so structured that every potential bidder can or will bid or even that a particular subset of potential bidders can or will bid”. He relied in this respect on the Finnish bus case[3], in which the ECJ found that a criterion established by a contracting authority that was only able to be satisfied by a limited number of undertakings did not amount to a breach of equal treatment. The judge also found that the DfT acted lawfully by not making clear its own view on the scale of the risk – a conclusion that seems eminently correct given the comeback that could follow on from the provision by a contracting authority of inaccurate information at tender stage.
So, how far does a contracting authority have to go to neutralise commercial risk? While the obligation to neutralise competitive advantages between bidders so far as reasonably possible remains, this case is clear that there is no similar obligation in relation to risk that is as unknown for one bidder as it is for everyone else.
In our next article on the Rail Franchising Litigation, we will look at the question of whether a contracting authority is able to use undisclosed tools to assist it in the process of evaluating bids.
[1] Regulation (EC) No.1370/2007 on public passenger transport services by rail and road. This requires that the procedure adopted for competitive tender shall be open to all operators, shall be fair and shall observe the principles of transparency and non-discrimination. It does not set out specific provisions for notification and explanation of decisions - including contract award decisions - in the manner required in the PCR.
[2] Case T-345/03 Europaiki Dynamiki v Commission
[3] Case C-513/99 Concordia Bus Finland v Helsingin kaupunki
