Issues to consider when procuring joint ventures
Public/private joint ventures have become popular procurement options for the public sector, as a way to benefit from the private sector's innovative service delivery and duty of care, while retaining significant influence over the governance and operation of the joint venture entity delivering the works.
Despite this popularity, there still seems to be some confusion in the sector as to whether joint ventures are subject to the procurement rules set out in the Public Contracts Regulations 2015.
The setting up of a joint venture entity as a discrete activity does not have to go through a regulated procurement process. Establishing a new corporate joint venture entity is essentially a corporate structure, involving the investment of funds, and the agreement of corporate documents such as shareholders agreements and articles of association. These exercises are not regulated procurement activities and so the procurement rules do not apply.
However, the procurement rules may apply to the activities that the joint venture is being set up to perform. Where the joint venture will be undertaking "works" or "services" or providing "supplies" within the meaning of PCR 2015, and where the public sector joint venture party is receiving financial or other benefits from those works, services or supplies that exceed the relevant financial threshold, then it is likely that the procurement of the private sector joint venture is a "public contract" and should be subject to a regulated procurement exercise.
Many joint venture arrangements are structured around the sale or transfer of land between public and private sector joint venture parties. There remains in the UK an ongoing assumption that transactions involving land transfers fall outside the procurement rules. The European Court of Justice cases of Roanne and Muller, since upheld by the English courts, have established that in some circumstances a public contract will exist regardless of the transfer of land and that the procurement rules will apply to those contracts.
To avoid being in breach of the procurement rules, public sector parties are encouraged to consider their procurement obligations as part of the strategic planning of any joint venture. Following the Government's 2010 guidance on public sector joint ventures, it is recommended that joint ventures are subject to outline and full business cases and various stages of planning. Public sector parties should consider how the joint venture will work, what the governance arrangement will be between the parties, and what type of works or services the entity will be undertaking. A regulated procurement process to appoint the private sector partner fits naturally into this approach.
Preliminary market engagement with potential joint venture partners can help establish market interest and identify precise requirements for the joint venture. Use of the Competitive Dialogue Procedure or the Competitive Procedure with Negotiation allows public sector parties to engage formally with potential bidders, identify key risks and finalise the governance and operational aspects of the joint venture. Public sector parties can utilise the competitive nature of the tender process to negotiate commercially favourable terms with the bidders, before the contract is formally awarded.
Once established, joint venture entities may themselves be subject to the procurement rules, especially where the public sector party holds a majority shareholding or interest. As the joint venture entity will have partial private sector ownership, the public sector party will not be able to award contracts directly to the entity without a procurement procedure (although this can be addressed through the original procurement process).
Joint ventures for long-term investment or asset management projects can be structured to allow for benchmarking of prices against industry norms, to ensure that the public sector party is still getting value for money from the arrangement. However, this needs to be balanced against commercial agreements in which the joint venture entity is guaranteed a certain volume or value of work, to ensure that it is commercially viable and that the private sector party's profit margins are being maintained.
Additionally, the joint venture as a revenue-generating body, undertaking work for third parties are popular. With lots for the public sector body to consider, the strategic use of the procurement rules can provide a forum for the parties to discuss and agree these terms, and plan for the long-term viability and profitability of the joint venture.
This article is taken from Building Interest – Autumn 2017.