The implementation of the Procurement Act 2023 (the "Act") has reopened discussions around what is, and is not, a public contract. It has also altered the position on how some contracts may be lawfully procured. An obvious example of this is the scope to potentially rely on the direct award ground of exclusive rights by virtue of owning land - a right which in itself did not suffice under EU case law. A logical question therefore, is how has the Act impacted the distinction between grants and public contracts - is it clearer where the line is drawn? In this article we consider that question.
What is a public contract
If a contract is defined as a "public contract" under the Act it should be competitively procured via a procedure under the Act (the default being an open or competitive flexible procedure under section 19). For a contract to be so defined, it needs to be shown that:
- the contract is for goods, services or works;
- is for pecuniary interest;
- is above the thresholds set in Schedule 1 ; and
- is not excluded under Schedule 2 .
A public contract can also be a framework or concession contract but for current purposes we have focused on a typical goods, works or services contract.
Drilling more into the definition above, for the purposes of the "grant versus public contract" distinction, the key issue is whether it is a contract for goods, works or services and is it for pecuniary interest? The Cabinet Office Guidance on Covered Procurement Definition suggests pecuniary interest is more than consideration and is instead an arrangement with an intention of profit. Goods and services are not defined under the Act by way of a list of CPV codes and therefore should broadly carry their ordinary meaning. In comparison, works contracts are contracts for anything falling within the CPV codes in schedule 3 of the Procurement Regulations 2024. In essence contracts which have as their primary purpose the execution of works or the facilitation of this.
The other important point is that only contracting authorities must worry about the Act when procuring contracts. Therefore, private organisations that have a contract which otherwise would have met the conditions of a public contract do not need to comply with procurement rules.
What is a grant
So what is a grant? If you look at the 2020 definition from the Government Grants Management Function, they are described as ‘a common funding option for government, to support policy objectives in areas such as education, research, civil society and innovation and abroad through international aid projects.’ However, that doesn’t tell us much to distinguish them from public contracts.
The Grants Functional Standards is slightly more helpful on features to consider, noting that:
- funding is usually a sum transferred (generally with an option to clawback in the event of non-use or misuse of funds);
- funding will be from a public body out of public funds;
- the purpose for which the funding is given is to further policies or wider obligations for the public benefit and not to achieve a direct economic benefit to the grant funder; and
- there will generally be a statutory basis for providing the grant and conditions attached to achieve the purpose for which the grant is given.
Therefore, the question as to whether something is a public contract or a grant agreement is whether the agreement is intended to address the provision of goods/ services/ works or to document the provision of funding. If one considers a grant from Homes England to a local authority to assist with infrastructure costs on a development project, Homes England will be concerned to ensure the infrastructure is delivered so there is proper use of funds given, but ultimately their agreement is a commitment to fund. The provision of such infrastructure is a matter that has traditionally been for the authority and its procured developer.
Previous approach
Historically drawing a distinction between grant agreements and public contracts has involved a case-by-case assessment based on the substance of the arrangement and not the form. The fact that something is drafted as a contract does not matter as both grants and public contacts can be executed as such and the form of agreement will not dictate how the arrangement is viewed from a procurement sense. Elements to consider include:
- the financials – does the contract cover mere reimbursement or something more;
- the purpose – is there a direct benefit to the grant giver or for the benefit of the wider community (beyond any statutory duty of the grant giver). For example, there is a difference between a local authority providing funding to a local care home by way of a grant to allow general improvements versus a local authority giving funding to that care home to discharge legal obligations which the authority has to provide care for certain residents; and
- the enforcement mechanics – does the contract seek to ensure the return of the status quo or quantifying a loss of opportunity/ damages?
In recent years grant agreements have developed and become more robust documents (for example enhanced focus on performance metrics in the model grant agreement from Cabinet Office) which has muddied the waters between a pure agreement for funding and a public contract for the delivery of goods/ services/ works. This is particularly the case in development scenarios where grant giving bodies are seeking to assert greater control over the output delivered. It is understandable when significant public funds are on the line for there to be concern about the quality of projects delivered and the wider impact of that funding, but authorities need to know when such control could amount to a procurable activity under procurement rules.
So given the foregoing, has the Act changed anything?
Distinction under the Act
The Act maintains the status quo in deciding what is or is not a grant. The characteristics of a public contract (explained above) are consistent with what we have always thought when differentiating a public contract and a grant, and the retention of the concept of "pecuniary interest" in the definition of a public contract clearly signals where the two types of agreement differ. If a contracting authority is merely reimbursing an organisation's costs for provision of something in the public good, it is unlikely to be a public contract under the Act. Whereas an agreement with a contracting authority for delivery of services the authority needs or is obliged to provide, with a profit margin for the supplier, is likely to be a public contract. The Cabinet Office Guidance on the Covered Procurement Definition reinforces this view by stating that grants were not intended to be caught in the scope of public contracts as the notion of pecuniary interest assumes profit, and grants are meant to be merely compensatory (paragraph 9) (see above also).
However, there is an interesting question on how to approach provisions which are focused merely on contracts and not public contracts (because a grant will often be documented as a contract).
Under section 1(1) of the Act, procurement is defined as the "award or entry into a contract" whereas covered procurement is defined as" the award or entry into a public contract". Clearly provisions in the Act focused on covered procurements will not capture grants, but the disapplication of provisions focused on "procurements" is less clear: certainly as there is no definition of contract in the Act.
Whilst Hansard statements suggest there was never an intention to capture grants within the scope of the Act, it is hard to see why based on Pepper v Hart such statements would come into consideration. The court will consider Hansard in the event of ambiguity, and it is questionable if there is any. If grants were not to be caught by the Act, why was an express reference to that point not included?
However, following the recent decision of Parkingeye v Velindre University Trust it would seem likely that a court would take the view that grant agreements are entirely outside of the Act. In that decision HHJ Keyser noted that whilst not binding, the guidance issued by Cabinet Office was persuasive in interpreting the Act, and the guidance certainly points to grants being entirely outside the Act's scope.
Whilst the lack of specificity in the Act is unfortunate, in practice it is unlikely to be a significant concern for contracting authorities. Instead, the greatest risk to contracting authorities will remain the potential mis-categorisation of a grant or public contract, and the consequential challenge that could arise therefrom.
Conclusion
Contracting authorities will be concerned with the award of both grants and public contracts on a day-to-day basis. Procurement teams will be familiar with the Act and grant-making/ policy teams will be familiar with the guidance on grant giving, but arguably these teams should be working together. Teams need to be communicating regularly and considering programmes together to establish the best delivery mechanism for policies and objectives, and to correctly identify proposals. Greater awareness of the factors swinging the grant/ public contract line also need to be realised. The ramifications of getting decisions wrong could be significant, with VAT and subsidy risks being two major examples, and potential actions under the Act if a public contract is wrongly identified and not awarded compliantly.
If this is an issue impacting your organisation, please get in touch.
