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Service concession contract or public service contract?
Trowers Public Insight

Service concession contract or public service contract?

This is the first of two blogs about the new procurement rules for concession contracts.  The Concession Contracts Regulations 2016 will come into force in England and Wales on 18 April 2016, with the compulsory transposition of the Concessions Directive (2014/23/EU).

Where contracting authorities are procuring services, an important consideration will be whether the service is a concession or not.  This is because the threshold level for service concession contracts will be £4,104,394, which is vastly higher than the (current) threshold level of £164,176 for public service contracts.  The question remains difficult to answer in some cases.

Concession contracts are the most common form of public-private partnerships and represent a significant share of economic activity in the EU , and the Concessions Directive addresses the clear need for a specific legislative framework to provide greater legal certainty for this type of public-private partnership.  The Committee on Legal Affairs of the European Parliament reviewed the judgments of the Court of Justice of the European Union (ECJ) relating to concessions, and found that in just over half of the cases the main issue was the correct definition of the contract and, therefore, the determination of its legal status.

Examples of the types of services under concession contracts include running leisure centres, motorway service stations, cafes in public facilities, and amusement parks.

Contracting authorities will still be able to design their own procurement procedures under the new rules for concession contracts, so where there is any doubt about the correct categorisation of the contract, getting it right will be all the more crucial.

On the basis of the relevant factors set out in the Concessions Directive and recent ECJ case law, we set out below some of the questions which will help to determine whether a contract is a concession contract or a public contract.

  • Is the consideration for the services made up of the right to exploit the services or that right together with payment from the contracting authority? 
  • Is there a demand or supply risk?   Does the contractor depend on actual demand for the service for the recoupment of its investment made and costs?  Is there a risk of a mismatch between supply and demand?
  • Is there a possibility that the contractor will not recoup the investment made and costs incurred?  Is there a risk of receipts not covering the operating costs incurred?   
  • Is there guaranteed revenue that is equal or higher to the investment and costs? 
  • Is the contractor exposed to the vagaries of the market?   Does the operating risk assumed by the contractor stem from factors which are outside the control of the parties?    

The key concepts are the extent of the transfer of operating risk from the contracting authority to the contractor in the exploitation of the works or services, and the extent to which exposure to the vagaries of the market means that the contractor may not recoup capital investment and ongoing costs.

In practice, the nature of some contracts is far from clear, and correct categorisation will depend on the particular facts of the arrangement as they relate to all the relevant factors.


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