LAWYERS TO THE PROJECTS INDUSTRY www.klgates.com Autumn 2007 Projects Bulletin Revised Guidance on PFI contracts The Treasury has issued a revised version of its guidance on PFI contracts - Standardisation of PFI Contracts Version 4, or SoPC4 as it is known, was issued in March. It is more and more the case that PFI deals are required to follow SoPC to the letter, so the changes in SoPC4 are worth knowing about. Inclusion of soft FM services Soft FM services are services such as catering and cleaning which are labour intensive rather than related to the hard fabric of the building. In the early days of PFI the assumption was that all possible services relating to the new facility, whether a school or a hospital, should be included in the services provided by the private sector. Over time the Government have moved away from this position and Section 3.8 of SoPC4 confirms, by reference to a revised Treasury document called "Value for Money Guidance", that awarding authorities need to consider carefully whether to include soft FM services in the package. It must be said that much of this shift in policy is driven by politics, namely the opposition of trade unions representing FM service employees to the transfer of staff across to private sector providers. Early works agreements There is an interesting new section on early works agreements (Section 3.10). It points out that in a well planned project there should be no need for such a document. Entering into an early works agreement is undesirable in many ways, not least because it shifts the negotiating balance towards the private sector party that has entered into the agreement. There are also potential difficulties with the EU procurement rules, since the original OJEU notice probably did not refer to the award of an early works agreement. PFU approval is required before an early works agreement is entered into, and the guidance recommends that the works should be of a general nature not specifically related to the project solution of any particular bidder. That way the enabling works will be of value to the Authority even if the main Project Agreement is awarded to a different bidder. Change procedures Section 13 is a substantially new section dealing with changes/variations. This follows criticism from the market that the Variations procedures built into PFI project agreements have been difficult and expensive to operate and much too legalistic. The new guidance suggests dividing changes into small Welcome to the Autumn Edition of the Projects Bulletin. The revised guidance on the standard form of project agreement was issued in March 2007 (SoPC4). In this Bulletin, we analyse the substantial changes and lessons learnt from previous PFI deals. You will also find more on another common feature of the PFI market in the UK, the subcontractors’ cooperation agreements (page three), as well as an analysis of property issues in PFI transactions (page six), a brief review of the issues raised by the current tenders for nuclear decommissioning works (page eight) and an update on the Competitive Dialogue (page ten). Contents Revised Guidance on PFI contracts 1 An uncooperative approach? 3 £310m Major healthcare PFI project 5 Underlying property issues in PFI transactions 6 EU proposals for new standstill periods 7 Competition for Magnox Nuclear Decommissioning 8 Competitive dialogue: A minefield 10 or level playing field Who to contact 12 Projects Bulletin value and large value changes, and using a catalogue or schedule of rates approach for calling off and pricing small value changes. For large value changes SoPC4 recommends that authorities choose between three different approaches for ensuring value for money from the new work, namely benchmarking, appointing an independent technical adviser who will evaluate the cost of the change and competitive tendering of the new work. Market testing Section 15 on price variations now confirms that market testing is the preferred method for adjusting the soft FM elements of the unitary charge to market, and that benchmarking is out of favour. Since market testing may lead to the original provider losing the contract, it is worth noting that the Treasury guidance on this area is entitled "PFI: Strengthening Long Term Partnerships". Sir Humphrey would be pleased. Authority break points Section 21.5.4 contains a controversial proposal that authorities should seek to introduce "break points"; in other words, a pre-priced option to terminate the project early at specified intervals. The intention is to give the public sector certainty as to the cost of terminating projects prior to their expiry date. Bidders will be required to specify a fixed sum (i.e. not a figure to be determined in the future through the operation of some calculation), which they will be paid in the event of termination at a break point. The intention is that bidders will compete to bid the lowest price for terminating at these break points. This approach is not likely to be attractive to the private sector, which in most cases will have invested a large amount of money in securing what was planned to be a 25 or 2 AUTUMN 2007 30 year contract. Also the rationale assumes that competitive bidding will lead to tenderers reducing the amount they receive, compared with what they would have received under the old calculation of compensation for voluntary termination. It is hard to argue with the economics, but in an environment where it is becoming increasingly difficult to find three or four bidders for large PFI projects, one queries whether it is sensible to introduce provisions which are likely to make bidding less attractive rather than more. Commitment letter Section 32 contains a revised "commitment letter" which is the letter written by the authority to its "selected bidder". The letter has been revised to take into account the competitive dialogue procedure which will increasingly be used for PFI deals. As expected, it attempts to commit the bidder even more firmly to the words of the project agreement at the time the letter is issued. Bond funding There is a helpful new Section 36, setting out permitted revisions to the standard drafting applicable if the project is being financed through the issue of bonds as opposed to bank debt. Since PFUs in the different funding departments will be keen to enforce the new SoPC4 document, we can expect a number of these points to come up in negotiations over the next few months. For further information please contact Christopher Causer email@example.com +44 (0)20 7360 8147 www.klgates.com An uncooperative approach? 'Co-operation' or interface agreements ("IAs") are becoming an increasingly common feature of PFI/PPP projects. They are agreements entered into by Project Co and all subcontractors engaged on a project with the purpose of creating direct contractual relationships between the subcontractors which would not otherwise exist. The key purpose of an IA is to impose a contractual duty on each subcontractor to co-operate with the others, and to impose sanctions if they do not. liabilities, liability caps and detailed requirements regarding design review, access and inspection of works. At subcontractor level, the popularity of IAs depends to a large extent on which side of the fence you sit on. They are generally seen as beneficial by the major service and equipment providers who will be working together for a 20-30 year period. The issue is often somewhat different however if viewed from a building contractor's perspective, whose involvement in the project is comparatively short-term. Whilst there is certainly merit to the argument that subcontractors focussed on working well together will serve the 'greater good' of a project, the negotiation of IAs can be a timeconsuming, unco-operative and disproportionately expensive process as efforts are made to reconcile the various parties' competing interests. The building contractor's work is geared towards the beginning of the project, and a delay to construction has the potential to delay subsequent service and equipment providers. As such, building contractors may be inherently more likely to be on the receiving end of claims under IAs than to benefit from them. IAs are popular with and often required by Project Co, authorities and funders as a way of allowing claims and disputes between subcontractors to be dealt with directly and thereby reducing the administrative burden on Project Co, and the risk that it will be left with residual liabilities. In the absence of an IA, a claim by subcontractor A that it has been delayed by subcontractor B would need to be passed 'up the line' from subcontractor A to Project Co, and then back down by Project Co to subcontractor B. Under an IA however, subcontractor A can claim directly against subcontractor B. Key issues for a building contractor to bear in mind when negotiating an IA include the following: As well as obligations to co-operate, and a domestic claims procedure, IAs also typically include provisions dealing with indemnities, the treatment of pass-down The number of parties to the IA - as a general rule, the more subcontractors, the greater the complexity of the IA. A large number of service providers can mean a disparity in the bargaining power between the 'lone' building contractor and the various service providers who do, to an extent, have common interests. It also increases the likelihood that the building contractor will be on the receiving end of claims by sheer virtue of numbers. Extent of subcontract obligations - in addition to an undertaking to observe and perform the obligations in the IA itself, IAs commonly seek to impose AUTUMN 2007 3 Projects Bulletin obligations to comply with the underlying subcontracts as well. This is frequently a contentious issue from the building contractor's perspective, as it means it is warranting to the various service providers that it will comply with the terms of the building contract. This presents an associated risk of 'nuisance claims' being brought under the IA in respect of subcontract matters which do not really concern the service providers. Scope of indemnities - IAs will contain a clause providing that each subcontractor indemnifies the others against specified losses and damages arising from negligence or a breach of the IA by the indemnifying subcontractor. Issues to consider when negotiating these clauses include whether or not the indemnity is limited to direct losses, the circumstances where the indemnity does not bite (for example, contributory negligence and if insurance proceeds are recovered in respect of the damage) and whether the value of certain elements of the indemnity (such as in relation to property damage) are capped. Re-allocation of Pass Down Liabilities ("PDL") - IAs include a mechanism for the reallocation of liabilities incurred by Project Co at project agreement level and passed down to the subcontractor Project Co considers responsible. Where subcontractor A does not accept that Project Co's initial assessment of responsibility for the PDL is correct, the IA enables it to seek a reallocation of that PDL to subcontractor B and/or back to Project Co. The extent of the grounds agreed for reallocating a PDL to Project Co will depend on the collective bargaining power of the 4 AUTUMN 2007 subcontractors. Project Co will want to minimise the risk of being left with any PDL, whilst each subcontractor to whom a PDL has been wrongly allocated will want to ensure that if there are any reasons why the PDL cannot be allocated to the responsible subcontractor, the PDL does not by default remain with them. Domestic claims and liability caps where subcontractor A is in breach of its obligations under the IA and this causes subcontractor B to suffer loss, subcontractor A is obliged to compensate subcontractor B for its loss (for example, for the additional costs incurred as a result of delayed handover). Caps on liability for such claims need to be agreed, included in the IA, and can frequently result in a complex matrix of liability. Different caps may apply in respect of each subcontractor, be different for the construction and operational phases, and there may also be a separate cap for delay damages. It is not uncommon for a building contractor to have a high cap on its liability to each service provider, but only have the benefit of relatively low caps on those service providers' liability in return. A key risk for a building contractor is in its liability for any delay caused. It may face claims under the IA for the additional costs incurred by the other subcontractors as a result of delay caused as well as liability for liquidated damages under its subcontract to Project Co. This needs to be considered when negotiating the value and coverage of the IA caps. Detailed obligations - IAs contain detailed 'statements of requirements' regarding each subcontractor's technical and access requirements of the others, and forms the focal point of the obligation to co-operate. Project Co should also be bound by an express duty to co-operate with the subcontractors, but this is often resisted (an approach typically taken by Project Co is that its obligations and liabilities under an IA should be as limited as possible). An issue for building contractors is likely to be how far the duty to co-operate extends, particularly in the context of design review and inspection of works. Service providers are involved in design review prior to financial close, and are obliged to set out their various design requirements in FM assumptions which then form part of the building contractor's obligations at subcontract level. Service providers also often seek to obtain a right to comment on design under the IA. It is not in the building contractor's interests to have service providers raising new issues late in the day or having a 'back door' way of submitting comments which circumvents the formal design review procedure set out in the building contract. The negotiation of IAs can be a complex process, and an understanding of the interrelationship between the terms (and liability caps) in the IA and the underlying subcontract is crucial to assessing the true exposure to risk which signing an IA represents to a building contractor. For further information please contact Inga Hall firstname.lastname@example.org +44 (0)20 7360 8137 www.klgates.com £310 million major healthcare PFI project signed by Laing O'Rourke Construction North Limited A team from K&L Gates, led by Projects partner Trevor Nicholls, advised Laing O'Rourke Construction North Limited on the £310 million PFI construction contract for the design and construction of new hospitals in Stoke on Trent for the two Trusts, University Hospital of North Staffordshire NHS Trust and the Stoke on Trent Primary Care Trust, which was signed on 8 June 2007. Financial close was reached on 12 June 2007. The largest NHS bond deal after Bart's and Birmingham, the North Staffs project is financed by EIB and a bond issue guaranteed by MBIA. The new hospitals, based in North Stoke, will be the largest PFI healthcare facility after Bart's and Birmingham. Once operational in 2014, they will provide 664 new beds, new operating theatres, a new community hospital for the Stoke on Trent Primary Care Trust, care facilities for the elderly, out patients, and a walk-in centre. The project is challenging as it is spread over two sites, involves two Trusts, and requires close co-operation between the construction contractor, equipment supplier and IT provider. Advance works have been underway since 2005 including construction of a multi-storey car park, demolition of existing Victorian healthcare buildings, piling and the diversion of utilities. The K&L Gates team led by Trevor Nicholls and projects associates Inga Hall, Sophie Charveron and Peter Dzakula, included Steven Cox (property partner), Sebastian Charles (planning and environment partner) and Ashley Mather (associate property). accommodation on the campus of Loughborough University. The new student halls, once operational in 2008-09, will provide 1,300 new student rooms. The team was led by Trevor Nicholls, assisted by Sophie Charveron, Eleanor Smith (associate property) and Martyn Hanmore (associate - planning and environment). For further information please contact: Trevor Nicholls email@example.com +44 (0)20 7360 8177 The same week, Laing O'Rourke Construction North Limited signed the £49 million PPP construction contract for the design and construction of new student AUTUMN 2007 5 Projects Bulletin Underlying property issues in PFI transactions The property lawyer's role in a PFI transaction is to review the ownership of the land where the facility is to be built, check access to it and what rights others may have over it. If there are any potential hindrances or delaying factors, these need to be highlighted to the team at an early stage so that risk can be appropriately allocated and/or a pragmatic solution found. The form of Certificate of Title (currently the City of London Law Society Standard Form Sixth Edition) or report on title provided by the Public Authority/Project Company offer the recipient a contractual remedy against the author for misrepresentation or inaccuracy, and look similar to those used in institutional property lending/sale and purchase transactions but the issues can be slightly different. Sites may have been acquired piecemeal by the public body landowner over the years, and part or even the whole of the facility may not even be registered at the Land Registry. Historically, as publicly owned assets, they are unlikely to have been subject to the scrutiny of a mortgagee's solicitor's microscope, and there is a likelihood that informal arrangements at the site have not been legally documented or recorded. Is insurance an adequate remedy against defects in title? Whilst an institutional owner may be happy to insure against any likelihood of a breach of a restrictive covenant where a development is fully built out and let, insurance is not an adequate solution if a contractor client is injuncted so it cannot access the site 6 AUTUMN 2007 and fulfil its obligations to undertake the demolition/ construction phase. Trigger points could be that rights of access are inadequate, rights of light benefiting surrounding buildings are interfered with or the proposed development breaches a restrictive covenant. How can you work around a restrictive covenant? If for example, with a hospital project, the title deeds prohibit the use of part of the site as an asylum/hospital or limit the use to a single dwelling house, if alerted early enough, it may be possible for the team to amend the layout of the facility. The affected land could perhaps be made part of the landscaping, car park area or another non-breaching use. Voluntary first registration at the Land Registry If any part of the site is unregistered, the Public Authority/Project Company should undertake a voluntary first registration. The cost is modest and the Land Registry guarantees title. This will clarify the boundaries and will indicate any likely ransom strips or gaps in the site without full documentary title. What about matters that will not be revealed by registration or searches? The landowner should provide full responses to the relevant British Property Federation set of CPSE enquiries, particularly for matters which the party relying on the replies cannot www.klgates.com www.klng.com obtain from elsewhere, either via searches, inspections or survey. The proliferation of companies providing telecoms and electricity supplies means that some third party rights could otherwise slip through the net. What level of replies to enquiries is acceptable? If you are the recipient, attempt to strike out any qualifications risk averse lawyers framing the replies attempt to insert, such as "in all material respects", "all material information", "subject to any qualifications in replies to enquiries". The warrantor of the information will try to argue, in light of the decision in William Sindall plc -v- Cambridgeshire County Council (1994), that the parties agree the expression "to the best of the Trust's knowledge and belief" does not warrant that the warrantor has made any further enquiries into such a matter. This means that you are accepting the warrantor's actual knowledge rather than the knowledge of everyone at the organisation, information in archived files or suppliers that the warrantors might reasonably enquire of. This may come down to a value judgement on the part of the recipient as to how much it estimates the warrantor actually knows about its asset and its faith in the continuity of its facilities management as well as the complexity of the site and its location. Just because a claim has not arisen historically or has not been triggered at the planning stage does not mean that the title information is comprehensive and accurate and permits the scheme to be completed as proposed. An early review of the title and a site inspection/study of aerial photos can allow issues to be identified and risk allocation to be resolved in a timely fashion before the property issues become deal critical. For further information please contact Ashley Mather firstname.lastname@example.org +44 (0)20 7360 8215 EU proposals for new standstill periods As announced in our previous issue, public contracts for works, services or supplies that are awarded after a public procurement tender cannot be executed until the expiry of a ten-day standstill period. The standstill period commences on the day the contract is awarded to the preferred contractor and enables any claimant to bring a claim for breach of the public procurement regulations before the contract is executed and comes into force. The standstill period has led to a rise in the number of challenges but also levelled the negotiation playing field between contracting authorities and bidders. decision in Alcatel (1998). A proposal to amend the current Remedies Directive has found its way to the EU Parliament and suggested that the standstill period is rolled across the EU to all European Member States. The current proposal is to impose a 12-day standstill period for electronic communication and 17-day period for postal communication. Derogations are allowed and may result in the contract executed during a standstill period to be effective nevertheless. For further information please contact: Sophie Charveron email@example.com +44 (0)20 7360 8154 The mandatory standstill period applies only under the UK Public Contracts Regulations 2006 and was implemented folowing the ECJ's AUTUMN 2007 7 Projects Bulletin Competition for Magnox Nuclear Decommissioning The Nuclear Decommissioning Authority (NDA) was formed in April 2005 to secure the decommissioning and clean-up of the UK's nuclear sites previously owned by British Nuclear Fuels Limited (BNFL). The NDA is under a duty to promote effective competition by encouraging new industry thinking. It has already launched the initial competitions. The contract for the Low-Level Waste Repository (LLWR) near Drigg will be awarded later this year, and the new Parent Body Organisation (PBO) contract for Sellafield is to be awarded in the second half of 2008. The NDA has now begun the competition for the South Magnox reactor sites (Berkeley, Bradwell, Hinckley Point A, Dungeness A and Sizewell A). The bidders are competing for a contract worth over £3 billion, assuming it runs for its full term of 17 years. The South Magnox competition is to select the PBO which will own the shares of the new Site Licence Company (SLC), Magnox South Limited. The new Parent Body Organisation (which will be owned by the successful bidder) will be required to enter into an agreement with the NDA, under which it will acquire the shares and nominate key staff to the SLC. These staff are required to improve the performance of the SLC in accordance with the terms of its Site M & O contract with the NDA. The successful bidder will have the opportunity to negotiate and agree the terms of the M & O contract before acquiring the shares. How will all this be brought about? As part of the bid process, three or four of the short-listed tenderers will be 8 AUTUMN 2007 invited to participate in a Competitive Dialogue with the NDA, a new process under the Public Contracts Regulations 2006. During this dialogue each bidder will have an opportunity to explore with the NDA the ideas and solutions which it considers will best meet the NDA's requirements. It is intended to be an open dialogue leading to more efficient tendering. The final contract award, however, will be made strictly in accordance with the objective award criteria published in the OJEU Notice. Whilst this may be seen as free consultancy for the NDA and an unwarranted expense for unsuccessful bidders, these are the only rules of the game as set by the NDA. Looked at positively, competitive dialogue offers bidders in the words of Ian Roxburgh, the NDA's Chief Executive, "a chance to shape the exam question which they will ultimately be required to answer". Mr Roxburgh was also at pains to emphasise at the recent Industry Seminar on Magnox South, that there would be "a totally level playing field" during the bid process and that, for example, the recent purchase by Energy Solutions of the BNFL reactor sites management company would not alter the position or give ES or its partners, Jacobs Engineering, any advantage. Notwithstanding these assurances, competitive dialogue will plainly add to bid costs and so far the NDA have not indicated they will be making any contribution towards such costs. Although the proposals discussed during competitive dialogue will not be the basis of the final decision (which will be made by the NDA on the basis of the published objective criteria), the www.klgates.com calibre of the bid negotiating team will inevitably be assessed. The team may be required to participate in role-play exercises to test how it would react to specific situations and the level of team-working. As far as possible therefore, the competitive dialogue process should be undertaken by the same individuals who will become the management team, essentially those who will be seconded to the SLC. The NDA will want to explore with these individuals what opportunities there are for innovative solutions and improvements to the way the M & O contract works. It will want to be assured that the team will be supported by its parent companies (the owners of the new PBO) and the extent of expertise available to the SLC through the management team from the parent companies. Although the team is expected to bring its influence to bear on the SLC's activities, it will not be the 'controlling mind' of the SLC. The NDA is keen to ensure that the SLC remains an enduring and stable entity with its own employees. These employees must be capable of running the company without interruption should the Parent Body Agreement terminate. The Agreement is subject to review at fiveyearly intervals and there is a risk it may not be renewed. The intention is that the individuals seconded to the SLC should be senior management, but not 'permanent staff'. If they are directors of the SLC, their first duty will be to the company and there may be situations where they have to act against the wishes of the PBO, for example when asked by the PBO to take on board an unacceptable risk. An early example of this independence is that the new PBO cannot commit the SLC to changes in the M & O contract without the approval of the SLC Executive. Following the appointment of the new PBO, there is a six month transition period during which the SLC (not the PBO) draws up a transition plan for approval by the Regulators. Once the detailed changes have been negotiated and agreed, the shares are transferred from the outgoing PBO to the new PBO and the revised contract arrangements come into force. On the assumption that final tenders will be submitted at the end of 2008 and then have to be evaluated, this change is not likely to take place until towards the end of 2009. For further information please contact: David Race firstname.lastname@example.org +44 (0)20 7360 8106, or Sebastian Charles email@example.com +44 (0)20 7360 8205 AUTUMN 2007 9 Projects Bulletin Competitive dialogue: A minefield or level playing field? What do nuclear de-commissioning works, a £370 million hospital PFI project in Bristol and a new schools BSF scheme in Islington have in common? They are all currently advertised under the new Competitive Dialogue procedure. Competitive Dialogue is a new form of negotiated procedure used by public sector authorities to award large or complex contracts for works, services or supplies. The new Directives on public procurement dated 21 April 2004 (the Works, Supplies and Services Directive 2004 and the Utilities Directive 2004) were transposed into English law in January 2006. The Public Contracts Regulations 2006 and the Utilities Contracts Regulations 2006 replaced and consolidated the existing public procurement rules and case law. They also introduced a new form of negotiated procedure for major and complex projects. Public authorities are under an obligation to award contracts under either an open or restricted tender. In exceptional cases, they can opt for the negotiated procedure, which allows for negotiation of the terms of the contract with the winning bidder. The new Competitive Dialogue is available for particularly complex projects, where the nature of the contract or the risk do not permit overall pricing, because the contracting public authority is not objectively able to define the technical means capable of satisfying its requirements or objectives. This new procedure seems perfectly adapted for major or complex PFI and PPP projects in the UK. 10 AUTUMN 2007 The first phase is the publication of a contract notice in the Official Journal of the European Union. This is then followed by the qualification of candidates who are selected to participate in the dialogue on the basis of social, economic and professional criteria. In a third phase, the invitations to tender are sent to the candidates on the basis of the Solution. The Regulations require that at least three candidates should receive the invitation to tender. Alternatively, the Department of Health guidelines on the Competitive Dialogue recommend that four bidders are invited to participate in the Dialogue and two are kept until the final stage. The second phase consists of detailed discussions on all aspects of the contract with each selected candidate, during which the authority and bidders discuss fully all aspects of the project until the requirements of the contracting authority (the Solution) are defined. In the fourth and final stage, the winning bidder is asked to clarify its bid and confirm its commitments, prior to being appointed preferred bidder. According to the Regulations 2006, clarification means specifying points, fine tuning or adding to the bid, without altering or modifying A dialogue in four phases www.klgates.com substantial aspects of the tender. Clarifications must not distort or create a risk of distortion of the competition between the candidates. The preferred bidder is appointed on the basis of the Most Economically Advantageous Tender, as in the negotiated procedure. The contract is awarded without further negotiations, which means all issues need to be resolved as early as possible, and in any case, before the appointment of the preferred bidder. Competitive Dialogue is new and raises several issues, both for the candidates and public sector entities. Negotiations after appointment of preferred bidder In the Regulations, adjustments to final bids are allowed after the dialogue phase has been concluded, provided that the basic features of the tender are not fundamentally or substantially changed. Discussions after the appointment of the preferred bidder may result in a contract different from the one that has been advertised. Discussions with the preferred bidder must be limited to matters that are not price sensitive and therefore, in theory, there should only be limited scope for discussions after the preferred bidder stage. It is, however, well known in commercial practice that discussions with the preferred bidder in PFI projects involve negotiations on price, scope of work and other commercial aspects of the bid, and may last for months after appointment of the preferred bidder, as may be the case in some Competitive Dialogues. For instance, the Treasury recommends that funding competitions are held after appointment of the preferred bidder. The commercial reality is that bidders and funders will only be prepared to commit substantial resources to bring a project to close after one tenderer has been selected as preferred bidder, and not before. Some authorities in Northern Ireland or London currently tendering under the Competitive Dialogue do not follow the recommendation. They ask that each participant concludes its due diligence up front and then submits a complete offer, including full bank support. Tenderers are asked to submit tenders which are supported by funders, hence removing the risk that they are unpicked by the banks after preferred bidder stage. Negotiations after preferred bidder stage may result in an increase in the tendered price. The Regulations 2006 focused on price and payment mechanism, but not the scope of work. Prices may be changed as a result of the application of the price variation formula that was already in the draft contract discussed before preferred bidder stage. The key test is, as for negotiated procedure, whether the essential terms of the contract changed after the preferred bidder was selected. In the UK, certain contracting authorities simplified the scope of the project tendered on the basis of a Competitive Dialogue to make it easier to compare bids. For instance, a tender for a large PFI hospital in Northern Ireland is currently running and the public authority applied for outline planning permission on the basis of the exemplar design prepared by its own consultant. Bidders will specify their own variations to the exemplar design (rather than their own full designs). The scope of the project was limited to new build, and excluded refurbishment work, the provision of equipment or any prospect of a property developmenttype deal. Increased bidding costs The Regulations recommend keeping at least three bidders (DoH Guidance recommends keeping two bidders) in the tender until the contract is finally awarded under a Competitive Dialogue. This is not always followed because it may be impossible to reserve one or two bidders, as this would result in huge bidding costs for the reserved bidders. Participants who are invited to tender under the Competitive Dialogue are likely to incur substantial costs and have to mobilise resources which could be applied elsewhere. The bidding costs incurred by a bidder during a Competitive Dialogue may not necessarily exceed those incurred during a negotiated procedure but they are incurred much earlier on in the project and before any tenderer is the preferred bidder. It completely changes the risk profile for the private sector, which ultimately impacts on the value for money delivered to the public sector. The Regulations allow (but do not oblige) contracting entities to provide payment of a prize or contribution towards bidding costs. Bid cost sharing arrangements are not unusual in complex large PFI projects, such as healthcare projects. It would be interesting to see whether these will find a way into the Competitive Dialogue and become standard practice. Confidentiality It is feared that contracting authorities cherry pick the best ideas from outline submissions made by the participants in a Competitive Dialogue, and incorporate those ideas into an optimum set of output specifications for the Invitation To Negotiate. Authorities should require the consent of the participants before disclosing their confidential information, but neither AUTUMN 2007 11 Projects Bulletin the Directives nor the Regulations define exactly what confidential information is. Cherry-picking ideas would give the other candidates an opportunity to tender on the basis of a solution they have not designed. Why would potential bidders disclose exclusive know-how and intellectual property rights for the design of solutions during the initial stages where they may not even be appointed preferred bidder? This does not stop designers from entering into design contests and never stopped French design and build contractors from participating in "appel d'offres sur performance", which allow early contractor involvement. The use of Competitive Dialogue in France is thriving as it allows competitors to test their design ideas as well as the appetite of the market for innovative solutions. Bidders value being involved in defining the public authority's output requirements, even though they are competing with other bidders to win the contract. Discussions during the Competitive Dialogue ought to take place without disclosing the solutions proposed or any confidential information to the other participants. Any disclosure has to take place with the participant's consent. It is up to the contracting authorities to ensure equality of treatment and that the same information is given to all bidders. It seems from our experience that the only solutions workable in practice rely on: the bidders' good understanding of English intellectual property law; the existence of a strict protocol, set up and monitored by the contracting authority to ensure that participants' confidential information is not disclosed to the other bidders. Electronic data rooms and passwords can be used in order to store and circulate tender documentation, as well as circulate clarification requests and responses to clarification requests; and as in some of the recent Competitive Dialogues taking place in the UK, a waiver of confidentiality at the outset of the tender. This would however Who to Contact provide little comfort to bidders when they are confronted by a contracting authority cancelling a tender, and re-launching it on the basis of the confidential information obtained during the first Dialogue. Competitive Dialogue presents clear risks, not to mention dangers, and also offers exciting opportunities to engage with bidders at an early stage and to test the appetite of the market. Competitive Dialogue is time and resource intensive, it is expensive for both the contracting authority and the bidders, and it is still new, therefore risky. At the end of the day, there is still the ten-day standstill period and the remedies available to unsuccessful bidders at any stage of the Competitive Dialogue but this is for discussion another day. For further information please contact Sophie Charveron firstname.lastname@example.org +44 (0)20 7360 8154 K&L Gates For further information contact the following 110 Cannon Street Christopher Causer email@example.com T: +44 (0)20 7360 8147 London EC4N 6AR Stuart Borrie firstname.lastname@example.org T: +44 (0)20 7360 8155 www.klgates.com Trevor Nicholls email@example.com T: +44 (0)20 7360 8177 T: +44 (0)20 7648 9000 Kevin Greene firstname.lastname@example.org T: +44 (0)20 7360 8188 F: +44 (0)20 7648 9001 David Race email@example.com T: +44 (0)20 7360 8106 Sebastian Charles firstname.lastname@example.org T: +44 (0)20 7360 8205 K&L Gates comprises approximately 1,400 lawyers in 22 offices located in North America, Europe and Asia, and represents capital markets participants, entrepreneurs, growth and middle market companies, leading FORTUNE 100 and FTSE 100 global corporations and public sector entities. For more information, please visit www.klgates.com. 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