Lawyers to the projects industry
projects
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Spring 2004
contents
Outsourcing and PFI projects - 1
avoiding the TUPE pitfalls
Changes to EU procurement
thresholds
4
Office of Fair Trading to
4
review public sector procurement
Waste management
projects
5
Stamp Duty Land Tax
5
Housing
6
EU enlargement
7
Stop Press
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Who to contact
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Welcome to the
Spring edition.
This issue contains a number of
articles on a wide spread of
topics, including EU procurement,
PFI in the housing industry, the
forthcoming EU enlargement and
a lead article on employment
rights.
Outsourcing and PFI projects avoiding the TUPE pitfalls
TUPE has traditionally kept
Employment Tribunals and the Appeal
Courts in business. Some recent
decisions dealing with the impact of
TUPE on outsourcing highlight the
continuing uncertainty which TUPE
creates. The DTI has promised to
provide draft regulations to clarify the
impact of TUPE on outsourcing and
PFI projects.
The cases below show the pitfalls
involved in determining whether TUPE
applies, and if so, what transfers. In
particular, difficulties have arisen as a
result of having to determine the
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nature of the business and regarding
the scope of the pension exclusion
and the transfer of collectively agreed
terms. As will be seen, the key to
avoiding the pitfalls is ensuring that
proper due diligence is carried out and
that effective and carefully drafted
indemnities and warranties are
included.
The European Court of Justice (ECJ)
has recently considered the issue of
what constitutes a "relevant transfer"
for the purpose of TUPE in Abler & ors
-v- Sodexho MM Catering GbbH
(2004). Catering services at a hospital
projects
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less of a consideration and the Court
would consider the fact that Sodexho
was to use the same premises and
equipment, pointed towards the entity
retaining its identity and, therefore,
TUPE applying.
were outsourced, initially to a
company called Sanrest. Sanrest were
responsible for producing and serving
meals and also for cleaning. The
management authority of the hospital
provided water, energy and
equipment. Following a re-tender
Sodexho won the contract but refused
to take any of the catering staff, as
employed by Sanrest.
Labour intensive or asset
reliant?
The question of whether TUPE applied
as between Sanrest and Sodexho
essentially depended on whether the
ECJ thought that catering services
were "labour intensive" or "asset
reliant". If the activity was inherently
labour intensive then the fact that
Sodexho did not intend to take on
any of the staff would be a significant
factor pointing against TUPE applying
(because the entity could not be said
to have retained its identity). If it was
asset reliant however, this would be
2
The ECJ decided that catering was
asset reliant and that TUPE applied. It
thought that the use by Sodexho of
the same premises and equipment
provided by the hospital, without
which meals could not be prepared
and served, was sufficient for TUPE to
apply. It made no difference that
these assets did not belong to Sanrest
but, rather, to the hospital. The fact
that employees were not taken on
also made no difference since,
otherwise, this would defeat the
purpose of the Acquired Rights
Directive.
was no transfer of assets and only one
employee was taken on. The EAT
again emphasised the asset reliant
nature of catering services. The fact
that no assets were transferred was a
significant factor behind the EAT's
decision that TUPE did not apply.
However, as with most TUPE cases,
there is an inconsistency: in Abler, the
ECJ confirmed that ownership of the
assets was irrelevant and the fact that
the incoming contractor used the
same assets was a factor pointing
towards a transfer. The EAT in
Wodson, by contrast, adjudged that
no change in ownership means no
transfer, even though the same assets
were used. One can only hope that
the DTI's new regulations will provide
some clarification to this complicated
issue.
Terms and conditions
The case shows the importance of
deciding at the outset whether an
activity is asset reliant or labour
intensive (since this is likely to affect
the question of whether TUPE
applies). Clearly, however, it will often
be difficult in practice to know where
to draw the line. Are cleaning
services asset reliant or labour
intensive? What about security?
In another decision (Wodson Park
Sports & Recreation Association -vLouise West & ors (2003)), the
Employment Appeal Tribunal (EAT)
had to consider whether TUPE applied
to a re-tendering of a catering
contract. However, the difference
between this case and Abler was that
the terms of the incoming contractor's
contract were significantly different in
terms of use of equipment, charges
and duration compared to the terms
of the outgoing contractor. There
Where TUPE does apply, the question
of what terms and conditions actually
transfer still causes difficulties. As a
general rule, pensions are excluded
from the scope of TUPE and so do not
transfer. In Martin -v- Southbank
University (2004), the ECJ had to
decide whether a clause providing for
"immediate payment of an enhanced
retirement pension and other
compensation in the event of an
employee ceasing work on grounds of
redundancy" fell within the pension
exemption or whether it transferred.
The ECJ held that it did transfer and
drew a distinction between benefits
which are payable when an employee
reaches the end of his or her working
life (which do not transfer) and those
benefits which are payable to people
who have reached a relevant age but
are payable for some other reason
(which do transfer). As a result of this
decision the pensions exclusion has
Spring 2004
been significantly narrowed.
The Court of Appeal in Glendale
Managed Services -v- Graham & ors
(2003) had to consider whether
nationally agreed pay increases
applied to an employee who had
transferred from the public to the
private sector. Mr Graham was
employed by Southend-on-Sea
Borough Council and his contract of
employment provided that his rate of
pay would normally be decided in
accordance with the National Joint
Council for Local Government Services
(NJC). His contract further provided
that any changes would be separately
notified to him.
Glendale did not increase Mr
Graham's pay or that of any of his
other colleagues.
The Court of Appeal decided that the
Council had reserved the possibility of
departing from the NJC agreed rates.
This right transferred to Glendale who
could (subject to various implied
duties of trust and confidence) have
taken advantage of this and informed
the employees that their pay was not
to increase along NJC lines. The fact
that it did not was its downfall, and
the company was obliged to increase
pay in accordance with the NJC rates.
Protections
Mr Graham and his colleagues
transferred to Glendale Managed
Services under the provisions of TUPE.
Following the transfer, the NJC
implemented a pay rise of 3% but
The Martin and Glendale cases
highlight the importance of due
diligence to establish exactly what
terms and conditions are likely to
transfer.
The effect of the Martin decision is
that it is no longer enough simply to
assume that a term which relates to
the payment of benefits to people of
a relevant age will fall within the
pensions exclusion. Where full
documentation is not available,
incoming contractors would be well
advised to ensure that they obtain the
protection of carefully drafted
warranties and indemnities relating to
these benefits and to any collectively
agreed terms which are likely to
transfer. This will ensure that the
pitfalls are avoided.
For further information contact
Paul Callegari
tel: 020 7360 8194
email: paul.callegari@ngj.co.uk
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projects bulletin
Changes to EU procurement thresholds
EU procurement rules apply to public authorities (for example local authorities, NHS authorities and government
departments) and certain utility companies operating in the energy, water, transport and telecoms sectors. The rules are
complex and of the utmost importance - public procurement represents approximately 14% of the combined GDP of the
EU Member States. The procurement rules set out detailed procedures for the award of contracts whose value equals or
exceeds these thresholds. As of 1 January this year the procurement financial thresholds changed. The table below
represents the current thresholds.
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1) For a full list of bodies, see Schedule 1 of the Public Supply Contracts Regulations 1995
2) There are certain exceptions
Office of Fair Trading to review public sector procurement
The OFT is to commission a preliminary
research study into the impact of public
sector procurement on competition.
External consultants will be asked to
undertake a broad-ranging economic
analysis of how public sector
procurement might affect competition,
both positively and negatively. The
research will also aim to identify
specific markets where public
procurement is likely to be affecting
competition. One possible example is
whether procurement practices might
be restricting entry by new firms;
another is whether they might be
enhancing competition - and its
benefits - through openness to new
and innovative ideas.
The OFT expects the study to highlight
areas for further market studies under
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the Enterprise Act 2002. It is also likely
to be of interest to other parts of
Government, in particular the Office of
Government Commerce and the work
it is conducting in relation to
competition and long-term capacity
planning.
Market investigations form an
important element of the 2002 Act.
They give the OFT and certain
regulators the ability to refer markets
to the Competition Commission for a
public investigation. The OFT may refer
a market for investigation if it has
reasonable grounds to suspect that one
or more features of a market restricts
or distorts competition. A particular
feature might be:
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the structure of the market
concerned (i.e. the current form of
Government regulations, or simply
the fact that the market has a
limited number of players); or
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the behaviour of persons supplying
or purchasing goods or services on
the market.
The outcome of the OFT's current
commissioned research, especially if it
does lead to a reference being made,
could ultimately enhance the
opportunities for small and medium
sized enterprises to win government
procurement contracts. We will keep
you apprised of developments.
For further information visit the OFT's
website at www.oft.gov.uk or contact
Neil Baylis
tel: 020 7360 8140
email: neil.baylis@ngj.co.uk
Spring 2004
Important guidance on the
procurement of waste management
projects
The long awaited guidance from the
Public Private Partnerships Program
(the "4ps") on waste management
projects procurement is expected to
be published imminently.
Included in the pack will be model
documentation that is likely to form
the template for future projects in the
waste management sector. The
publication follows on from the draft
guidance that was published for
consultation in November, and is
expected to include a simplified model
of the payment mechanism that was
much criticised at the time. Whilst
the work of 4ps is generally to be
commended it does not, and cannot,
provide a solution to all the issues that
might arise in waste management
projects of differing size, scope,
geographic region and urban/rural
location.
The challenges for local authorities
and the industry are to take the best
of the guidance and to refine it to suit
local circumstances and provide best
value for the public.
Stamp Duty Land Tax Relief for private finance
initiative projects
The Stamp Duty Land Tax
(Amendment of Schedule 4 to the
Finance Act 2003) Regulations 2003
have come into effect to give relief for
PFI land transactions under Stamp
Duty Land Tax (SDLT). SDLT is the new
tax that has replaced stamp duty for
all land transactions in the UK from 1
December 2003.
PFI transactions can take the form of
lease and leaseback transactions,
giving rise to two land transactions for
SDLT purposes. Furthermore, the
services to be rendered by the
provider would on a strict technical
basis have been taken into account as
part of the consideration and subject
to SDLT.
Generally, under the SDLT regime,
where one interest in land is
exchanged for another interest in
land, SDLT is charged on both halves
of the exchange on the market value
of each interest. Furthermore, where
the price for the purchase of land
takes the form of services or works,
SDLT is charged on the market value
of the land.
A relief was needed to ensure that
land transactions in PFI were not more
harshly dealt with under the SDLT
regime than under the stamp duty
regime. Such a relief has been
introduced, so that:
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the value of the leaseback is
ignored as consideration;
the value of any surplus land
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transferred is ignored as
consideration; and
the value of any works or services
is ignored as consideration.
Accordingly, in the case of land
transactions in PFI, broadly, SDLT will
only be chargeable on any cash
premium or rent paid by the private
sector body and public body.
If you have any queries on this relief
or PFI taxation matters generally
please contact either:
Richard Woolich
tel: 020 7360 8270
email: richard.woolich@ngj.co.uk or
Victoria Green
tel: 020 7360 8202
email: victoria.green@ngj.co.uk
5
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Housing
£600m for housing PFI
The UK Government is allocating
£600 million in the current funding
round to support its decent homes
initiative. The funds will go towards
both repair and renewal (called
Housing Revenue Account or HRA)
projects and new build projects. Two
of each have already been signed out
of the 22 pathfinder and second
round schemes in procurement.
Public Private Partnerships
Programme (the "4ps")
Following on from the procurement
pack for waste management projects,
the Public Private Partnerships
Programme (the "4ps") has initiated
the production of a similar pack for
housing PFI. The recently launched
consultation draft of the housing PFI
procurement pack includes a detailed
draft payment mechanism and output
specification.
There is also a paper considering
issues arising out of tenants' right to
buy, which can result in properties
being withdrawn from a project, with
the consequent uncertainties this
would create. 4ps' efforts to address
this issue, which is unique to housing
PFI, is to be welcomed. One of the
most helpful elements of the draft
pack is a risk issues table. This matrix
seeks to identify the potential risks to
housing PFI projects and proposes
model solutions. A number of these
risks are common to many PFI
projects (eg ground conditions,
insurance, health and safety) and
many more are specific to housing
PFI. The period for comments on the
consultation draft pack closed on 27
6
February 2004, and the final version
is awaited with interest.
Affordable Housing Group
The affordable housing sector is
undergoing considerable change and
facing many new challenges.
Nicholson Graham & Jones has
formed an Affordable Housing Group
to draw together its expertise in
projects, finance, real estate and
construction in this important sector.
The work of the Group will be of
interest to all those involved in the
sector including:
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those involved in social housing
PFI or in the diversification of
housing associations into nonhousing PFI, social care or
education;
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developers involved in
regeneration projects or working
with housing associations to
unlock the potential of mixed use
or residential sites;
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housing associations looking to
merge or restructure, or to expand
their development programmes;
and
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lenders looking to develop
innovative structures secured on
affordable housing stock, or
offering development finance.
Please contact Sebastian Charles
tel: 020 7360 8205
email: sebastian.charles@ngj.co.uk
or your usual contact at Nicholson
Graham & Jones for more
information.
Spring 2004
EU enlargement
On 1 May 2004, ten new Member
States will join the European Union
(EU): Cyprus, Czech Republic, Estonia,
Hungary, Latvia, Lithuania, Malta,
Poland, Slovakia and Slovenia. This is
the most dramatic change to the EU
since its creation and will present
significant challenges for all twenty
five Member States as well as for the
institutions of the Union itself.
The benefits of enlarging the EU to
include the 10 new Member States
are political, economic, and cultural
and are described by the European
Commission in the following terms:
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the addition of more than 100
million people, in rapidly growing
economies, to the EU's market of
370 million will boost economic
growth and create jobs in both old
and new member states;
there will be a better quality of life
for citizens throughout Europe as
the new members adopt EU
policies for protection of the
environment and the fight against
crime, drugs and illegal
immigration;
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the arrival of new members will
enrich the EU through increased
cultural diversity, interchange of
ideas, and better understanding of
other peoples;
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enlargement will strengthen the
Union's role in world affairs - in
foreign and security policy, trade
policy, and the other fields of
global governance; and
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enlargement will entrench
advantage of the single market
through increased trade.
Economic growth in existing States
will be stimulated as trade and
investment opportunities increase
with the new States. Estimates
suggest that enlargement could
increase EU GDP by 11 billion
euros a year and create up to
300,000 new jobs in the existing
Member States;
democracy and respect for human
rights. This will also help tackle
asylum. New Member States will
have to demonstrate their
adherence to EU norms, including
respect for minorities, and citizens
of new Member States will have
no grounds on which to seek
asylum in other Member States.
There is no doubt that the
enlargement of the EU will present
significant commercial opportunities
to EU businesses and the wider
economy. The perception that the
accession countries of Central and
Eastern Europe are difficult places to
do business, with difficult legislation,
local political control over decisionmaking on all contracts and state
domination of markets no longer
reflects reality.
In certain countries, the regulations
and procedures for establishing
companies are easier than in many
current EU Member States, and many
of the accession countries are offering
banking services on a par with UK
banks. Application of Community
laws and preparations for the single
market are having major effects and
the economies of these countries will
increasingly fall in line with EU best
practice. The European Commission
anticipates the commercial
implications of EU enlargement being
as follows:
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enlargement will generate
economic growth in both existing
and Member States. In the new
states, the reform/development of
economic systems into market
economies will generate increased
productivity and efficiency and
allow them to be able to take
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enlargement will bring down
barriers to trade and business. EU
businesses will benefit from access
to the largest single market for
trade and investment in the world;
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membership of the EU will bring
political stability to the new
democracies of Eastern Europe as
they reform their legal and
government institutions as part of
the accession process. Such
stability is important in generating
investment not only from within
the EU but also from outside it,
thus contributing to further
economic development;
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the international competitiveness
of EU businesses will increase.
They will benefit from cheaper
inputs, a larger and more diverse
labour market, additional
opportunities for technology
transfers and greater economies of
scale;
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the EU will have a stronger global
voice, as its enlargement will bring
the population to over 500 million
(more than the USA and Russia
combined), so giving more weight
in international negotiations such
as trade policy;
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companies in existing Member
States will have more confidence
with those in the new Member
States, as they will be operating
on a level playing field in terms of
EU legislation. Again, business
confidence is an important factor
in generating investment and
encouraging enterprise and
initiative;
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membership of the EU and the
euro will increase the amount of
foreign direct investment in the
new Member States; and
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the regional aid programmes,
which attempt to redistribute
funds from the wealthier regions
of the EU to the poorer ones, will
be made available to the new
Member States. This will help
develop these countries and
improve infrastructure.
Improvements in infrastructure will
again be a benefit to trade and, in
theory, all countries involved will
benefit - the applicant country
from improved internal
infrastructure and the existing
states from the extra revenues
earned from new trade.
Nicholson Graham & Jones has ties
with firms in all the new Member
States and is well placed to give
advice through these contacts and in
its own name on all legal issues
facing businesses in the enlarged EU.
We are preparing an EU accession
document, which discusses the
impact of EU accession and includes
information on projects.
If you would like a copy, please
contact a member of the projects
team or Ian Meredith
tel: 020 7360 8171
e-mail: ian.meredith@ngj.co.uk
stop press
Nicholson Graham & Jones are
advising the Mexican Government on
the structuring and procurement of its
Customs accommodation project in
48 sites around Mexico. Head of the
Projects Group, Christopher Causer, is
leading the team.
For more information contact one of the following partners:
Christopher Causer
christopher.causer@ngj.co.uk
tel: 020 7360 8147
Nicholson Graham & Jones
110 Cannon Street, London EC4N 6AR
020 7648 9000
The contents of this projects bulletin
have been gathered from various
sources. You should take advice before
acting on any material covered in this
publication.
© Nicholson Graham & Jones 2004
8
Carolanne Cunningham
carolanne.cunningham@ngj.co.uk
tel: 020 7360 8160
Stuart Borrie
stuart.borrie@ngj.co.uk
tel: 020 7360 8155