This article is an excerpt from The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.
Concession contracts are contracts that do not fit the traditional scope of a procurement, as they are not based on government expenditure, but are instead based on the exploitation of a commercial opportunity. The opportunity itself generates revenue paid to the contractor, thus removing the requirement for government funding. In comparing Canadian and European Union practices, this discussion sets out how a concession contract varies from traditional procurement contracts and how it should be treated for the purposes of tendering and awarding contracts according to the applicable public sector principles of fairness and transparency.
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The Canadian Approach: Outside the Threshold of Procurement
To understand the application of concession contracts, it is imperative to first understand the threshold applicability of the procurement rules. For example, for the Canadian Free Trade Agreement (CFTA) procurement rules or other Canadian trade treaty rules to apply, there is a minimum government expenditure required. The valuation of government expenditure has been subject to litigation in Canada. Prior to the CFTA, the threshold value of a procurement was defined in Article 518 of the Agreement on Internal Trade (AIT) as “the estimated total financial commitment resulting from a procurement”. In its January 2002 decision in BCE Nexxia Inc. v. Canada (Commissioner of Corrections), Canada’s Federal Court of Appeal dealt with a concession contract for phone services in a correctional facility and analyzed the quantifiable value of government expenditures based on the financial commitment aspect. The finding was related to the source of the funds, which were paid by inmates in the correctional facility who used the phone services and not by the government. The Federal Court of Appeal found that there was no financial commitment by the government and therefore no procurement value for the purposes of the procurement treaty.
With the new rules under the CFTA, the wording for valuation of government contracts has evolved to the following provisions at Article 505, which states that:
In estimating the value of a procurement for the purpose of determining whether it is a covered procurement, a procuring entity shall:
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estimate what the value would be as of the date the tender notice will be published; and
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include the estimated maximum total value of the procurement over its entire duration, whether awarded to one or more suppliers, taking into account all forms of remuneration, including:
i. premiums, fees, commissions, and interest; and
ii. the total value of options if the procurement provides for the possibility of options.
As this wording has not yet been litigated, there is no absolute certainty as to what would be qualified as a procurement value. However, there is nothing in the new wording to suggest that the prior BCE Nexxia Inc. v. Canada (Commissioner of Corrections) decision, based on the updated language, would have been decided differently, as there would still have been no government expenditure in the form of premiums, fees, commissions, or interest. Whether a contract would be quantified to have a procurement value would depend on the nature of the project and whether the premiums, fees, commissions, or interest, if any, were to accumulate to meet the threshold contract value amount.
In Canada, there has been no special treatment of concession contracts to date. However, other jurisdictions that were previously in the same situation of lacking a clear governance structure for managing concession contracts have since advanced new contracting rules. In these jurisdictions, concession contracts and procurements have been treated as mutually exclusive and new protocols have been developed to manage the award of concession contracts.
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Treatment of Concession Contracts in the European Union
For the European Union, concession contracts are intentionally defined separately from other types of procurements in order to create a differentiation in how concession contracts are awarded. The purpose of concession contracts is to enable public entities to expand infrastructure and development.
In this process, expansion and development occurs by government entities engaging operators to provide services or construct infrastructure, whereby the operator is remunerated by the capitalization of the service provision or infrastructure construction by third parties, instead of by public funding.
This differs from traditional procurement contracts, which are paid for directly by the public institutions with the funds of the public institution. Under the European directive, concessions contracts are defined as follows:
Concessions are contracts for pecuniary interest by means of which one or more contracting authorities or contracting entities entrusts the execution of works, or the provision and the management of services, to one or more economic operators. The object of such contracts is the procurement of works or services by means of a concession, the consideration of which consists in the right to exploit the works or services or in that right together with payment. Such contracts may, but do not necessarily, involve a transfer of ownership to contracting authorities or contracting entities, but contracting authorities or contracting entities always obtain the benefits of the works or services in question.
Historically within European jurisdictions, concession contracts have not been regulated by open competition rules. As a result, much litigation has surrounded complaints from contractors for unfair contract awards, and, as in the type of analysis taken in the Canadian BCE Nexxia Inc. v. Canada (Commissioner of Corrections) case, the European courts have ultimately found that if a contract is a service concession contract, then procurement legislation typically does not apply.
Within the EU and the United Kingdom, challenges have been made with regards to non-application of the general procurement legislation. When analyzing the applicability of the legislation for concession services, the courts repeatedly found that the procurement legislation was not in effect for the tendering of those types of contracts, and therefore any complaint with regards to the procurement legislation was rejected.
Given the large number of government contracts being classified as concession contracts and thereby being outside the purview of the procurement rules, the EU recognized a need to close the governance gap. The European directive for awarding concession contracts was enacted in 2014, in order to create a governance framework distinct from traditional procurement rules, while still applying transparency and open competition standards appropriate for government contracting.
While, within Canada, there has been a general tendency to intermingle the award of concession contracts within general procurement rules, or to simply leave the award of such contracts open to ad hoc and informal award procedures, neither of these courses is recommended. Rather, in jurisdictions lacking formal rules, concession contracts should be approached in accordance with relevant case law and international developments from more advanced jurisdictions. In summary, concession contracts should be expressly excluded from general procurement rules, but should then be made subject to their own open tendering rules along with exemptions that are more aligned to this class of contracts.
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European Treatment Regulates Concession Contracts
The European directive on concession contracts has helped to narrow the discrepancy between the treatment of traditional public contracts that must observe public procurement requirements and concession contracts. The essential impact has been to create a preventative mechanism that does not allow government organizations to directly award contracts without competition just because they are categorized as concessions.
In the European market, the directive has established that a concession contract is not a limitless opportunity for the provision of the services associated with a government tender. The duration for a concession contract should therefore be established based on the potential for the concessionaire to recuperate the investment and also obtain an additional return on the investment. A contract duration that accomplishes both goals will be considered a reasonable duration for the contract.
The general principles of the concession contract requirements, as denoted by the European Directive on Public Procurement, include:
- The contracting authority has the freedom to determine the tendering procedure subject to the European directive.
- The contracting authority must observe procedural fairness requirements and, specifically, these requirements should not allow the opportunity for any entity to provide information in a discriminatory fashion that could allow any bidders an unfair advantage.
- Recommendations for Concession Contracts in Unregulated Jurisdictions
Based on the above-noted considerations, the following governing principles are recommended for managing concession contracts in Canada and across other unregulated jurisdictions:
- Standard transparency and open competition rules should be followed unless a valid exemption to open competition can be established. To ensure that contract award decisions are made in a defensible manner, those rules should include (i) ethical guidelines; (ii) open tendering protocols; and (iii) legal due process standards.
- Given the longer-term investment with concession contracts typically required by the contractor before profit is realized from third parties, the thresholds for open tendering should be set at contract values that are significantly higher than those set for the open tendering of procurement contracts.
- For the purposes of valuation of contract value, since no government funds are spent on concession contracts, the estimated value of the profit to the contractor should be used in calculating the contract value to determine whether it should be put to open tender.
- Exemptions to open tendering for concession contracts should include:
i. Contracts that are awarded to service a public purpose or provide a public purpose with little profitability to the service provider (including, but not limited to, non-profit services or other break-even initiatives);
ii. Situations where the revenues earned by government from its share of the concession’s profits would make it significantly more advantageous to extend the incumbent’s contract rather than risking a retendering that could compromise the public institution’s financial position, either due to a lack of competing bidders or transition costs; or where an alternate regulation or law has directed the award on the basis of an exclusive right; and
iii. Other grounds that are typically exempt from open tendering for traditional procurement contracts, including no-bid situations, urgency, exclusivity, proprietary rights, prototypes, or exempt service categories, etc.
Final Considerations
The award of all government contracts should be based on transparent and defensible procedures. Public institutions should not use the governance gap created by local procurement rules to avoid proper tendering practices when awarding concession contracts. While tendering rules need to be adjusted to the unique elements of concession contracts, whenever possible the general norms of open competition should be adopted when awarding those concession contracts.
