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Are You Caught by the Utilities Procurement Regulations?
1 February 2012
For much of the UK's rail sector there has not been a clear answer to this question since the Utilities Contracts Regulations 2006 ("UCR") came into force. Some answers have been provided in the latest judgment in the long running case between Eurostar and Alstom, handed down on 20 January 2012.
Background to the judgment
This litigation arose out of Eurostar's decision to award the contract for 10 new high speed trains to be operated on its services through the Channel Tunnel to Siemens plc rather than its original rolling stock supplier, Alstom. Alstom has brought various claims against Eurostar for breach of the UCR.
This judgment, Alstom Transport v Eurostar International Limited [2012] EWHC 28 (Ch), is from a preliminary issue that considered whether Eurostar was caught by the UCR at all. Mr Justice Roth had to grapple with complex interpretation of EU and UK procurement legislation. The judgment held that Eurostar was not caught by the regulated procurement regime. Whilst the decision may still go to appeal, as it stands this judgment provides some very welcome clarification on the question of whether train operators in England are subject to the procurement regulations.
When is a rail operator caught by the regulations?
A company is caught by the regulated procurement regime if it answers "yes" to two tests set out in the UCR:
The "Activity Condition" : does the company provide or operate a network providing a service to the public in the field of transport by railway? and
The "Status Condition": is the company a contracting authority as defined in the Public Contracts Regulations 2006 ("PCR"), a Public Undertaking as defined in the UCR, or subject to "special and exclusive rights" (which apply when a private company is placed by the State in a privileged position)?
The Activity Condition
The judgment explains what activities are caught under the Activity Condition:
- Providing and / or maintaining rail infrastructure (e.g. the track)
- Providing a railway service to the public at large, with legal requirements regarding conditions such as routes to be served and frequency of service.
Using this analysis, Eurostar, Open Access Operators and freight operators are not caught by the Activity Condition. Therefore they do not have to comply with the UCR and are free to procure contracts as they choose.
Franchised rail operations which are subject to legal requirements on routes and frequency of service will be caught by the Activity Condition.
Despite Eurostar not being caught by the Activity Condition, Mr Justice Roth helpfully went on to consider the application of the Status Condition.
The Status Condition
If an entity is caught by the Activity Condition, it will only be subject to the UCR if it is also caught by the Status Condition.
The overall aim of the Utilities Directive, transposed into UK law by the UCR, is to ensure that utility operators, which themselves may not operate in competitive markets, adopt transparent and fair procurement practices. Procurements should be free from any preference for suppliers from the member state in which they operate. Utilities caught by the Status Condition should either therefore be 'controlled' by a public body or operate without (or with very limited) competition.
The UCR contains a list of named entities caught by the Status Condition in the UCR (including Network Rail, Transport for London and Eurotunnel plc). There is also a catch-all provision which covers a 'relevant person'. A 'relevant person' is caught under one of three headings:
A contracting authority
The definition of a contracting authority is set out in the PCR and includes English central government departments, local authorities and other bodies that meet public service obligations and do not have a commercial or industrial character.
There is, however, a difference in approach between EU Directive (Directive 2004/17) and the UK's implementing regulations, the UCR. Under the English regulations only bodies in England can be a contracting authority. However, under the Directive a public body in any member state may be a contracting authority.
Mr Justice Roth considered that the domestic definition of contracting authority should not be interpreted in accordance with the Directive and so it did not extend to non-English bodies, stating that "in my judgment, that would go beyond the bounds of a generous, purposive interpretation" (paragraph 93 of the judgment).
In this instance, being 55% owned by the French State (a contracting authority for the purposes of the Directive, but not the UCR) meant that Eurostar was not caught by the UCR.
This will be of interest to any franchise operators owned or controlled by non-UK contracting authorities such as SNCF, Deutsche Bahn or NedRail.
A public undertaking
An entity is a public undertaking for the purposes of the UCR if one or more English 'contracting authorities' (as defined above) is able to exercise directly or indirectly a dominant influence over the entity.
In this instance Eurostar was held to be a public undertaking by virtue of the Department for Transport's (a contracting authority) ownership of London and Continental Railways ("LCR"). LCR has a minority shareholding in Eurostar which gave rise to certain contractual veto rights on some of Eurostar's business decisions. Mr Justice Roth held that because of this LCR had a dominant influence over Eurostar for the purposes of the 'public undertaking' test.
Neither of the above, but which carries out a relevant activity on the basis of special or exclusive rights
Historically, many franchise operators have considered that they are caught by the UCR on the basis that they might be operating under "special or exclusive rights" granted by the UK Government. However, there has always been debate as to whether the "special and exclusive rights" provision applies, given that franchises are awarded after an open competitive tender process run by the Department for Transport.
Mr Justice Roth gave the clearest indication to date that if asked the question an English Court would find that a franchise operator is not caught by the special or exclusive rights test. His reasoning is that:
(a) Recital 25 to the Directive states that contracts, rights or concessions that are obtained on the basis of objective, proportionate and non-discriminatory criteria do not enjoy special or exclusive rights.
(b) If an operator may face competition, then it is not in a position of exclusivity and the fact that the number of potential competitors is in practice limited is inherent in the nature of railway infrastructure.
(c) A franchisee faces competition in both the franchise bidding process but also, potentially, by virtue of the Open Access regime.
The EU Commission has also given a strong indicator that it would consider competitively tendered franchise operators as not caught by the" special or exclusive rights" test. In December 2011 the Commission set out proposals for modernising the utilities Directive. It clarified that a utility will not be deemed to have "special or exclusive rights" where the rights have been granted by means of a procedure in which adequate publicity has been ensured and where the granting of those rights was based on objective criteria.
Taken together, the judgment and EU Commission's proposals provide the strongest argument yet for rail franchise operators to argue that they are not subject to the UCR.
Alliances between TOCs and Network Rail
A number of TOCs have recently announced alliances with Network Rail, with more to follow. Under these arrangements, the TOC and Network Rail will share responsibility for the management of infrastructure on routes where the TOC operates services. Network Rail is caught by the UCR. TOCs will need to give careful thought as to how they structure alliances with Network Rail and the implications for their status under the UCR, as there is a risk that certain structures may result in procurements being within the scope of the Regulations.
Current trends in utilities procurement challenges
One of the primary mischiefs to which the regulated procurement regime was directed was to prevent public bodies from awarding contracts on the basis of national preference. It is therefore ironic, as Mr Justice Roth notes in his judgment (paragraph 27), that this case involved a disappointed French tenderer bringing a claim against a company that is majority owned by the French Government through SNCF, alleging that the procurement rules were breached through lack of equal treatment in the way the contract was awarded to a German company.
The irony observed by Mr Justice Roth is unsurprising. There has been a steady increase in litigation by aggrieved bidders in this field. Often challenges are brought on technical objections to the process even where there has been clearly no national preference in the award of the contract. Open Access Operators and rail franchisees will welcome this judgment.
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