Reserved contracts for certain services under Reg. 77 Public Contracts Regulations 2015

Reg.77 of the Public Contracts Regulations 2015 (PCR2015) establishes rules concerning the possibility to reserve contracts for certain services to specific categories of providers, in line with Article 77 of Directive 2014/24. In short, this is fundamentally an anti-competitive legally-tolerated way of advantaging certain service providers in the award of public contracts and I cannot but repeat that I think it is a very bad idea in the long run. Pedro concurs.

As I already discussed (here), this is probably the novelty within the light touch regime applicable to the award of contracts for social and other specific services that better suits the regulatory needs implicit in the UK public sector reform strategy, since Art 77 Dir 2014/24 allows contracting authorities to reserve for the participation of given types of organisations (such as ‘public sector mutuals’, for instance) the award of contracts for certain services in the areas of health, social and cultural services, which basically comprise all, or the most relevant, medical services, personal services, educational and training services (including eLearning), sports and cultural services.

In terms of reg.77(1) PCR2015, contracting authorities may reserve to "qualifying organisations" (below) the right to participate in procedures for the award of reservable public contracts, which are those comprised in the categories listed in reg.77(2) PCR2015, which include 75121000-0 (Administrative educational services), 75122000-7 (Administrative healthcare services), 75123000-4 (Administrative housing services), 79622000-0 (Supply services of domestic help personnel), 79624000-4 (Supply services of nursing personnel), 79625000-1 (Supply services of medical personnel), 80110000-8 (Pre-school education services), 80300000-7 (Higher education services), 80420000-4 (E-learning services), 80430000-7 (Adult-education services at university level), 80511000-9 (Staff training services), 80520000-5 (Training facilities), 80590000-6 (Tutorial services), from 85000000-9 to 85323000-9 (fundamentally, all types of medical services), 92500000-6 (Library, archives, museums and other cultural services), 92600000-7 (Sporting services), 98133000-4 (Services furnished by social membership organisations), and 98133110-8 (Services provided by youth associations).

However, reg.77(6) PCR2015 determines that this does not apply in relation to the procurement of health care services for the purposes of the NHS within the meaning and scope of the National Health Service (Procurement, Patient Choice and Competition) (No. 2) Regulations 2013. This exclusion and its meaning is very unclear to me, particularly in view of the coverage given in reg.77(2) PCR2015, which includes a significant volume of services that can be procured for the NHS (should those not have been excluded, then?). Furthermore, in view of the special rules applicable to NHS procurement, it seems odd that no attempt to reconcile all these bodies of exceptional, sector-based procurement regimes is attempted [for discussion of the rules applicable to NHS procurement, see A Sanchez-Graells, “
New Rules for Health Care Procurement in the UK. A Critical Assessment from the Perspective of EU Economic Law” (2015) 24(1) Public Procurement Law Review 16-30].

The guidance offered by CCS in this regard does not sort out the issue, but seems to defer resolving the need for harmonisation of these competing regimes until after ongoing consultations: "At present, it is not possible to use the reserved contracts provision for healthcare commissioning by NHS England or Clinical Commissioning Groups in England. This is to ensure consistency with the general requirements in regulation 3 of the existing NHS (Procurement, Patient Choice and Competition Regulations) (No. 2) 2013 Regulations, in particular the prohibition on favouring types of provider. This position is subject to further consultation with the sector. Part of the role of the Mutuals in Health: Pathfinder Programme is to consider any potential legislative hurdles to the further development of health mutual in clinical services" (
Guidance on the light touch regime, 14). We shall wait for further developments.

In the cases where reserving contracts under reg.77 PCR2015 is possible, the contracting authority will need to make sure that the (type of) organisation chosen to be awarded the contract--ie the "qualifying organisation" meets all of the following requirements [reg.77(3)]: (a) its objective is the pursuit of a public service mission linked to the delivery of the services to be contracted; (b) its profits are reinvested with a view to achieving the organisation’s objective (and where profits are distributed or redistributed, this should be based on participatory considerations); (c) the structures of management or ownership of the organisation performing the contract shall be based on employee ownership or participatory principles, or shall require the active participation of employees, users or stakeholders; and (d) the organisation shall not have been awarded a contract for the services concerned by the contracting authority concerned pursuant to this special rules within the past three years.

The main (only) deviation between reg.77 PCR2015 and Art 77 Dir 2014/24 concerns the requirement for  structures of management or ownership of the organisation performing the contract to be based on employee ownership or participatory principles, or require the active participation of employees, users or stakeholders. Whereas Art 77(2)(c) Dir 2014/24 requires this without any qualifiers, reg.77(3)(c) PCR2015 includes the following possibility: "the structures of management or ownership of the organisation are (or will be, if and when it performs the contract) based on ...". 
This seems to aim to allow for entities in the process of becoming "qualifying organisations" to already tender for these reserved contracts, maybe also enabling for brake provisions (of the mutualisation process) linked to an eventual lack of success in being awarded the contract--ie, the government seems to be aiming to be in a position to ensure that mutuals are only created and go ahead if contracts are awarded to them, which would certainly make the mutualisation option much more attractive by reducing the risk undertaken by public officials seeking to spin-off from the public sector.

However, in my view, this is not necessarily in line with EU law, particularly because it refers to a future-looking contract compliance clause that triggers access to the competition for the reserved contract--which, in my opinion, is not compatible with the exceptional nature of this set of special provisions [for discussion of this type of requirements, A Sanchez-Graells, Public Procurement and the EU Competition Rules, 2nd edn (Oxford, Hart, 2015) 390].

On top of complying with the above requirements (of the Directive), the maximum duration of the contract shall not be longer than three years [reg.77(4)] and the call for competition shall make reference to  Art 77 Dir 2014/24, so that there is sufficient transparency on the use of this set of special rules [reg.77(5) PCR2015].

General comments
Under these special rules within the light-touch regime, contracting authorities seem almost completely free to decide to award the contracts to public service mutuals (and, most likely, to a specific public sector mutual, given their initial lack of capacity to tender for contracts to be awarded by contracting authorities other than the one they have just “spun-off”).
This creates a significant risk of ‘sweet deals’ aimed at supporting, fostering and consolidating public sector mutuals, which may well end up resulting in (3-year long, local) monopolies for the provision of those services in the hands of the newly spun-off public sector mutuals, which may extend their dominance beyond that point in time as incumbency advantages pile up. That would result in distortions of competition similar to those just identified by the UK’s Competition and Markets Authority (CMA) in the market enquiry on private health care services (final report here) and, as such, it is an undesirable prospect.

Generally speaking, it is worth stressing that public procurement rules and the general principles of public procurement can be applicable beyond the regulated cases, as the CJEU has been expanding the coverage of the procurement regime and systematically imposed certain obligations to the tendering of contracts not, or not-fully, covered by the Directives. Hence, the possibility for the CJEU to significantly restrict the discretion to resort to reg.77 PCR2015 / Art 77 Dir 2014/21 cannot be totally excluded. 
However, in recent cases such as Libert and Others (C-197/11 & C-203/11, EU:C:2013:288; see here) and Azienda sanitaria locale n. 5 «Spezzino» and Others (C-113/13, EU:C:2014:2440; see here), the CJEU appears to show very significant (and I would claim ‘excessive’) deference towards social and special services. Consequently, it may be unlikely to extend obligations to the award of contracts under reg.77 PCR2015. And, ultimately, I would think that this will be a provision mostly litigated at domestic level on grounds of judicial review due to deviations of power or excess of competences.