Posted: 22/11/2019
A recent Court of Appeal case (Ocean Outdoor UK Limited v The London Borough of Hammersmith & Fulham [2019] EWCA Civ 1642) has clarified the distinction between services concession contracts, regulated under the public procurement regime, and other commercial arrangements entered into by local authorities. Where an authority allows another party to use its assets to provide services, the key distinction is whether those services are being provided on behalf of the authority (which may need to provide them under its statutory duties, or to further its public functions), or whether the services are undertaken by the other party for its own commercial reasons.
Anyone driving in or out of London on the west side is likely to be familiar with the two ‘Towers’ on either side of the Hammersmith flyover, on which large digital billboards target the spend of motorists. Given the volume of traffic crossing the flyover, these advertising sites reach a huge out-of-home audience, and so represent a significant commercial asset for whoever owns them.
The owner is in fact the London Borough of Hammersmith and Fulham, which, being a local council, is subject to public procurement law. The exploitation of the Towers has now been the subject of a Court of Appeal judgment, which gives a useful steer to any public body looking to commercialise its assets.
At issue was whether the contract under which the council allowed Outdoor Plus Limited to exploit the Towers was a concession contract, regulated by the Concessions Contract Regulations 2016 (which implemented the EU Concessions Directive 2014/23 EU). If this was a regulated concession contract – as argued by Ocean Outdoor UK Limited, the previous ‘occupant’ of the Towers which had now been outbid by Outdoor Plus – then the council’s award process would have been defective, and Ocean might have been able to claim damages.
Until recently, the award of concession contracts by public bodies was not regulated to the same degree as ‘core’ public contracts for the supply of goods or services, or the carrying out of works. Before the 2014 directive, a ‘works’ concession (for example, a contract to build a bridge with the opportunity to recoup tolls from motorists) was subject to some formalities, whereas a ‘service’ concession (for example, a contract to run a local authority swimming pool in return for ticket revenue) was not. The award of such service concessions would only be subject to the broad ‘EU Treaty principles’ (such as proportionality, transparency and non-discrimination) where the opportunity would attract ‘cross-border interest’. Accordingly, a formal advertising process was, in practice, only likely where a service concession would clearly be the subject of competitive interest from bidders from other EU member states. The 2014 directive sought to change that, and imposed a uniform regime across the EU for the advertising and award of concession contracts, whether covering works or services. The directive was implemented in the UK by the Concessions Contract Regulations 2016.
The Towers case revolved around two sources: the definition of a ‘concession contract’ in the regulations, and the recitals to the underlying directive. EU directives contain lengthy recitals which, although not operative provisions, elaborate on the policy purposes and intended effect of the legislation.
The key definition states that a contract will be a regulated concession contract where:
This model is obviously popular with public bodies that wish to push some of the risk involved in the provision of local services out to the private (or third) sector.
The relevant recitals included recital 11, which stated that “The object [of concession 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”. Recital 14 contrasted such concession contracts with authorisations or licences which set out the conditions for an economic operator to carry out an activity, but which did not impose obligations on that operator to perform the activity, while recital 15 clarified that agreements giving the operator the right “to exploit certain public domains or resources”, under which general conditions for use might be set out but without procuring specific works or services, were likewise not concessions in this context.
Ocean argued that the Towers contract was indeed a concession contract on this basis: it was asserted that Outdoor Plus was entrusted with the provision of advertising services, under a contract for pecuniary interest, and assumed the risk of exploiting the Towers (in that the fees it would charge to advertisers might not allow it to recoup the rental fees it would pay to the council). It was also asserted that the ‘land exemption’ in the regulations (which provided that the regulations did not apply to services concession contracts for the acquisition or rental or land, buildings, or interests or rights over them) did not apply, on the basis that any land element was incidental to the advertising concession.
The Court of Appeal rejected Ocean’s arguments: this was not a concession contract under the regulations. In reaching judgment, the court focussed on the following issues:
To come within scope, the services in question must be ones that the contracting authority would otherwise be obliged to perform itself – that is, services that it had a statutory duty to provide, or which were otherwise services it would provide in accordance with its functions or in furtherance of its strategic objectives. This was supported by the recital that referred to contracting authorities always obtaining the benefit of the services, and by the wording of the definition of concession contract that referred to contracts under which the authority ‘entrusted’ the provision of services to the operator.
In other words, the regulations covered those services that would otherwise fall to the authority itself to provide, and accordingly, were ones that the provider (the concessionaire) would be obliged to provide under the terms of the contract. By contrast, advertising at the Towers was not a duty of the council, or a service it might otherwise provide to its residents as part of its functions.
The court also found that, in terms of the definition of concession contracts, the council did not ‘entrust’ the performance of advertising services to Outdoor Plus (in the sense that Outdoor Plus would be contractually obliged to perform those services on behalf of the council), so much as allow Outdoor Plus to carry out those activities on a council-owned structure. It was relevant that the contract contained no positive obligation to carry out advertising (although the display of static advertisements was the permitted use), even though there was an obligation to use all reasonable endeavours to promote the Towers so as to maximise income.
Finally, the court found that the land exemption referred to above did indeed apply: this was in fact “precisely the sort of situation which the land exemption was designed to cover”.
In a nutshell, perhaps the critical distinction in this case (albeit not considered in quite these terms by the Court of Appeal) was that here the council was selling, not buying (ie procuring): it was selling access to a valuable asset (through a kind of auction process) rather than looking to buy advertising services through a concession mechanism. Bidders were invited to make offers as to how much they would pay in order to have the use of the site. The fact that the bidder would use the Towers for advertising was, in a way, incidental, and was only (from the council’s perspective) a necessary adjunct to realising the Towers’ commercial value to the council.
By contrast, when a public body procures services, it is outsourcing the provision of services that it might equally have provided itself to service users on an in-house basis. For example, where a local authority has duties to provide recreational facilities (eg swimming pools), it has a choice whether to run the pool directly with its own staff; to pay a third party to manage the pool under contract in return for service charges; or to entrust the running of the pool to a third party under a concession contract, in return for allowing the third party to exploit ticket sales. The end result is the same, in that the council is ensuring the provision of the pool to its residents, and in the case of a concession contract on that basis, a key provision will be the obligation on the concessionaire to provide the services throughout the contract term. By contrast, in the ‘Towers’ case, the council was not using Outdoor Plus to operate advertising services (under whatever commercial model) that the council would otherwise have been providing itself.
It appears that in the Towers case, the rent paid to the council was fixed, and did not operate as a function of the fees charged by Outdoor Plus to advertisers. However, our view is that even if part of the rent was calculated on a turnover basis (perhaps with a requirement to maximise income accordingly), that would not have affected the issue, since the basis of how rent is calculated is a commercial matter and does not itself affect the question of whether the council was entrusting the provision of services for its own benefit to an operator.
Finally, it is also worth noting that in arrangements such as this, there are indeed some other duties to which the council could be subject and of which it should be aware: if it sold access to the asset at an undervalue, it could in some circumstance be found to have given illegal state aid to the beneficiary; and a local authority has certain ‘best value’ duties as well as express ‘best price’ duties for land disposals that may be relevant (which are not inconsistent with the state aid considerations).
This case suggests that a public authority looking to invite bids in a scenario where it has doubts whether the concessions regime would apply could ask itself the following questions:
If the answer is yes, then the authority is procuring services, and (if the authority is not providing in-house) the public procurement regime will apply. Whether the resulting contract is structured as a services contract, or a services concession, is a strategic and commercial matter but the provider must of course have clear contractual obligations to supply services to given levels for the duration of the agreement.
If the answer to the first question is no, then this is likely to be a ‘Towers’ situation, outside the concessions regime: the authority’s purpose in allowing the other party to carry out activity is to achieve a commercial return from its assets. The other party will carry out relevant services in order to generate its own revenues, but the authority’s interest in those services is as the basis of its own revenue stream, not because of the nature of the services themselves.
It follows that in a ‘Towers’ situation, it may be helpful if the contract does not impose obligations on the other party to carry out services. It may however set out conditions and restrictions to ensure the lawful and proper use of the authority asset, and it may even provide for an element of ‘turnover rent’. The commercial reality is that it is in the authority’s interests that the other party ‘makes a go’ of its enterprise, since that bolsters the profitability of the asset, but that common interest does not make the relevant activity ‘public services’ carried out on behalf of the authority.
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