Public sector clients tempted to reintroduce cancelled projects as variations to existing PFIs may be breaking the rules

Innovative and pragmatic ways of working will be needed by public sector bodies seeking to minimise the impact of government cuts. Local authorities, NHS trusts and other clients are likely to look at existing PFI contracts to assess whether additional or new construction projects can be procured using the variations procedures (that are common to most PFI contracts).

This may be even more attractive if the private sector agrees to fund such a variation. In effect, the public sector would get the additional works or facilities management services, and pay later by an increase in the various PFI payments.

Putting aside questions about the private sector’s desire to fund such variations, all parties need to be warned that contracts for new works and services could conflict with the Public Contracts Regulations 2006 or breach other PFI obligations.

Local authorities and NHS trusts hit by the cancellation of Building Schools for the Future (BSF) projects and new-build hospitals respectively may consider it attractive to look to an existing PFI contract as a means to get additional works or services. However, opting to “push” schools that are covered by a signed (but cancelled) BSF strategic partnering agreement (SPA) into a variation procedure under an existing PFI contract may cause problems.

This is because the SPA gives the private sector an exclusive right to deliver school projects (with capital value of more than £100,000) to the local authority for 10 years. So a council opting to procure a single new school as a variation to an existing operating PFI contract is likely to face a claim for damages in breach of the SPA.

For hospitals, as the Building editorial of 16 July suggested, the focus will shift to smaller contracts. However, such contracts may be greater than the threshold for works contracts (currently £3,927,260), which tempts some to ask whether an OJEU contract notice needs to be issued in accordance with the regulations.

The applicability of the regulations relates to the impact of the variation on the original project agreement.

The regulations do not cover variations to existing contracts but this area has been developed by the case law from Europe, particularly Pressetext Nachrichtenagentur vs Austria. Pressetext forms what one may describe as the legal test in deciding when changes to an existing PFI project agreement will require compliance with the regulations - namely, that any “material contractual amendment” to an existing public works, services or supply contract potentially constitutes the award of a “new contract” for the purposes of the regulations. This would place a fresh requirement on the local authority or trust to conduct an OJEU tender process for the whole of the works or services to be covered.

One needs to consider whether the new works or services instructed as a variation will lead to the revised project agreement being “materially different in character from the original”; or will introduce conditions that (had they existed during the original tender exercise) would have allowed a successful tender from someone other than the current contract holder; or will extend the scope of the agreement considerably to encompass services not initially covered; or will change the economic balance in the agreement in favour of the private sector.

Amendments to existing project agreements necessitated by variations will, ordinarily, be minor technical adjustments. Further, existing express terms dealing with variations during the operating phase will, ordinarily, avoid the need for renegotiation of essential terms.

Each project ought to be looked at on a case-by-case basis. The risk of getting this wrong has an impact for the public sector, private sector and funders. Typically, a project company indemnifies the public sector party so incumbent project companies need to look carefully at the scope and impact of the requested varied works or services.

Innovation and pragmatism must be respected. But it would be most unfortunate if the need for work and/or misunderstandings about the OJEU process led to even greater hardship for public and private sectors.

Hamish Lal is head of construction at Jones Day