Major infrastructure and energy projects in CEE Public procurement rules

Case Study: Poland

The European Union will invest €170 billion in ten former Eastern block countries in Central and Eastern Europe between now and 2020. The majority of this money will be invested in major infrastructure and energy projects and be subject to public procurement rules.

With the global economy stuttering, this represents a significant opportunity for the construction/engineering industry. These projects will be viewed as relatively low risk compared to projects in emerging markets and offer revenue growth at a time when established western economies are not investing in major infrastructure/energy projects on this scale. International EPC Contractors, supply chain and consultancies will all be considering a focus on projects in this market place.

In this article, we focus on the characteristics of the tendering rules for public procurement projects in Central and Eastern Europe (CEE), look at how those rules are applied in Poland (the largest market in CEE) and how to avoid falling foul of the rules.

Introduction

Almost all major infrastructure projects procured by public bodies or utilities in the European Union (EU) are governed by EU Directives which have in turn been implemented in national legislation.

As the national legislation governing public procurement in each EU member state derives from the same Directives, the good news is that the principles applied in each country are very similar and are recognisable to anyone tendering in the different EU states.

However, each country has scope to implement those Directives in slightly different ways to reflect their local legal culture and business customs. Some similarities can therefore be illusory and subtle differences can trip up unwary tenderers.

Fail to comply with the relevant procurement rules and you will be disqualified from any tendering process.

EU public procurement principles

The core EU public procurement principles include:

• The public procurement rules in each state apply to public sector “contracting authorities”, including state, regional and local authorities, and bodies governed by public law.

• A contracting authority wishing to award a contract (other than one which is excluded from the rules) for “works”, “supplies” or “services” will need to comply with the rules if its value exceeds a specific financial limit.

• The current threshold for works contracts is €5,186,000 (£4,322,012). Separate (lower) thresholds apply to supply and services contracts.

• Contracting authorities must treat all suppliers equally and in a non-discriminatory way (e.g. not setting tender requirements which are easier for locally based contractors to comply) and act in a transparent manner.

• Contracting authorities must run a tender exercise following one of the specified procurement procedures in awarding its contracts – either the “open”, “restricted”, “competitive dialogue” or “negotiated” procedure – and follow certain minimum time limits in carrying out the tender exercise.

If a contracting authority breaches any of its duties and/or awards a contract without following a proper tender process, it will be at risk of a procurement challenge from unsuccessful suppliers or others within the market.

Successful claims can result either in a contract being cancelled, a fine and damages claims.

Case Study: Poland

All of these principles apply across the EU.

However, different states implement the core principles in a slightly different manner. There are many requirements which need to be observed arising from local legal systems and business culture which may change the practical application of the core principles.

In order to explain how the Polish authorities approach procurement, it assists to compare it to another long established system such as the procurement system in the UK. Here are some examples of differences between Poland and the UK:

• There are a significant number of formalities required by Polish contracting authorities to protect tenderer commercial information and to evidence compliance with tax and company solvency.

• It is a common requirement for documents submitted with tenders in Poland to be “notarised”. See the case study below for more information in the context of criminal convictions. Notary practices in Poland differ from those in other parts of CEE and the UK.

• Competitive dialogue is used conservatively. Polish authorities procure projects using the open or restricted procedures which in the other states, such as the UK, would use competitive dialogue. Arguably this increases the risk of a “lowest cost wins” approach and less opportunity for contracting authorities to fully explore different potential solutions and nuances in their own requirements.

• Clauses in Polish public contracts are often drafted heavily in favour of contracting authorities with high contractual penalties and no liability cap. There is a general reluctance to move from this position even where commercially this may offer a better option. Contractors should be aware of how these cultural issues may differ from what is considered the norm in international contracting.

• Bid bonds are used commonly in Poland as a matter of routine.

• Detailed letters of reference from previous clients must be included in tender submissions as evidence of previous experience. This is in contrast to other jurisdictions where examples of experience are commonly given in the tender documents but with the contracting authority following up references only at a later date should the tenderer be successful.

Whilst to some this will appear symptomatic of a greater degree of bureaucracy surrounding public procurement in the CEE and specifically Poland, none of it is insurmountable with adequate forward planning.

The lesson for tenderers is of course to comply with the formalities as any failure to do so, no matter how small, is likely to result in exclusion from the tender.

Case study: Proof of no convictions

A classic example of the differences in formalities between Poland and the UK is in respect of evidence of criminal convictions.

For many EU public procurement projects, tenderers are required to provide evidence they have not been the subject of a court conviction for corruption or fraud. In Poland this requirement applies not only to legal entities but also any individuals, including company directors and any person having powers of representation or decision-making. This is in contrast to, for example, the UK where documentary evidence is not commonly required.

We sometimes see UK companies submitting with tenders to Polish contracting authorities certificates issued by the UK Disclosure and Barring Service (DBS) in respect of criminal convictions of individuals. However the DBS provides these for employment recruitment purposes only and the Polish National Appeal Chamber (which hears public procurement disputes) has refused to accept that DBS certificates meet the requirements of Polish law.

Under the EU Directives, where certificates regarding criminal convictions are not available they may be replaced by a declaration on oath or by a solemn declaration made before a notary.

Public procurements in emerging Europe often require that a range of documents submitted as part of tenders are “notarised”. This requires that signatures are made in accordance with strict procedures before the competent authorities “in person”. Whilst this is an established principle in UK and other common law jurisdictions it is used far more routinely in emerging Europe jurisdictions.

Possibly because there is generally a lower awareness of what “notarisation” means in the UK in particular, it is not unusual to see tenderers based in the UK (and elsewhere) submitting tenders in Poland with “witnessed” or “certified” signatures but which do not comply with the notarisation formalities. This brings a strong risk of disqualification from the tender process.

Aversion to risk – procurement challenge

Whilst all contracting authorities across the EU are very focussed on avoiding any risk of procurement challenge we find this particularly acute in Poland where there is a greater reluctance to consider any doubts in favour of tenderers.

This may be partly because of the greater propensity in Poland for other tenderers to mount a procurement challenge if they suspect foul play. Whilst procurement challenges are certainly on the increase in states such as the UK, they are still seen as the exception rather than the rule.

In Poland, it is almost expected that there will be a procurement challenge. Fast track challenge procedures and relatively low fees in Poland contributed to 3,044 procurement cases in 2013 and the figures are rising.

Infrastructure contracts in Poland

The impression of aversion to risk on the part of Polish public bodies manifests itself not only in the approach to the procurement procedure itself but also to the method of contracting used and changes to the contract post-tender.

Poland has a mature construction and infrastructure market for both conventionally procured projects and established contracting principles. For example both domestic and international contracts in Poland tend to use

the International Federation of Consulting Engineers forms of contract (FIDIC), with Particular Conditions amended to comply with Polish law (including the Construction Law 1994 and Polish Civil Code 1964).

However, their use tends to be focussed on fixed price lump sum solutions. For some projects this is absolutely likely to be the correct solution. But as yet there has been only a relatively limited exploration of other procurement models which in other markets and sectors, such as the UK, Australia and USA and the oil and gas sector are considered relatively mainstream.

For example, “target cost” contracts where the contractor is paid on a cost reimbursable basis and the contractor and employer share the risk of cost overrun (“pain”) and underrun (“gain”) are quite common in UK public and utility procurement but are still relatively rare in Poland.

We also find that the instinct of Polish contracting authorities is to automatically pass construction risks to the contractor. As noted above, Contracts without liability caps but with heavy contractual penalties are not uncommon. With clients unwilling to negotiate on these issues, contractors should consider how to price for these risks in their tenders. There is a degree of inefficiency in this approach given that this will result in higher tender prices and yet may be unnecessary if the contracting authority is actually best placed to manage that particular risk.

Changes to the contract

This does not mean that tenderers cannot and should not seek to influence the terms of contracts proposed by contracting authorities within the rules applicable to the relevant procurement procedure.

However they should be aware that:

• Whilst in some circumstances there is scope for contracting authorities to change the terms of contracts pre-award (in response to questions and comments received from tenderers) provided all tenderers are treated fairly, it is relatively rare for them to do so. This is particularly the case where the open and restricted procedures are used. It is very important that the contract is reviewed in detail before the tender is submitted to ensure all risks are factored in to the bid.

• Tenderers should not expect to have the opportunity to stretch the permissible process of “clarification” of specific contract terms post-award to full blown negotiation of unpalatable terms. This principle applies in all EU states but, unlike some jurisdictions, Polish contracting authorities will adhere strictly to it, and will expect to contract on the terms set out in its tender documents.

• Once the contract is entered into Polish contracting authorities will adhere strictly to limits on the ability to subsequently modify that contract (for example decisions such as extending the duration of the contract

or its scope). If it was not envisaged in the original contract then a significant change is likely to require a new tender which of course the incumbent is not guaranteed to win. It is therefore vital to ensure that the grounds for change and additional orders are adequately covered by the contract.

Practical solutions

The opportunities for tenderers in emerging Europe are huge, particularly in infrastructure and energy.

However:

• Don’t underestimate the formalities which are required or the willingness of contracting authorities to disqualify tenderers for a failure to comply.

• Be prepared. Some of the formalities take time to put in place. Don’t wait for the tender notice before you have taken the steps necessary to comply with the formalities.

• Review the contract before you submit your tender. It will be too late if you want to make changes later.

• Take local advice – it will save you plenty of time and costs.

For a more detailed guide to Polish public procurement law download our mobile guide: Mobile Polish public Procurement law guide www.procurementexplorer.pl

Tomasz Zalewski

Partner

+48 22 50 50 796Tomasz.zalewski@eversheds.pl

Authors:

Simon Oats

Global Head of Construction and Engineering

+44 207 919 4750 simonoats@eversheds.com

For further information please contact:

www.eversheds.com©EVERSHEDS LLP 2015. Eversheds LLP is a limited liability partnership. DT04472_03/15

Chris Pickens

Partner

+44 161 831 8139chrispickens@eversheds.com