UK: Building Schools for the Future: Key Issues Arising from Last Week's Cancellation

In his emergency budget speech delivered on 22 June, the Chancellor George Osborne said that the Government "would undertake a fundamental review of all capital spending plans to ensure that they are affordable and to identify the areas of spending that will achieve the greatest economic returns". The announcement by Education Secretary Michael Gove on 5 July of a complete overhaul of capital investment in England's schools – including the cancellation of the Building Schools for the Future (BSF) programme – brings home the realisation of what this might mean.

The Chancellor also said in his emergency budget that apart from the capital element of the £6.2 billion savings in 2010-11 (worth £2 billion a year until 2015-16), the Government "will make no further cuts in public sector gross investment compared with the plans that it inherited". This promise was repeated by Michael Gove last week. It appears that the BSF programme is being cancelled, in Mr Gove's words, because of " massive overspends, tragic delays, botched construction projects and needless bureaucracy" rather than as a result of a policy decision to stop building new schools. For example, it has been reported that Mr Gove has promised Sandwell Council in the West Midlands that he will look at "other ways" in which their planned schools building programme can be done.

An external review body looking into alternative approaches to capital investment in schools is due to report in the early autumn.

Nevertheless, the cancellation of the BSF programme has generated an angry outcry from all those affected, including Tory backbenchers, a reaction that was compounded by the serial inaccuracies in the lists issued by the Government of the schools projects that are unaffected, to be reviewed or to be stopped. As the dust settles on the lists, even more important questions arise over the consequences, both legal and commercial, following the cancellation of BSF to those who have invested in it since its inception in 2004.

The BSF programme was an ambitious plan to rebuild or remodel all secondary schools in England based upon public and private sector partnership. The legal structures created to procure this programme included Local Education Partnerships (LEPs) in which the private sector partner was the majority shareholder, which were granted exclusive rights by Local Authorities in relation to schools projects with a capital value above a prescribed threshold over a ten year period. The procurement process leading up to the establishment of the LEP and the agreement of the Strategic Partnering Agreement (SPA) between the LEP and the Local Authority, including the design of sample schools, was expensive and time consuming, in particular for the private sector.

The cancellation of BSF raises a number of legal issues both with regard to costs arising from the cancellation and the future procurement of school buildings. The Government has yet to make clear how it intends to deal with these issues. We consider some of the key points below.

LEPs

Those BSF schemes which have already reached financial close will, as mentioned, have given rise to a LEP and an SPA with the Local Authority. The SPA provides the LEP with an exclusive right to deliver school projects to the Local Authority for 10 years in relation to all projects with a capital value of over £100,000. The Local Authority has no ability to cut short this period unilaterally in the absence of an event of default under the SPA on behalf of the LEP.

This mandatory ten year term raises a number of questions in light of the cancellations:

  • If local authorities are to procure schools during the periods of exclusivity, they must do so through their LEP under the BSF scheme. Procurement by any other means would be a breach of the SPA entitling the LEP to damages. Will the Government therefore let the existing schemes run their course, or will it wait out the ten years and restrict the flow of schools allowed through the schemes?
  • If local authorities wish to escape the terms of any SPA, in particular the exclusivity provision, it may be possible to do so by agreement, although it is likely that the private sector will be keen to protect their investment or at least receive adequate compensation for releasing local authorities from their obligations.  There would be significant legal and commercial obstacles to renegotiating the basis upon which schools will be procured. How, for example, would local authorities protect against the bringing of procurement challenges to any renegotiated deal? Would local authorities be obliged to re-tender the renegotiated scheme, and if so, how would it persuade the existing private sector participant to give up its rights under the SPA?
  • If renegotiation is not possible, and the Government waits out the ten years by restricting the flow of approved schools, local authorities may face large bills for bid and development costs which they will be unable to offset against existing projects. Under the standard SPA, private sector bidding costs, together with the costs of establishing LEPs, are to be repaid by local authorities proportionately over the course of five years as part of the cost of school projects put through the LEPs. The SPA also provides for a five year long-stop date, meaning that regardless of the number of schools put through, local authorities must repay bidding and LEP costs, together with financing charges, at the end of five years. These are real liabilities already incurred by local authorities. Will local authorities repay these liabilities now so as to avoid private sector financing charges for the next five years? How would such a payment represent value for money in these times of austerity?  If such payments are not made, thought may also need to be given to the repayment by LEPs of working capital facilities provided to them on some schemes.

Selected Bidders and Sample Schools

We understand that where the scheme is at Selected Bidder stage, sample schools have not been "stopped" as part of the BSF cancellation, but are "for discussion". Thus, bidders will find out within 4 to 6 weeks whether these sample schools are to go ahead. Similarly, we understand, where the dialogue process has closed so that the selection of the successful bidder is imminent, those sample schools are also "for discussion".

One key aspect of these discussions is likely to be the recovery of bid costs incurred to date for the sample schools. Were the scheme to have reached financial close, these costs, as mentioned above, would be recovered in part through the service payments for the sample schools and the balance from subsequent projects. How will these costs be reimbursed if sample schools are to proceed on their own?

If sample schools are taken forward independently, significant procurement issues may once again arise. An OJEU notice for an entire BSF scheme covers a scope substantially different from a notice for one or two schools only. Smaller contractors in particular, who may not have had the resources to bid for the complete scheme, might argue that they would have bid had the scope had been smaller and therefore ought now to be given the opportunity to bid for the sample schools only. How would local authorities protect themselves against such a challenge? Would it be viable to re-tender the sample schools, and if so, to re-imburse the bid costs incurred by participants in the first tender process?

Abortive Bid Costs

Selected Bidders and bidders for schemes yet to reach the Selected Bidder stage may have considerable exposure to abortive bid costs. They will now be considering whether to seek reimbursement of these costs.

The standard BSF Invitation to Participate in Dialogue (IPD) contains an express provision reserving the local authority's right at any time to issue amendments, alter timetables, negotiate with one or more of the bidders and/or not to award the contract and to withdraw from the process altogether. In addition, it states in terms that the local authority will not reimburse bid costs and that it shall have no liability for costs or losses incurred by bidders in connection with the bidding process.

This express term of the IPD reflects what is commonly understood in the market, namely that the private sector incurs costs in developing projects "at risk" until appointment as selected bidder. Even without such an express term, custom and practice, in relation to the costs of tendering, and legal precedent would, in normal circumstances, preclude recovery. That said, each case should be considered on its merits, to see whether special facts and circumstances are present which take the case outside the normal rules.

Notwithstanding the express terms of the IPD and custom and practice, bidders at this stage of the procurement are likely to be justly outraged at the cancellation of BSF and their consequent wasted expenditure. The risks anticipated when costs were incurred by them would have been risks relating to losing the competition or the project failing to meet the procuring authority's objectives set out in the invitation to tender (eg value for money) – bidders do not participate on the basis that a sudden change in government policy can result in a whole scale cancellation of a major building and services programme and that the consequences are for their account.

The re-imbursement of bid costs was a topic considered  in the Bates Review, commissioned in 1997 at the request of the then new Labour government, which recommended that: "when a decision is made not to proceed with a project and that decision is not related to the viability of tenders received, contractors' bidding costs should be refunded". The Labour government quickly adopted the Bates Review as central government policy in 1997. Will the present Government stand by it in circumstances where the level of abortive bid costs associated with the cancellation of the BSF programme has been estimated to be in excess of £100m?

Even if the Coalition Government honours Bates, there is a question over whether the policy applies to decentralised local authority procurement, or whether the reimbursement of bidding costs will be a matter for the discretion of each local authority. Similar issues arose previously with regard to PFI and the NHS, and were resolved by the Department of Health in favour of applying Bates generally to all NHS procurement.

In a Guidance Note issued in 2004, the Office of the Deputy Prime Minister highlighted the distinction between NHS Trusts and local government, indicating that the NHS approach to re-imbursement of bid costs ought only be applicable across sectors where there was an established procurement methodology for specific contracts. Schools PFI, even in 2004, was identified as an area where an established methodology had emerged. Nevertheless, the ODPM Guidance stated generally that it was, "not ODPM policy to encourage local authorities to reimburse bid costs".

The future

These are some of the key issues which arise from the decision to cancel the BSF programme. There are likely to be others: judicial review has been mentioned in the press, as well as claims based upon legitimate expectation and restitution. What is conspicuously lacking however, is any indication from the Government as to how these issues are to be worked out and resolved. The longer such issues are left unaddressed, uncertainty and dissatisfaction is likely to increase. It is hoped that the Government will shortly make known how it expects to manage these issues and bring a measure of calm to the confusion brought about by last Monday's announcement.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 12/07/2010.

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