The competitive dialogue procedure has been adopted as the standard procedure for UK PFI projects. A number of key issues are still being worked out.

Allen & Overy (A&O) has been involved in discussions with the Department of Health and the Treasury, and is also acting on one of the pilot projects for the use of the procedure.

Here a team of A&O lawyers look at a key feature of the use of the procedure in the PFI health sector - and this may be extended to other sectors - is that the competition between the bidders will not include the price of the funding for the project, since there will be a separate funding competition after the appointment of the preferred bidder.

However, the evaluation of the bidders will include the bankability of the project arrangements and the deliverability of the funding arrangements by the bidder.

The key procedural stages and a number of the key issues are discussed below. References to Regulations are to the UK Public Contracts Regulations 2006. The Authority letting the contract is referred to as 'the authority'.

Early Stages of CDP

The early stages of the Competitive Dialogue Procedure (CDP) are similar to the negotiated procedure in that normally:

• an Information Memorandum will be sent to prospective bidders
• bidders will be invited to pre-qualify in accordance with the normal criteria of technical expertise (this is general but can include particular skills required for the project - see Regulation 25) and financial strength (Regulation 24). Authorities may include particular sub-criteria under these main headings

However, there is now a new requirement - compared with the negotiated procedure - to pre-qualify at least three bidders, unless there are not a sufficient number of bidders who satisfy the criteria but there must always be a sufficient number of bidders to ensure genuine competition - see Regulations 18(12), 18(13) and 18(14).

Authorities will need to decide whether they pre-qualify bidders on the basis of a hurdle, in which case they may pre-qualify too many bidders for an efficient competition, or they pre-qualify a predetermined number, for instance, the top three - in which case there may be a danger that the application of the criteria may exclude a promising bidder.

The Competitive Dialogue Stage

The next stage is the competitive dialogue (CD) stage, where the authority invites responses, on a number of occasions, to successive iterations of its requirements set out in the Invitation to Participate in Dialogue (ITPD), which will be similar to an ITN (Invitation to Negotiate) document.

Following receipt of responses, the authority may then discuss the documentation with each of the bidders.

As under the negotiated procedure, the authority must ensure equal treatment between bidders (see Regulation 18(21)).

Thus, though the authority may, in effect, conduct parallel sets of discussions and may receive different responses from each bidder, it will need to give each bidder the same material information and an equal opportunity to put forward its position.

Further, since it will be obliged to issue a single Invitation to Submit Final Bids to all bidders at the end of the CD stage, it cannot reach a different position on its authority requirements for each bidder, although each of the bidders' contractor's proposals may be different.

During the CD stage, the legal project documents will be issued to bidders who will be invited to respond in writing and clarification meetings may be held with bidders.

Following these meetings, and consideration of amendments by the authority and its advisers, the documents may be reissued and, depending upon the responses, it is likely that the process will be repeated and the documents further reissued on one or more occasions.

Similarly, the authority's technical and commercial requirements will be issued by the authority and bidders will comment on these.

The bidders' proposals will be clarified and refined and the authority may pursue different technical solutions with different bidders on a parallel but equal basis.

The CD stage represents successive rounds of bidding against, and/or responses to, successively revised output requirements.

In that sense, individual discussions with bidders are not so much parallel negotiations, but rather they facilitate the general revision of the authority's requirements.

In practice, this is what has happened in many PFI projects before the appointment of the preferred bidder under the negotiated procedure, but it is important to note that the CDP allows less flexibility here than the negotiated procedure.

Narrowing the field of bidders at CD

During the CD stage, it will be possible to narrow down the number of bidders, where:

• this is the result of the reduction in the 'number of solutions' which the Authority has decided to entertain during the CD stage (see Regulation 18(22)). The legal issue here is whether a 'solution' can be interpreted to include all aspects of the bid, including price, and not just the technical aspects. It is likely that some Authorities will take
• the view that 'solution' includes the whole of the bid, including price
• the authority applies all the award criteria in the process of narrowing the solutions (see Regulation 18(22)). This will mean that there is an extra stage during which a full evaluation takes place. This may be a longer process than the narrowing at a PITN (Pre Invitation to Negotiate) stage under the negotiated procedure

Funding competition - funders' advisers

Where there is a funding competition, the authority may appoint both the legal and technical advisers to funders during the CD stage so that, as far as possible, funders' comments are taken into account in the final documents.

There may also be a requirement for sub-contracts to be included in the bid, since the terms of the sub-contracts could affect both the price of the funding and the length of time required to close the project after award.

Similarly, the authority may wish the funding documents to be accepted by bidders at the award stage, since they too could affect the pricing of the funding and the closing of the project.

Declaration of the end of the CD phase

Once the authority is satisfied there is no further requirement for changes to the contract documentation, it must declare the CD stage to be at an end.

After this formal declaration, there can be no further discussions as to revisions to the contract documentation, subject as mentioned below.

Following the declaration, the authority will issue the final contract documentation in an Invitation to Submit Final Bids (ITSFB).

A major change from the negotiated procedure is that after the declaration there can only be one final bidding stage.

There can be no BAFOs (best and final offers) and LAFOs (last and final offers) though there may be 'clarification' (see below).

A key issue is likely to be the scope of the technical deliverables required from each bidder.

In general terms, design should be completed to a point where all risks have been identified and any design review process under the Project Agreement can be operated so as to produce the remaining detailed design without the need for further negotiation.

For many projects in the PFI health sector, 1:50 drawings and room data sheets will be required, though they may only be required for designated areas.

Final bids, clarifications and changes

The major change from the negotiated procedure is that the final bids must contain 'all the elements required and necessary for the performance of the project'.

There can be no further competitive dialogue once the authority declares that the CD stage is finished.

However, certain clarifications are allowed, both before and after the award, and these may afford authorities and preferred bidders some flexibility.

Before the award is made, the authority can ask a bidder to 'clarify, specify or fine-tune' its bid.

However, there can be no changes to the 'basic features' of a bid when this would be likely to distort competition or have a discriminating effect.

Thus a bidder can change basic features where there is no anti competitive effect.

This may mean that all bidders, but possibly not just one of them, may be asked to clarify their bids.

However, because there can be no BAFO, the authority probably cannot at that point change its requirements, as it could in a BAFO.

In practice in the health sector, there could be a period of about three months from the time the NHS Trust appoints a provisional preferred bidder to the time the NHS Trust makes its award, since the NHS Trust's Appointment Business Case - which needs to be approved by both the central Department of Health and by the Treasury - requires that time to go through the approval processes.

It will be for debate what kinds of clarification and contract development the authority may undertake before the award only with the provisionally selected preferred bidder and not with the other bidders.

After the award has been made, the scope for changes is more limited.

There can be no clarification which has the effect of modifying substantial aspects and no discrimination or distortion of competition.

What can be done?

In practice, there will be further work on the project documentation after award. There may be a detailed award letter under which the appointed bidder agrees to the process from the award to financial close.

The further work should follow the risk allocation agreed in the contract documents finalised at the time of the award, so that it can be said that the basic features of the contract remain unchanged.

This further work might include the following:

• price development following unit prices bid and reflected in the contract
• design development in accordance with the design review procedures in the contract
• drafting refinements
• documentation to reflect funders' requirements during and following the funding competition, but which does not change the project contract documentation or the risk allocation

In view of the requirements for commercial certainty at the award stage, the authority may require land surveys to be done and made available to bidders during the CD stage.

Bidders may be asked to comment on the form of appointment of the surveyors and the identity of the surveyors, and collateral warranties should be give to the project company on financial close.

Where surveys are completed after the award, any additional work, or extensions of the contract period, should be dealt with in accordance with a risk allocation agreed at the award stage.

Funding Competition

If there is a funding competition, this will take place after award and will involve sending an information memorandum to potential funders, together with the Project Agreement, subcontracts and funding documents and reports from the funders' legal advisers and the funders' technical advisers, who may have been appointed in the CD stage.

It may be a term of the funding competition that funders accept and price the documents on the basis of a 'bought deal' where no changes are allowed to the Project Agreement.

Variant bids may be considered on the funding documents, if these give value for money and can be agreed with the successful bidder, since these will not be award documents.

Notice of an award to bidders

Once the award has been made, the authority must give notice of the award to bidders at least 10 days before entering into the contract.

Once this period has elapsed without a challenge to the award, the contract cannot be set aside, although the authority may be liable to pay damages to a bidder where it has not followed the correct procedures.

However, under the regulations, authorities now have to give more information to losing bidders including, where practicable, scores (see Regulation 32).

The Freedom of Information Act may also enable detailed information to be obtained about evaluation processes.

Further, Regulation 18(18) and the Venice Transport case (ATI v ACTV, Case C-331/04) makes it clear that the ITPD should contain the evaluation criteria and relative weightings, and bidders should have the opportunity to respond to these before they make their bids.

Conclusion

As will be seen, there are a number of legal questions and practical issues which will need to be resolved as the practice of using the CDP progresses.

Authorities and bidders may bear in mind that whereas, prior to the new legislation coming into force, the choice of the negotiated procedure, even if it was legally questionable, would not generally give rise to a claim against the authority by a bidder, a failure to operate the CDP could easily give rise to a claim by an unsuccessful bidder that the correct procedures have not been followed.

The interesting question is whether the culture in the UK, which has generally been against making procurement law challenges against authorities, will change in the new legal landscape.

The A&O authors include: John Scriven, David Lee, John Wotton, and Brian Sher