Asset Finance in the UK Public Sector. The Development of Framework Agreements in a Challenging Economy within the UK Public Sector

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1 Asset Finance in the UK Public Sector The Development of Framework Agreements in a Challenging Economy within the UK Public Sector Whilst 2015 has seen little overall growth in the UK, with the economy growing only 0.5% between July and September, according to the Office for National Statistics (ONS), there has been an increase in a sharp growth in IT investment and Commercial vehicle sales during September 2015 as compared to 2014, according to statistics revealed by the Finance & Leasing Association (FLA) This growth in asset finance investments has been steadily growing, and data from the FLA suggest a 3.9% growth over the past two years, as organisations seek to fund investment on essential equipment to expand and deliver higher quality services. Why the growth in leasing activity? There has been an abundant level of growth in vehicle acquisitions. In June 15 an announcement was made by the Crown Commercial Service (CCS) who orchestrated a new arrangement to deliver vehicle leasing and fleet management solutions to enable public sector fleets operated by government departments, local authorities, emergency services and the NHS to acquire.

2 Under this new agreement, expectations are that it will deliver 100m of savings over the next 4 years. The Government identified savings achieved in the 2014/2015 schemes were 34.4m; the task is on to deliver the same, if not better. The CCS outlined that 90,000 vehicles were leased through the 2014/2015 scheme. It is anticipated that more public sector fleets will be financed through the new 2015/2016 scheme. The vehicle lease and fleet management agreement builds on the CCS vehicle purchasing agreement announced earlier in That agreement runs until December 2017 and has been billed as a large commercial agreement, in the public sector. This arrangement, will likely deliver in excess of 500m of new business, towards financing participants. Some of the more innovative elements to this form of public sector leasing are the use of telematics. Telematics is a general term that merges telecommunications and information. This may include GPS systems, hands free mobile phone calling and roadside assistance, together with fleet tracking and management. The concept in itself can enable further savings to be made.

3 This government scheme is broken into three categories; Cars, vans, electric cars and other hybrids Commercial vehicles, buses, coaches, municipal vehicles Fleet management services, including accident & claims services, fuel management and driver support. Up to 20 different leasing organisations are supporting the public sector in delivery of this programme. This market sector has increasingly been aligned to the concept of Framework Agreements. Frameworks have become a popular method and a smarter approach to procuring goods and services in the public sector. One big plus is the ability to optimise volume purchasing discounts and repetitive purchasing tasks. The Office of Government Commerce (OGC) state that a framework is an agreement or other arrangement between one of more contracting authorities and one or more economic operators which establishes the terms (in particular the terms as to price and, where appropriate, quantity) under which the economic operator will enter into one or more contracts with a contracting authority in the period during which the framework agreement applies It is suggested that a framework agreement will generally allow the public sector a degree of flexibility in terms of acquiring the goods and services it needs to

4 operate. A multi-supplier framework for example can allow a public sector authority to choose or select from a number of different suppliers for their requirements, helping to ensure that the most economically advantageous or value related bid is achieved. A call off contract under a framework agreement will likely be a contract between the appropriate supplier and the public sector contracting authority. If the framework agreement is awarded to one leasing company for example, then the contracting authority can simply call-off their requirement as and when it s needed. If a selection of suppliers are operating within the framework then it may be appropriate for best value purposes to set up a mini-competition between these suppliers, to assess who is best placed or capable of meeting the business need. The EU Procurement Directives and Regulations 2006/2015 do make it clear that a public sector contracting body MUST not use a framework agreement improperly or in such a way to prevent, restrict or distort competition. The authority must comply with the general EU treaty principles of: - Non discrimination Proportionality Transparency

5 Equal Treatment (e.g.) if a call-off is undertaken were a number of multiple providers are involved, it is important that the process is transparent to all relevant suppliers and that everyone is treated equally. This may manifest itself on the grounds of the Award Criteria utilised must be clear and provided to all participants s part of the EU regulations Most Economically Advantageous Tender (MEAT) approach. A note of caution is to be examined with minicompetitions, in that it can bring into play the possibility of a disgruntled bidder bringing a claim for a declaration of ineffectiveness. This is an important point despite the fact that call-off contracts under a framework agreement can be concluded as soon as an award decision has been made. Good practice suggests with some advice that a standstill period should be held in relation to the call-off contact. It has been identified in Regulation 99 of the 2015 EU Procurement Regulations, that it is possible for a challenger to apply to court for a declaration of ineffectiveness in relation to a public contract. This claim may be on the grounds of not meeting the EU treaty principles or not following an appropriate and transparent award criteria and process. If a successful claim is made, the court could render the call-off contract ineffective. The contracting authority may then have to pay a fine and compensation to the

6 claimant; normally this is by means of a set-aside of the contract and damages being claimed. Within Regulations 99 there is a mechanism, which enables contracting authorities to protect themselves from the risk of a claim for a declaration of ineffectiveness, provided that the contracting authority believes the call off was in accordance with the 2006/2015 Regulations. This mechanism would involve the contracting authority voluntarily sending the participants award decision notices and holding a standstill period (even though these are not mandatory for the award of call offs). As long as no challenge emerges during the standstill period; the effect of these voluntary steps is to prevent a supplier from being able to claim for the remedy of ineffectiveness on the grounds that the minicompetition rules were not properly followed. Good practice should prevail and lessor advisors, who manage frameworks on behalf of contracting authorities as their agents, should follow this general principle. There are a variety of Frameworks in operation to support public sector acquisitions and purchases including: - A Schools Leasing Framework, covering a range of assets from Catering equipment, Electronic whiteboards, photo-copiers & MFD s, ICT equipment together with projection and vending equipment

7 A Crown Commercial Services (CCS) has developed a MFD framework and the service has provided some practical advice to Schools too. 1. Use terms and conditions as approved by their local authority or under a public sector framework, as these will have been scrutinised for any hidden or in-appropriate clauses. 2. Seek advice from the Finance & Leasing Association An Ambulance Vehicle supply framework has been established this is enabling a variety of assets / conversions and also lease finance, maintenance and contract hire facilities to be made available. o Up to 12 different financiers are involved in this programme. A Framework originated by NHS Supply Chain dealing with in the main CRACOE Medical equipment (Clinical Radiology and Clinical Oncology Equipment) and other Non-Cracoe items such as Laboratory equipment, Ward, Domestic and Estates facilities together with IT devices have been established. Its clear that asset finance and leasing services are on the increase in this sector, this is indeed good news for the sector and supports the growing data emerging from the steady growth in asset finance sales in recent times.

8 However, there is no time for complacency especially with continued financial pressures upon the public sector spending and funding. The UK still has a widening trade gap and it s this, which is being blamed for the economy not progressing at the rate it was planned to achieve. The deficit in the trade balance (i.e.) the gap between the level of exports and imports saw a 0.9% increase in exports with imports increasing by 5.5% in the last quarter. This imbalance has reduced GDP (Gross Domestic Product) by 1.5%, which is the most since records began in The UK inflation rate static at -0.1% in October 2015 according to the Office of National Statistics, based upon the CPI (Consumer price index) monitor. It was also noted that the RPI (Retail Price Index) fell to 0.7% the lowest rate since The backdrop still remains difficult for growth and expansion, in fact the bank of England suggest the global economy is weakening and this will have a depressing inflation risks. Its unlikely the bank suggested that interest rates would rise in the near future. Chris Williamson, chief economist at Markit, said: "The benefit of ongoing low inflation is not only that interest rates will stay lower for longer but that real wage growth remains robust, which will in turn continue to boost consumer spending power and help sustain the economic upturn. "The deflationary picture supports the Bank of England's dovish outlook, which envisages interest rates staying

9 on hold until However, this outlook is dependent on oil prices and wage pressures remaining low, both of which remain something of an unknown." Whatever the case, it looks like asset finance and leasing will provide a real alternative whilst the squeeze remains upon the public purse. This publication is not intended to be a comprehensive review of all developments in law and practice. Readers should always take appropriate legal advice before applying the information contained within this publication to specific issues or transactions they are involved with. This article was written by Geoff Kontzle, Managing Director of K3 Consulting & Training Services Ltd, Worting House, Church Lane, Worting, Hampshire RG23 8PX. He can be contacted at or by geoff.kontzle@k3ctservices.co.uk References BBC Economy reports (November 2015) Guide to Fleet Management at Mills & Reeve LLP (June 2015) Guidance of Framework Agreements pp. 1-9 NHS Supply Chain (2015) How to realise the benefits of Asset Leasing pp. 1-8 Crown Commercial Services (CCS) (2015) Vehicle & Fleet Management Leasing Programme Williamson C, Markit, BBC report (2015)

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