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Competition: a barrier to innovation Should all private finance projects be put out to full competition or is vital innovation being put at risk? Andrew Bolton looks at a problem which is affecting ro

Last month the French government ordered the termination of two major toll road concessions the 373M Lyon northern ring road and the 1.17bn A86 road tunnel in the western suburbs of Paris on the grounds that they were illegally awarded.

European Union competition rules are at the heart of the problem. Both were deemed illegal by the Conseil dEtat, Frances highest court, because they were awarded without being put out to competitive tender under EU directives passed in 1989.

The circumstances surrounding the closure of the Lyon road look relatively straightforward. Greater Lyon Council invited contractors Bouygues and Dumez to submit proposals for the project. The concession was awarded to Bouygues, which then formed a joint venture with Dumez.

Lyon thought it had acted legally because it had signed the agreement before the French government transposed the EUs public procurement directive into domestic law in 1994. And the French had always argued that they did not need to fulfil the demands of the directive until it became law.

It is this argument that allowed the government to sanction the award of a number of concessions which were technically in breach of EU law. It is likely therefore that many, if not all, other concessions signed between 1989 and 1994 will also be affected.

And the Conseil dEtat, spurred on by opponents to the Lyon project, appears to be backing this view. Cancellation of the Lyon concession which led to the temporary closure of the road was followed rapidly by the halt in construction on the A86 project in Paris (News last week).

While the background to the Lyon cancellation appears relatively straightforward only two contractors were invited to bid and the local authority failed to hold an open tender the case of the A86 is more complex. This project had long been in the governments roads programme, not least because it completes Paris outer ring road.

The projects main problem is that it is routed through the affluent south western suburbs of the French capital. Consequently, residents managed to block proposals for a conventional road scheme on environmental grounds.

The project was going nowhere until Cofiroute, the eventual concession holder, developed its own solution involving the construction of around 17.7km of tunnels under the whole area.

Cofiroute is thought to have spent huge sums working up the idea and was rewarded by being given the concession without having to compete. It has since spent over 100M on construction work, only to be kicked off site as a result of the Conseil dEtat ruling.

It could be argued that the Conseil dEtat was merely doing its job and applying the letter of the law. But it could also be argued that the A86 is worthy of special treatment.

With its high tunnelling content, the project is extremely expensive. Toll revenues are not expected to make the project financially viable on its own. Nevertheless, the government has repeatedly backed the project, and continues to do so even after the concession has been cancelled.

The French government had come up with a unique way of getting round the A86s financing problem. As Cofiroute already runs most of the toll motorways south west of Paris, the government decided to offer to extend these profitable concessions so that the extra income could be used to subsidise losses on the A86.

This practice has been common in recent years as the most profitable sections of the French motorway network between the largest cities have long been in operation. The government has been able to press on with less lucrative routes connecting areas with lower populations.

Sources from Frances toll road sector argue that putting these roads out to tender would be pointless unless some kind of subsidy were on offer. Foreign contractors, they insist, would be unable to build roads like the A86 in isolation because they would not make money.

But some might argue, and with some justification, that the A86 concession should have been tested in competition. Another contractor could perhaps have come up with a proposal giving better value for money and so been able to charge lower tolls.

Alternatively, the government could have extended existing concessions elsewhere, ring-fencing profits above a certain level and using them to subsidise the A86.

But there is a consequence of modern procurement exposed by the A86 episode which is perhaps more harmful namely the stifling of efforts to encourage contractors towards innovative ways to get projects done, or at least make them possible.

Cofiroute, for instance, might not have been spurred to work up its innovative tunnelled solution in the first place if it knew there was a risk of losing its intellectual property to a competitor in an open tender.

Last week Highways Agency chief executive Lawrie Haynes highlighted just this problem when he appeared before MPs on the British governments public accounts committee.

The MPs criticised the Agency for limiting the scope for innovation in DBFO road projects by being too prescriptive about routes and designs.

Haynes argued that the Agency was restricted in what it could do because it would have to re-tender projects if their scope changed significantly during negotiations with bidders.

The issue is a difficult one for European governments trying to marry the complexities of concession agreements with those of EU public procurement rules. Lawyers have also come to realise that the directives are too simplistic to be allowed to regulate the award of anything beyond simple construction contracts.

But the problem has not escaped the attention of the European Commission which last year published a Green Paper on public procurement. The paper drew around 300 responses and the Commission is now considering the introduction of new regulations or even a directive specifically tackling the award of these unique public-private partnerships.

Plans are still at an early stage but lobbyists are hoping for action on intellectual property rights and the extent to which a project should be put out to full competition.

It is clear, however, that something decisive must be done. If the public sector is to produce private finance projects which are as efficient and economic as possible, contractors must be encouraged to help.

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