Understanding the Norwegian Utilities Regulation – Forsyningsforskriften

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Understanding the Norwegian Utilities Regulation – Forsyningsforskriften

This article describes how to procure products and services in accordance with the Norwegian Utilities Regulation (Norwegian: Forskrift om innkjøpsregler i forsyningssektoren, Forsyningsforskriften) and Norwegian Procurement Act (Norwegian: Lov om offentlige anskaffelser). The objective is to provide answers and guidance on key questions related to the use of framework agreements, requirements for competition, and when it is possible with single sourcing procurements.

Legal and regulatory standards must be met, and there is no possibility to seek internal or external approval to deviate from the regulations. It is likewise not permissible to skip any of the specific requirements. This differs from internal procedures and requirements in that it is up to the appropriate level in a company to decide whether or not they can be deviated from.

Violation of the Utilities Regulation in a procurement could result in legal ramifications for a corporation in the form of agreements that are rendered null and void, compensation claims from losing suppliers, and possibly coercive penalties and infringement fees. Violations of procurement laws may also result in a bad reputation and unfavorable media coverage.

Which parts of the Utilities Regulation (Forsyningsforskriften) apply?

It is the total estimated value of the procurement at the time of initiation that is decisive for which sections of the Utilities Regulation must be complied with. The following threshold values applies:

  • Below NOK 100,000: The procurement is exempt from the Utilities Regulation. No requirements for the procurement process.
  • Between NOK 100,000 and MNOK 4.1 (construction contracts up to MNOK 51): Part 1 of the Utilities Regulation must be followed. The requirement for competition applies. Must invite at least 3 bidders to submit a tender, given that competition is possible.
  • Above MNOK 4.1 (construction contracts over MNOK 51): Part 1 and 2 of the Utilities Regulation must be followed. Detailed rules in the regulations must be complied to.

The Utilities Regulation applies both to the award of individual contracts, framework agreements, and call-offs.

How to estimate the total contract value?

One must determine the estimated contract value for the upcoming procurement to know which parts of the Utilities Regulation will apply. It must be clarified whether the procurement has an estimated value that is lower than NOK 100,000, between NOK 100,000 and MNOK 4.1 (MNOK 51 for construction contracts) or above MNOK 4.1 (MNOK 51 for construction contracts). The thresholds are calculated on the basis of estimated price ex. VAT.

The contract value must be calculated based on an estimate of the entire payment for what is to be delivered (excl. VAT) including options. The calculation must be correct when the competition is announced, i.e. when the procurement process begins. In reality, this implies when the chosen tenderers are invited to submit bids, i.e. at the time when the Invitation to Tender (ITT) is sent out.

In the case of framework agreements, the contract value must be assessed based on the maximum value of all contracts or call-offs projected to be entered into throughout the framework agreement’s length (incl. Options).

It is not permitted to choose a calculation method or divide a contract to avoid the Utilities Regulation.

It should be documented in writing in the procurement protocol that a prudent assessment of the estimated contract value has been made prior to the procurement process.

We will now take a closer look at the requirements that apply to procurements above the threshold values.

Estimated value between NOK 100,000 and MNOK 4.1 (construction contracts up to MNOK 51)

Procurements shall be carried out in accordance with basic principles of competition, equal treatment, predictability, verifiability and proportionality. The detailed procedural rules in the Utilities Regulation part 2 do not apply to these procurements. It is normally sufficient to follow general procurement procedures to meet the requirements. However, the documentation requirement related to key procurement decisions might require additional attention and actions.

Estimated value above MNOK 4.1 (construction contracts above MNOK 51)

Part 1 and 2 of the Utilities Regulation apply. Part 2 contains detailed requirements related to the procurement process.

As a starting point, an invitation to participate in the procurement should be announced at Doffin / TED. Doffin is the Norwegian national notification database for public procurement. It helps Contracting Authorities to create and publish notices in accordance with the regulations, and make it easy for suppliers to find relevant competitions in the public sector. It is free for suppliers to register on Doffin.

If the announcement is to be published in the EU database; TED (Tenders Electronic Daily), Doffin is responsible for ensuring that the announcement is translated into English. The announcement will be published in TED within five working days from the date of publication in Doffin.

A company may also choose to announce an upcoming tender in other official channels or qualification systems. For instance, the Norwegian Oil and Gas industry uses the Magnet JQS qualification system to announce any upcoming tenders. If one or more of the suppliers you want to invite to submit a tender are not registered in the appropriate qualifying system, the competition must be announced separately. The competition should subsequently be announced in Doffin / TED in compliance with the appropriate deadline requirements.

Fundamental Principles of the Utilities Regulation (Forsyningsforskriften)

The laws governing public procurement are founded on a few fundamental principles. The fundamental principles are described in the Procurement Act §4:

§ 4. Fundamental principles
The client shall act in accordance with fundamental principles of competition, equal treatment, predictability, verifiability and proportionality.

Procurement Act (Anskaffelsesloven) §4

The client must comply with the standards for competition, equal treatment, predictability, verifiability, and proportionality while carrying out all procurements covered by the regulations. The principles serve as guiding principles in the interpretation of particular provisions of the procurement regulations. If there is any uncertainty about how a provision should be interpreted, the answer supported by the fundamental principles must be selected as a starting point.

Failure to follow the basic principles will constitute a violation of the regulations on an equal basis with failure to follow particular procedural procedures in the regulations.

Competition

Competition is seen as a critical element for accomplishing regulations’ purpose of efficient procurement as stated in the Procurement Act §1. In public procurement, it is consequently preferable from both socioeconomic and commercial standpoints, as well as administrative law equity standpoints, that purchase take place following competition among possible suppliers.

The number of suppliers required to submit tenders to establish true competition is determined by the market condition and the value of the procurement, as defined by the proportionality principle (see below). The starting point is that at least three suppliers must always be invited; but, based on a specific evaluation, it may be essential to invite more than three if this is what is required to ensure true competition given the market’s value and quantity of relevant suppliers.

Equal treatment

The demand for equitable treatment is intended to foster healthy and successful competition among suppliers, including ensuring that all suppliers have equal opportunities in the competition. Only when all possible suppliers in the market are given equal opportunity to participate do you obtain a well-functioning competition, which is mostly required to achieve the regulations’ objectives.

The client is required to treat all suppliers fairly throughout the competition, including in the creation of procurement documentation, qualification and selection of suppliers, assessment of tenders, and contract award.

The assertion does not prevent discrimination that is both factual and objectively justified. This indicates that not all forms of discrimination are incompatible with the demand of equal treatment. Actions designed to provide a supplier an advantage are expressly banned. On the other hand, not every move that inadvertently gives a supplier a slight advantage is in violation of the need of equitable treatment. In determining what is acceptable, the degree of competitive advantage received by the supplier, as well as whether the client’s behavior is reasonable and typical in light of general commercial factors, must be considered.

The fact that a supplier has a competitive advantage due to professional credentials or expertise from other similar assignments does not conflict with the obligation for equitable treatment.

Predictability

Openness must ensure procurement transparency, and the client must conduct the competition in a predictable manner for the suppliers, as well as prevent illegal discrimination throughout the procurement process by allowing suppliers to check that the competition rules do not violate the requirement of equal treatment.

Predictability involves being able to look ahead in a procurement process in an organized and consistent manner, whereas verifiability means being able to look back and record the choices made in the procurement process. Both standards are necessary to maintain suppliers’ and the general public’s trust in procurement procedures, as stated in the Procurement Act §1. The requirements are also linked in the sense that predictability is required for the procurement process to be auditable in the future.

Clarity is a condition that may be drawn from the demand for predictability. As a result, the client must create the procurement documents in such a manner that all diligent suppliers comprehend them in the same way.

Verifiability

All significant choices must be documented to be verifiable. The criterion for verifiability will thereby protect suppliers’ interests in being able to verify that procurement requirements have been followed. The goal of the criterion for verifiability is therefore to secure the legal security of the suppliers as well as the efficient implementation of the laws.

The client is responsible for documenting all things relevant to the implementation of the full procurement process. If the client fails to secure the verifiability of the evaluations made along the route, it may have an influence on whether the requirements are deemed to be followed.

Proportionality

The proportionality criterion implies that there must be proportionality between goals and instruments. The proportionality criterion must so guarantee that the conditions imposed by the client to suppliers in a procurement process (instrument) are proportionate to the procurement (goal). This implies that the customer can and must tailor the competition to the specific procurement.

The requirement of proportionality has mainly two sides:

  1. It follows from the principle that duties and rights derived from other principles must be adapted to the nature and scope of the individual procurement (complexity and value). The smaller and simpler a procurement is, the less far-reaching procedural requirements can be deduced from the other requirements. It follows that duties and rights derived from the requirements of a procurement cannot be automatically transferred to another procurement. The client is thus not obliged to take care of the basic requirements in the same way and to the same extent for small and simple procurements as for large and complicated procurements.
  2. The requirements set by the client for the suppliers in the competition and the performance to be procured must be in proportion to the nature and scope of the procurement. Thus, no stricter requirements shall be set than are necessary to realize the purpose of the procurement.

The requirement of proportionality is reflected in several of the provisions in the regulations for public procurement.

Single Sourcing in the Utilities Regulation

The starting point is that access to enter into a contract directly (single sourcing) with a supplier without prior competition is very limited in situations where the Utilities Regulation apply, i.e. where the contract value is above NOK 100,000.

For procurements between NOK 100,000 and MNOK 4.1, the regulations don’t specifically define which scenarios allow a contract to be entered into directly with a supplier without previous competition, i.e. single sourcing. The assumption is that the basic legislative requirement for competition restricts the right to single sourcing. However, the competition requirement only applies where it is “to the greatest extent practicable”.

Only in extraordinary circumstances would the client be permitted to award a contract without competition to a supplier. Deviations from the concept may be authorized, for example, if there is only one supplier in the market and the client may obtain the service directly from the supplier.

Due to the risk of negative effects on competition, procurement without announcement should only be used in completely extraordinary cases. The exceptions from the obligation to compete must therefore be interpreted restrictively. The client also has the burden of proving that the conditions in the exceptional cases are met.

Procurements above MNOK 4.1 can only be made as direct acquisitions if one of the situations in the Utilities Regulations §9-3 is met (exception provision):

  • Exception 1 – §9-3 a): Single sourcing may be conducted if, owing to time restrictions, it is impossible to conduct a competition with negotiation, and the cause for this is due to events beyond the client’s control and which the client could not anticipate. The requirement is not met due to the client’s poor time management and planning. In such a case, the contract’s scope should be expanded beyond what is strictly necessary.
  • Exception 2 – §9-3 b): Single sourcing may be used if the purchase involves services that only one single supplier can provide.
    • Technical: Competition is impossible due to technical constraints. This covers, for example, sales restrictions, production restrictions or that there is a technical dependence between previous projects with the client and what is to be carried out. The condition can, for example, be fulfilled where there is only one supplier who has products that are compatible with products the client already has.
    • Exclusive rights: The Supplier is the exclusive owner of all rights, including intellectual property rights. It is not sufficient that one supplier has an exclusive right in the sense that only one supplier produces the product in question, it is a requirement that it can prove that there are in fact no other suppliers who can offer the service.
    • The solitary supplier scenario does not result from the customer tailoring the procurement documentation to a certain supplier.
  • Exception 3 – §9-3 c): In the case of a goods contract for further deliveries with the original supplier, single sourcing may be carried out, provided that:
    • The additional delivery is meant to replace or expand on previous deliveries or installations, and
    • The customer will be forced to purchase items with technical / operational / HSE qualities that are incompatible with the original deliveries / installations, or that make operation and maintenance disproportionately technically onerous.
    • The original contract and the additional contract should not generally last more than three years.

For all exceptions, the client must be able to provide objective reasons why only one supplier is capable of providing the service. It is not enough for one supplier to execute the service more efficiently, at a cheaper cost than others, or with claimed higher quality. The exemption clause must be construed strictly, and it is the client’s responsibility to demonstrate that the prerequisites for direct procurement are satisfied.

If, after a thorough examination, it is determined that one of the conditions that constitute the basis for single sourcing occurs, the rationale must be detailed and recorded in the procurement documents.

Changes to existing agreements

The Utilities Regulations allow certain adjustments to negotiated framework agreements without triggering a new competition. Section §24-1 states which changes are permitted to be made in existing framework agreements.

If renegotiation of an existing framework agreement entails significant changes (when “the content of the contract becomes significantly different from the original contract”), it means that the framework agreement can no longer be used. Significant changes may include situations where the scope of the framework agreement being considerably increased or the supplier achieving considerably higher pricing than in the initial agreement.

Frequently Asked Questions (FAQ)

In this section you can find answers to frequently asked questions when it has been determined that a purchase must comply with the Utilities Regulation (Forsyningsforskriften).

Is market research permitted, and if so, what kind of information may the client request when the Request for Information (RFI) is sent out?

Yes, it is possible to perform market research in preparation for the purchase. It is permissible to obtain information like:

  • The competitive situation and maturity of the market.
  • Future capacity, which products and services the suppliers offer.
  • What requirements can hinder competition and what can stimulate competition.
  • What can contribute to lower life cycle costs.

You may also notify suppliers about your own ideas and requirements. You may also seek and receive assistance from third parties, including suppliers, both formally and informally, and utilize this advice in the procurement’s planning and implementation.

Contact with the market may be done in a variety of ways, including the distribution of RFIs. It is strongly advised that this is done in writing.

It is necessary to ensure that the use of information and advice obtained from potential suppliers does not distort competition or result in a violation of the principle of equal treatment.

If a supplier has provided advice prior to the procurement process, measures must be taken to ensure that this supplier does not receive an unreasonable competitive advantage if the supplier is to participate in the competition.

How much flexibility do we have in defining scope and dividing the procurement into sub-procurements?

The client is allowed to define the demand and the extent of the procurement, as long as the definition of scope is based on real underlying needs.

Even if there are numerous concepts that can meet the procurement need, the customer is free to select the concept that is deemed most appropriate to cover the demand.

If it is deemed suitable, you can additionally break the purchase into subcontracts. This must then be specified in the invitation to tender (ITT).

It is possible to allow or require that the offer contains alternative solutions. This must then be stated in the ITT.

It is not permissible to define the scope with the intent to avoid the rules of the utilities regulations. For example, by describing its needs extremely specifically without this being founded on true underlying needs to ensure that the need can only be met by a single selected supplier.

It is critical to understand that the regulations give limited flexibility and the potential to adjust the procurement process after the deployment of the ITT, and that any requirement for flexibility is handled through the descriptions in ITT. It is, however, permissible to make minor edits, amendments, and modifications to the ITT before the tender deadline expires.

How will it be decided which vendors will be asked to submit tenders?

If the contract value is less than MNOK 4.1, you can choose as many suppliers as you like without going through a formal selection procedure, as long as you include a sufficient number of vendors to guarantee actual competition (minimum of 3 bidders).

If the expected contract value exceeds MNOK 4.1 (or MNOK 51 for building contracts), a selection process in accordance with Part 2 of the regulations is required.

Suppliers must be given at least 15 days after receiving the request to confirm interest to confirm their interest in submitting a tender.

After receiving responses from suppliers who intend to submit tenders, you must determine if those who have shown an interest fulfill the qualification criteria. They should be discarded if it is evident that they do not.

Then, depending on the selection criteria you must decide which of the qualifying suppliers will be asked to participate in the competition.

After deciding which suppliers may submit tenders, you must notify the suppliers who were not chosen in writing as soon as possible, along with a brief explanation.

Following that, you may send ITT to the vendors who have been chosen to submit tenders.

What selection criteria can be used during the pre-qualification phase?

The criteria must be verifiable and relevant to the specific procurement.

The most essential thing is that you have determined what the critical competencies of the suppliers you want to include in the competition are and have based your selection criteria on this.

You can state that you want to choose those who overall have the best qualifications for the specific procurement. It is not always the case that those who have the best qualifications, e.g. those who have the largest organization or the longest experience are those who are best qualified in the specific procurement.

You can also indicate that you want to choose what gives the best competitive dynamics in the further competition, by saying that you want to choose some smaller, some medium-sized and some large suppliers. Alternatively, some new and some well-established suppliers.

You can also specify that you want to select suppliers from different market segments.

References

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Ulf Emsoy has long working experience in project management, software development and supply chain management.

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