Some initial comments On the Commission's Report on the Effectiveness of the Public Procurement Remedies Directives

The European Commission recently published its long awaited report on the effectiveness of the public procurement remedies directives [COM(2017) 28 final, 24.1.2017], which is accompanied by a much bulkier staff working paper [SWD(2017) 13 final, 24.1.2017]. The report provides an interesting general overview of the situation at Member State level after the last revision of the remedies directives 10 years ago and, by  and large, offers the unsurprising conclusions that (1) the remedies directives have been transposed in all Member States in a relatively homogeneous manner, except in relation to institutional decisions--where there is a split between administrative and judicial first instance review procedures, (2) there is a general consensus that the remedies directives are relevant and that they enhance the effectiveness of the substantive public procurement rules, (3) the costs of compliance with the review system envisaged in the remedies directives is not necessarily higher than that derived from any alternative domestic system the Member States would have in place in its stead, (4) the remedies they create are generally in line with the right to an effective remedy as a general principle of EU law, and (5) that the remedies directives are generally fit for their purpose. 

On the basis of that overall assessment, the report concludes that, generally, "the evaluation identified neither major nor urgent needs to amend the Remedies Directives, [so] it is decided to maintain them in their current form, without any further modification at this stage." This is not to say that the Commission does not recognise shortcomings in the remedies directives and their fitness for purpose going forward, but that it rather strategically decided to avoid a path of legal reform and rather aims to work on soft mechanisms to try and improve the situation (see below). In my view, this is a highly questionable regulatory strategy and the assessment that there is no major or urgent need for an amendment of the remedies directives does not really tail up with the difficulties in ensuring an improvement of the system by alternative means without a review of the remedies directives [for discussion, see A Sanchez-Graells,  "'If It Ain't Broke, Don't Fix It'? EU Requirements of Administrative Oversight and Judicial Protection for Public Contracts", in S Torricelli & F Folliot Lalliot (eds), Administrative oversight and judicial protection for public contracts (Larcier, 2017, forthcoming].

Throughout the report, there are internal evaluative contradictions and clear indications that the Commission has not been ambitious in its assessment of the remedies directives, or even adopted a coherent approach to its overall evaluation, and that it has rather indulged in a complacent strategy that severely limits the ability of the remedies system to continue being fit for purpose in the future. Indeed, the main report itself indicates that 

The evaluation revealed that certain aspects of the Remedies Directives could be made clearer. This is confirmed by the contributions received. This applies, for example, to matters such as the interplay between the Remedies Directives and the new legislative package on public procurement, and the development of criteria to be applied to lift the automatic suspension of the conclusion of the contract following the lodging of a legal action.
The Remedies Directives are in line with the rights and general principles laid down in EU primary law concerning fundamental rights. They lie at the core of public procurement legislation as they allow bidders to enforce their substantive rights. They were found to be generally aligned with the new 2014 legislative package on public procurement, in particular to cover the concessions subject to Directive 2014/23/EU. Nonetheless, as already mentioned, the interplay between these Directives and the new legislative package on public procurement could be further clarified.
... the Commission acknowledges that certain provisions of the Remedies Directives are not entirely clear. In particular, despite the update introduced by the new legislative package on public procurement, some additional needs for clarification have been identified. For instance, references to ‘contract notice’ in the Remedies Directives do not reflect the fact that new Directive 2014/24/EU permits the use of a prior information notice, instead of a contract notice, to call for competition in certain circumstances. It could also be clarified how the Remedies Directives apply to modifications of public procurement contracts and concessions, to the termination of such contracts and to the light procurement regime (footnotes omitted and emphases added).

In that regard, with little more detail, the Staff working paper indicates that

several stakeholders underlined that some provisions of the Remedies Directives could be more precise. In particular, more clarity would be welcome in a number of areas related to institutional aspects (for example, professional standards for members of an administrative review body), procedural aspects (for example, criteria for lifting the automatic suspension, for granting interim measures and to award damages) and the interplay between the Remedies Directives and the new Public Procurement Directives (for example, how the Remedies Directives apply to the modification and termination of public contracts and concessions and the so-called ‘light regime’) (p 43, emphasis added). 
It is reported, however, that certain areas could be clarified by the Commission, for example, in the form of guidelines (e.g. fees, requirements for first instance administrative bodies and their work organisation). Following the adoption of the new legislative package on public procurement, more clarity would be welcome with regard to the interplay between the Remedies Directives and the new substantive rules (e.g. references to "contract notice" in the classic Remedies Directive does not reflect the fact that the new classic procurement Directive enables a prior information notice to be used, instead of a contract notice, to call for competition in certain circumstances; it could be clarified how the Remedies Directives apply to modifications of public contracts and concessions, termination of such contracts and the light regime for such contracts) (p. 68, emphasis added). 

The Commission plans to provide such coordination between the remedies directives and the 2014 public procurement package without legal reform, and through "guidance on some outstanding aspects of the Remedies Directives in order to increase the understanding of some provisions and to guarantee their effectiveness. Aspects that could be covered include the interplay between the Remedies Directives and the new legislative package on public procurement and the development of criteria to be applied to lift the automatic suspension of the conclusion of the contract following the lodging of a legal action. Based on evidence gathered so far, the Commission will engage in a dialogue with Member States and stakeholders to identify other specific areas that require clarification."

I find this problematic for two main reasons: First, in my mind, it is not clear at all that the discoordination between the remedies directives and the 2014 public procurement package derives from lack of clarity, rather than from the limited scope of the remedies directives, which do not make provision for important issues such as the regulation of remedies for dynamic procurement mechanisms, or the rules applicable to excessive contractual modification or the improper avoidance of mandatory termination of contracts. They also completely fail to regulate situations that arise from the increased justiciability of interim decisions by the contracting authority (notably, on exclusion and the new possibility of self-cleaning). An adaptation of the remedies directives to these situations is not a matter of guidance, but rather of legislation--as there is no obvious way forward, there is no case law of the Court of Justice of the EU on which the Commission can rely to establish baseline proposals, and the competential limits of the EU can easily be exceeed, in particular regarding the interaction between the remedies directives and the new rules on contract modification and contract termination, where the development of EU rules keeps building on the flimsy residual competence of Article 114 TFEU.

Second, and more importantly, the issuance of guidance in this field strikes as a strange policy avenue and one that the Commission is avoiding in other areas (such as the provision of guidance on the interpretation of the 2014 public procurement package itself). It also strikes as an avenue of dubious effectiveness, in particular if/where the solutions proposed in that guidance are difficult to coordinate with domestic procedural and administrative requirements. In the report itself, the Commission indicates that "The evaluation also made it possible to identify problems that persist at national level. In particular, various stakeholders confirmed in the context of the public consultation that problems identified are rooted either in national legislation beyond the Remedies Directives or in national practices, and not in the Remedies Directives themselves"; and concluded (rather conveniently that) "Even if specific concerns are reported in some Member States, they usually stem from national measures and not from the Remedies Directives themselves".

This assessment should be carried to its ultimate consequences, and there are only two possible scenarios: (a) either the Commission plans to open infringement proceedings against the Member State where the domestic legislation and practices are incompatible with the Remedies Directive (which does not seem either the case, or a priority for the Commission), or (b) the only way to erode those national rules and practices is to create additional rules that make them incompatible with EU law (thus promoting legislative reform at Member State level, or creating the possibility for more clearly grounded infringement proceedings in the future). But this is not what the Commission suggests is the best way forward. Its proposal is, on the contrary, to suggest that there should be simple (soft) guidance and to hope that it will be voluntarily adopted in a way that demolishes contrary domestic rules and practices--if not voluntarily, then maybe as a result of the increased interaction between first instance review bodies it is also hoping to create as part of its future proposals.

I think any practitioner will agree that this strategy is very unlikely to create any meaningful change at Member State level. There are many reasons for that. It is not possible to rely directly on Commission interpretation before domestic courts, and it clearly does not trigger obligations of consistent interpretation as a revised remedies directive would. Commission guidance can, at best, be used as persuasive authority, but always under the risk of the Court of Justice eventually determining that the European Commission had gotten it wrong in its guidance and that domestic review bodies and courts should have asked for the proper interpretation of the Remedies Directives (but this is not an issue of lack clarity, as above), or else establishing that domestic rules breach some general principles of EU law. On that point, the general statement by the Commission that "The Remedies Directives are in line with the rights and general principles laid down in EU primary law concerning fundamental rights" can hardly provide any reassurance, because the difficulty is not in accepting that the remedies directives do not breach that general principle, but rather in establishing whether they do enough to uphold it in an effective manner going forward.

Overall, I find the Commission's decision not to review the remedies directives disappointing, in particular because it has some echoes that remind us of the difficulty of getting technical rules approved or reviewed at EU level, as well as the Commission's conformity with that situation. I can only hope that evidence on the unsuitability of the remedies directive in relation with the novelties of the 2014 public procurement package will emerge, to the point of prompting the European Commission to reconsider this strategy in the medium (or nearest possible) future.

A disappointing Brexit White Paper makes for disappointing comments

Theresa May's Government has published the White Paper on The United Kingdom’s exit from and new partnership with the European Union earlier today. It is an extremely disappointing document that, unfortunately, only allows for disappointing comments. The only remarkable aspect of the Brexit White Paper is the number of dimensions in which it is disappointing.

Its timing is probably one of its most disappointing aspects. Given that the House of Commons debated the European Union (Notification of Withdrawal) Bill and voted its passing to Committee stage only yesterday, today's publication of the Brexit White Paper mimics an absurd claim of power by the Government over the Parliamentary scrutiny of Brexit (the power to unduly limit and restrict it).

On the contrary, publication of the White Paper before the Parliamentary debate would have created the double effect of avoiding the impression that Government is only very reluctantly complying with the UK Supreme Court's requirement for Parliamentary approval of the giving of notice under Article 50 TEU (which would have been positive for the Government), but would also have allowed MPs to criticise the Government for the appallingly poor quality of the document (as per below, which would have been clearly negative for the Government) before even moving to the discussion of amendments.

Clearly, then, the timing of the publication of the Brexit White Paper demonstrates the Government's insecurity about its content and its overconfidence about the ability to push for (hard) Brexit no matter what. In my view, this is a dangerous combination of attitudes.

The content of the Brexit White Paper is also extremely disappointing. It is not more than a minimally expanded version of the speech given by Theresa May PM some weeks ago, coloured with some superficially analysis macroeconomic data, and most of its sections are simply a very superficial account of the current state of EU law coupled with the (unfounded) hope and half promise that Theresa May PM's Government will obtain a great deal from the EU.

Twitter is already full of criticism based on obvious mistakes in the Brexit White Paper, and I am sure that the analysis that will emerge in blogs and newspapers in the next few hours and days will not be more positive. However, I also find it unlikely that much of the criticism will be able to go beyond general issues or points already raised against Theresa May PM's speech, as the Brexit White Paper has not brought any meaningful additional detail that we can analyse. In any case, it may be worth highlighting that I found the sections on the creation of an alternative dispute resolution mechanism to substitute the ECJ's jurisdiction (section 2 plus Annex A) and on trade with the EU (section 8) particularly disappointing.

Section 2 on 'Taking control of our own laws' is very confusing and seems to me to miss several important points. The fundamental issue it does not address is the extent to which future case law of the ECJ will still need to be applied and followed by UK courts and in the UK more broadly, simply as a result of the incorporation of EU law into domestic law, or as an non-renounceable element of the EU's regulatory architecture of the single market.

This has implications in a number of dimensions, such as the difficulty in coordinating the effects of the Great Repeal Bill (which is meant to consolidate EU law into UK law as of the time of withdrawal) with the effects of the ECJ's interpretation of EU law, which is most frequently not time bound and thus has retroactive effect. A simple example would imply a situation where UK withdrawal from the EU happens in 2019 and later, say in 2021, the ECJ interprets a provision of EU law that was incorporated into UK law by the Great Repeal Bill. In that case, lawyers will feast with the litigation that will ensue from the difficult issue of determining the interpretation to be given to the 'nationalised' provision of EU law and the extent to which it would be consistent with the (Parliamentary) intention of using the Great Repeal Bill to 'download' EU law into UK law without any amendment at that point (or barring ulterior Parliamentary intervention or explicit reform through secondary legislation).

But even without going that far in creating a severance between UK and EU law, there is an unknown number of trade-related areas that will require continued compliance with ECJ case law as a technical matter and as far as the UK intends to have any access to the single market. For example, if the UK wants to engage meaningfully in trade with the EU, one of the main issues will be the need for continued compliance with technical standards (to which the Brexit White Paper also refers, but in a confusing or slightly misleading way in section 8), and these are bound to be increasingly subject to ECJ interpretation, particularly after the assertion that they are part of EU law and thus subject to its jurisdiction in the recent case of James Elliott Construction Limited v Irish Asphalt Limited (C-613/14, EU:C:2016:821).

Disposing of these very relevant difficulties in a simple paragraph that boasts that "We will bring an end to the jurisdiction of the CJEU in the UK. We will of course continue to honour our international commitments and follow international law." is a grossly misleading oversimplification.

Section 8 on 'Ensuring free trade with European markets' is not better. From a legal perspective, the point I find most internally contradictory in this section is the fact that the Brexit White Paper indicates continuously how several areas of regulation of the internal market for services hinge on the existence of a single regulatory framework at EU level, on legal certainty (which is logically and legally based on the interpretation of that regulatory framework by the ECJ) and on an effective system of civil judicial cooperation as well as cooperation between regulators and independent enforcement agencies.

Not get bogged down on detail, I fail to understand how this is a model that can be replicated without the need for the UK to comply with EU law (as interpreted by the ECJ, see above) and, even if that is possible, how could that be in line with a reduction of red tape and administrative burden for companies that would, by implication, need to comply with more than one regulatory framework--unless they were only active in the UK. Generally, the logic of wanting to create mutual recognition and at the same time pushing for regulatory disparity seems starkly at odds with the logic of regulatory architecture of the single market. Similar problems arise with the Brexit White Paper veiled insinuation that the UK can still be member of pan-EU agencies despite not being a Member of the EU/EEA. Overall, this section simply does not offer a logic that could pass critical muster.

From that perspective, the Brexit White Paper correctly identifies that "Unlike other trade negotiations, this is not about bringing two divergent systems together. It is about finding the best way for the benefit of the common systems and frameworks, that currently enable UK and EU businesses to trade with and operate in each others’ markets, to continue when we leave the EU through a new comprehensive, bold and ambitious free trade agreement." But it is plainly wrong in the implications it tries to derive from this. The blatantly obvious impossibility of this logic is that, whereas in other types of trade negotiations the harmonisation of systems will result in a reduced administrative burden for both the public and private sectors, in this case the need to dissociate a truly integrated system into two coordinated systems will necessarily create those burdens for both the public and the private sector. And this is what makes this negotiation so riddled with impossibilities and so suicidal: it is a negotiation to move from a win-win to a lose-lose scenario, and the only thing the negotiating parties can hope is to minimise the loss. In my mind, this is an irrational process to engage with, and the only justification for it is that Theresa May PM's government hopes for benefits that no one else identifies. If nothing else, the Brexit White Paper has done nothing to provide evidence of the existence of those potential gains or of the feasibility of the (under-worked) plans to unleash them.

Overall, thus, I find the Brexit White Paper extremely disappointing. And I can only blame myself for having had any hopes that it would not be so.

 

 

Interesting Preliminary Reference on Interaction between Competition and Public Procurement Law (C-531/16) [guest post* by Dr Deividas Soloveičik]

This guest post by Dr Deividas Soloveičik provides interesting background and critical remarks on a Lithuanian reference to the European Court of Justice (ECJ) for a preliminary ruling on issues concerning the interaction of public procurement and competition law--see case Specializuotas transportas, C-531/16. It will be interesting to keep an eye on the case, as it brings an opportunity for the ECJ to expand its limited case law in this area.

Unravelling conflicts of interest

The Supreme Court of Lithuania has been extremely active during recent years in developing the case-law related to both the concept and a genuine practice of the conflicts of interest in public procurement law. It’s interesting to note that the ideas the national judges are bringing “on the table” are much more than the inside legal practice of a Member State. The questions regarding the subject have been referred to the Court of Justice of the European Union (CJEU) and, therefore, became of cross-border interest.

It started from eVigilo case [1] where the Supreme Court sought and received the answers from the CJEU based on which it farther ruled inter alia on how the members of the evaluation committee of the contracting authority must behave during the procedures. First, the national court explained that the concept of the conflict of interest is to be understood broadly and in case of even a minor doubt that any member, employee or whomever might be biased in favor of a particular supplier during the public procurement procedures, the public buyers must take all the measures and actions to eliminate this doubt. Thus, the failure to prove that the relevant actions have been taken might suffice to repeal the subsequent decisions made by the contracting authority.

Secondly, the court explained that the burden of proof always rests on the shoulders of the contracting authority. In other words, namely the latter must prove that it has taken all required measures to inspect and eliminate any alleged or real conflict of interest (by suspending the concrete member of the evaluation committee, etc.) and not the other way around.

Finally, the Supreme Court held that the declarations of honesty or other documents alike do not have a priori legal power and thus do not automatically mean that the contracting authority has passed the conflicts of interest test. As mentioned before, the burden of proof that the transparency prevails belongs to the buyer, not the seller.

It is interesting to note that in the text of the decision in eVigilo the Supreme Court referred to the above-mentioned situations as the “outside conflicts of interest”. However, in later practice, as it will be shown, the Supreme Court named them as the “vertical conflicts of interest”.

The development of the concept did not stop there. Very recently, the national Court has confirmed the second part of the doctrine by referring to it as the “horizontal conflicts of interest”. This was done by two main cases both heard in 2016. Before providing their overview, it has to be mentioned that by “horizontal conflicts of interest” the Lithuanian case-law means situations of bid rigging and any kind of agreements which in whatsoever way distort the competition in a particular public procurement procedure, including the ones that are being caught by the competition law rules on the forbidden arrangements and the ones, that were entered into or agreed upon by the suppliers, the tenderers. The contracting authority is not involved in these cases. Hence, from a very rough point of view there is no conflict of interest, as in such cases the tenderers have not the conflict but, on the contrary, the one same goal – to deceive the contracting authority. However, in the eyes of the law, at least how the Supreme Court views it, this is the horizontal conflict of interest.

Thus, the first case was Maniga.[2] This company participated in a public tender arranged by the Klaipėda city municipality. It lost to another company – Sankryža. There was one more participant in a public tender – Biseris. Maniga, a claimant, argued that Sankryža‘s bid must have been rejected because it was directly connected and interdepended with Biseris’. The claimant contended that Sankryža and Biseris breached the principle of transparency, non-discrimination and fair competition, since the former company was 100% owned by the latter, they shared the same managing employees, their bids were resembling in a way of the same writing style, etc., and, therefore this meant that these companies exchanged information while participating in the same tender. Thus, Maniga argued that both of their bids had to be rejected and the claimant had to be awarded a public contract.

The Supreme Court started by the endorsement of the fair and transparent competition in every single public procurement procedure that takes place. The Court mainly referred to the national and EU competition law rules (including Art 101 TFEU) and ruled that the principle of fair competition is an inseparable part of a public procurement process. Hence, each participant must obey and follow that principle. The Court maintained the idea that in order to establish the legal connection between the tenderers, the competition law rules on related economic operators must also be applied.

Farther, the Supreme Court went on with the analysis of the concerted practices in public procurement procedures. The Court ruled that it was unfair to require from the interested party to prove the illegal arrangements between the other suppliers as the information the former tenderer has is always very limited. Thus, by making a reference to the eVigilo findings, the Court concluded that in order to prove the concerted practices in public procurement, it is enough to prove the irrational actions or bizarre business behavior of the relevant suppliers. To enforce this line of reasoning the Supreme Court backed it up with the case-law of the CJEU, namely Ahlström Osakeyhtiö v. Commission [3]. Hence, the Court found in favor of the claimant.

The Maniga case entrenched the foundations for the prohibition of the horizontal conflicts of interest. For the sake of clearness, it is important to mention that neither the case-law nor the law itself hinder the participation of the related companies in the same public procurement process. However, this case highlighted the importance of the principle of fair competition and made it as a ground for the rejection of the bids in public procurement in case the principle is breached. Besides, the ratio of the Maniga decision enabled the contracting authorities to reject the bids of all suppliers in case the signs of the concerted practices are detected. However, needless to say, from the point of the wording of the EU public procurement directives, especially the package of 2004, including the Lithuanian legislation, this ground for rejection is not directly regulated. Therefore, even if the idea of the Court is to promote and extremely safeguard the genuine competition among suppliers is very rational, however, legal technique to implement it remained undeveloped.  

And exactly the latter point shall be resolved not only by the Supreme Court of Lithuania but also by the CJEU, which has been referred to by the former Court for a preliminary ruling in a VSA Vilnius case [4].

This case is similar with its facts to the Maniga case. There was a public tender regarding waste management and utility. There were four tenderers. The first two were interrelated and shared the same shareholder and management board directors. Hence, the third-place bidder started legal proceedings against the contracting authority as well as the two related bidders and claimed that their bids had to be rejected on the legal grounds that were provided in the Maniga case, and that the public contract had to be awarded to the claimant.

The Supreme Court started by defining the scope of the case. The Court outlined that the relevant legal questions were the following: (i) the ex ante obligation of the suppliers and the tenderers to inform the contracting authority of their interdependence; (ii) the obligation of the contracting authority to be pro-active in search of the legally related tenderers and the formal outcome of a failure to act so; (iii) the rules on burden of proof in cases of the concerted practices or unfair competition; (iv) the applicable legal norms in cases of concerted practices or unfair competition which is present during the public procurement procedure. These are not only the questions the Supreme Court raised but also the dilemmas both national Court and the CJEU have to solve. As it might be understood most of the mentioned questions were referred to the Court of Luxembourg for the clarification from the standpoint of the EU public procurement law.

Dilemma #1. Hence, the first important question the Supreme Court faced in VSA Vilnius case is the following: do mutually legally related tenderers (e.g. two subsidiaries of one holding company, etc.) have the obligation to inform the contracting authority of their interdependence and possibly common economic ties? Contrary to the Maniga case, where the Court started with the promotion of the principle of fair competition as a guiding light in these kind of situations, the reasoning in VSA Vilnius started from the analysis of the EU and national legal regulation and coming to the conclusion that neither set of laws provides expressis verbis such requirement for the tenderers. However, the Court reasoned that even in the absence of such regulation this kind of legal obligation should arise from the general public procurement principles – equality, non-discrimination and transparency. On the other hand, namely the principles of equality and transparency require the contracting authority to strictly stick to its own procurement documents in accordance to which the purchase procedure is being organised. Thus, how could the public buyer require that tenderers ex ante inform it on their own initiative about the common economic ties if such obligation has not been explicitly envisaged in the tender documentation?

Dilemma #2. On the same note, the Supreme Court addressed the second question, related to the contracting authorities’ obligation to be pro-active and engage in the investigation on whether the particular tenderers are economically connected. On the one hand, the Court referred to eVigilo case and the conclusions made by itself and the CJEU, namely regarding the very active role of the contracting authority in cases of even alleged (not yet proved!) conflicts of interest. However, on the other hand, it remained unclear to the Court if the passive role of the public buyer should be qualified as a breach of the principle of transparency, keeping in mind that overall the related parties are not forbidden from participation in the same tender. Hence, the question is the following: does the fact that the related tenderers de jure are competing per se mean the presence of the reliable information which, as it has been decided in the eVigilo by the CJEU, first, would be sufficient to hold the procurement in breach of the principle of transparency and the whole procedure illicit and, second, would it require the contracting authority to start the investigation on the merits of this kind of information?

Dilemma #3. The third enquiry must have been the least sophisticated to the Court, since it addressed the purely procedural issue of how to prove the horizontal conflicts of interest in the form of concerted practices, bid rigging, etc. The Supreme Court relied on the standards and jurisprudence in the field of competition law, which allows indirect evidence as admissible in these kinds of situations. In its reasoning, the Court cited the CJEU Eturas case [5] and the conclusions made by the European Court regarding the investigation and the evidence in such cases. Thus, the clearest rule that was made in the VSA Vilnius by the Supreme Court is the one that the indirect evidence while detecting and proving the horizontal conflicts of interest is very welcome.

Dilemma #4. The latter one is the most serious issue at hand. The Maniga and VSA Vilnius cases proved that the crux of the concept of the horizontal conflicts of interest is based on the distorted competition made by the suppliers that are mutually related. In other words, horizontal conflicts of interest appear when two or more tenderers pretend to engage in artificial competition while having a disguised intent to deceive the contracting authority and to gain a non-market price for the supply of goods, execution of works or provision of services. The economic relationship among the tenderers in not a legal problem. However, if such relationship leads to the concerted practices, this is a breach of principle of transparency. It is obvious that the law on public procurement heavily relies on the rules of competition law, especially regarding the notion and forms of bid rigging, concerted practices, etc.

However, the paradox is that from the perspective of the competition law it is not illicit for the two or more inter-related parties to participate in a public procurement procedures, exchange of information, co-ordinate practices, etc. since these economic operators are held as one unit under the doctrine of single economic unit. Hence, by making references to the CJEU Corinne Bodson [6], Viho [7], Akzo Nobel [8] and other cases the Supreme Court expressed the following doubts. First, the Court held that on the one hand, horizontal conflicts of interest imply the breach of both the principle of transparency provided by the public procurement law and the competition law rules on concerted practices. However, on the other hand, the doctrine of single economic unit allows the latter practices (in cases of participation of related parties). This leads to a situation where public procurement law relies on competition law to deem the behavior of the tenderers as illegal, meanwhile, in the light of the competition law such actions are fully available (as mentioned, in case of related economic operators).

Moreover, even if the latter situations were allowed, the Supreme Court expressed doubts on whether it did not mean that the tenderers would be allowed to submit the alternative bids when such bids would be forbidden. In other words, if it is held under the rules of competition law that two related economic operators comprise a single economic unit, doesn’t that mean that if such unit participates in a public tender it submits alternative bids (in the meaning of Art. 45 of Directive 2014/24) and not the two separate bids? Again, the latter situation is hindered by the public procurement regulation and usually by the tender documents.

Based on the doubts raised, the Supreme Court referred the following questions to the CJEU for a preliminary ruling:

1. Do the principles of equality and transparency, envisaged in Art. 2 of the Directive 2004/18 due to the freedom of movement, provided in TFEU Art. 45 and 56, including the principles of free and fair competition (construed together or separately) must be understood and interpreted as:
In case mutually related suppliers, whose economic, management, financial and other relations may objectively cause doubts regarding the independence and the protection of the confidential information and (or) may cause (potentially) the advantage against the other suppliers, if they decide to submit separate (their own) bids in the same public tender, do they have in any case an obligation, notwithstanding whether such obligation of theirs is provided in the national legislation, to disclose to the contracting authority this kind of relationship, even if the contracting authority does not require so on its behalf?
2. If the answer to the first question is:
a) Positive (i.e. the suppliers in any case must disclose to the contracting authority their relationship), does it mean that the fact of the failure to execute this obligation fully or partially is sufficient for the contracting authority and for the judicial review body to deem that the related tenderers, who have submitted the separate bids in the same public tender are participating without the competition (fraud)?
b) Negative (i.e. there is no obligation for the suppliers – neither provided by the legislation nor by the purchase documents – to disclose their relationship), does the contracting authority bear the risk of the participation of such related suppliers, including the outcomes that arise thereof, in case the contracting authority does not include this kind of obligation for the tenderers in a purchase documents?
3. Despite the answer to the first question and taking into consideration the decision of the CJEU in eVigilo case, do the legal norms indicated in the first question as well as the third section of the first paragraph of Art. 1(1) of the Directive 89/665 and the Art. 2 (1) (b) of the same Directive (separately or together, without a limitation to these legal norms), must be understood and interpreted that:
a) In case the important relationships (connections) among some of the tenderers become clear in any form during the public procurement procedures to the contracting authority, does the latter, despite its own evaluation of this or other facts (e.g. dissimilarity of the bids of the suppliers, including their content, the public oath of the supplier to compete with the other tenderers in a fair manner, etc.), have an obligation to address separately the related tenderers of a public tender and to seek from them the explanation on if and how their personal condition is in line with the free and fair competition of the suppliers?
b) The contracting authority, having this kind of obligation, however, failing to execute it, is it a sufficient ground for the court to consider its actions, which have not guaranteed the transparency and the objectivity of the procedures, as illegal by not requiring from the claimant or without deciding on its own initiative regarding the influence of the state of the related parties to the outcome of a public tender?
4. Do the legal norms, indicated in the third question as well as the provisions of Art. 101 (1) of the TFEU (together or separately, but not limiting thereof) and taking into consideration the decisions of the CJEU in eVigilo, Eturas and VM Remonts, must be understood and interpreted that:
a) In case the claimant having found about the rejection of the bid of one of the related tenderers, meanwhile, awarding the contract to the other one as well as taking into consideration the other circumstances related to their (related companies) participation in a public tender, such as the same management of the companies, the sole holding company, which has not taken part at the public tender, the fact that the related suppliers have not disclosed their inter-relationship and have not provided any explanation regarding this, inter alia, because there was no request, etc., and when in the light of the afore-mentioned the contracting authority has not taken any action, is this information at its least is sufficient to claim the actions of the contracting authority as illegal and the ones that have not ensured the transparency and objectivity of the public tender, without the separate requirement from the interested party to prove the unfair activities of the related tenderers?
b) The related tenderers do not prove the actual and fair competition in a public tender only because one of the tenderers voluntarily provided the declaration of honesty as well as it has quality management systems implemented and the content of the bids is not similar?
5. Do the actions of the tenderers, who participate separately, taking into consideration the submission of the declaration of honesty voluntarily by one of the bidders, maybe be in principle evaluated from the perspective of the Art. 101 TFEU and the related case-law of the CJEU?

A couple of closing remarks regarding the aforementioned.

Firstly, the questions of the Supreme Court of Lithuania have cross-border interest. The answers are important for the notion, understanding and implementation of the concept of conflicts of interest in a public procurement practice. Moreover, this will have the impact on the understanding the content of Art. 24 of the Directive 2014/24.

Secondly, the CJEU most likely will have to provide the wide interpretation of the concept at issue, because the public procurement regulation must tackle the practices that distort competition.

Finally, in situations which are covered by the doctrine of the single economic unit (in cases of the same business group companies, etc.) it is very possible that the public procurement law would prevail over the general rules of the competition law, as in any case the public procurement procedure may not allow the situations where the companies of the same economic group would agree on the commercial conditions that would be profitable to them but expensive in terms of the financial funds, quality, even the prestige to the contracting authority and the public in general.

Dr. Deividas Soloveičik, LL.M

Dr Deividas Soloveičik is a Partner and Head of Public Procurement practice at COBALT Lithuania. He represents clients before national courts at all instances and arbitral institutions in civil and administrative cases, provides legal advice to Lithuanian and foreign private clients and contracting authorities, including the European Commission , on the legal aspects of public procurement and pre-commercial procurement.

Dr Soloveičik is an Associate Professor and researcher in commercial law at Vilnius University and a contributor to legal publications. He also closely cooperates with globally recognized academic members of the legal profession. Since 2011, MCIArb. Dr Soloveičik is a member of the Chartered Institute of Arbitrators; since 2016, he is a member of the European Assistance for Innovation Procurement – EAFIP initiative promoted by the European Commission and a recommended arbitrator at Vilnius Court of Commercial Arbitration.

Guest blogging at HTCAN: If you would like to contribute a blog post for How to Crack a Nut, please feel free to get in touch at a.sanchez-graells@bristol.ac.uk. Your proposals and contributions will be most warmly welcomed!

___________________

[1] Judgment of the Court of Justice of the European Union of 12 March 2015, eVigilo Ltd v Priešgaisrinės apsaugos ir gelbėjimo departamentas prie Vidaus reikalų ministerijos, Case C-538/13, ECLI:EU:C:2015:166.
[2] Judgement of the Supreme Court of the Republic pf Lithuania of 4th March,2016 in a civil case No. e3K-3-155-415/2016.
[3] Cases C-89/85, C-104/85, C-114/85, C-116/85, C-117/85 ir C-125/85 until C-129/85, ECLI:EU:C:1988:447.
[4] Ruling of the Supreme Court of the Republic pf Lithuania of 11th October,2016 in a civil case No. e3K-3-439-469/2016.
[5] Case C-74/14, Eturas and Others v Lietuvos Respublikos konkurencijos taryba, ECLI:EU:C:2016:42.
[6] Case C-30/87,Corinne Bodson v SA Pompes funèbres des régions libérées, ECLI:EU:C:1988:225.
[7] Case C-73/95, Viho Europe BV v Commission of the European Communities,  ECLI:EU:C:1996:405.
[8] Case, C-550/07, Akzo Nobel Chemicals Ltd and Akcros Chemicals Ltd v European Commission, ECLI:EU:C:2010:512.

UK Supreme Court Miller Judgment seeks to reassert Parliamentary sovereignty, but it does so in breach of EU law and in disservice to the UK Parliament

The UK Supreme Court (UKSC) has today handed down its Judgment in the well-known litigation concerning the UK's constitutional requirements for triggering Art 50 TEU and starting the process of leaving the EU -- see R (on the application of Miller and another) v Secretary of State for Exiting the European Union [2017] UKSC 5 (the Miller Judgment).

The UKSC has ruled that the UK Government cannot trigger Article 50 TEU without previous UK Parliament legislative intervention. In doing so, the UKSC has sought to reassert the basic constitutional principle of Parliamentary sovereignty. However, it has done so in a way that both infringes its duties under EU law and does a disservice to the UK Parliament.

Breach of UKSC's duties under EU law

One of the difficult legal issues on which the Brexit litigation hinged concerned the interpretation of Art 50 TEU and, in particular, the revocability of a notice given under Art 50(2) TEU. The interpretation of this point of law falls within the exclusive competence of the European Court of Justice (ECJ) under Art 263 TFEU. Interestingly, the UKSC stressed this monopoly of interpretation as a key element of EU law at para [64] of the Miller Judgment: 'so long as the United Kingdom is party to the EU Treaties, UK courts are obliged (i) to interpret EU Treaties, Regulations and Directives in accordance with decisions of the Court of Justice, (ii) to refer unclear points of EU law to the Court of Justice, and (iii) to interpret all domestic legislation, if at all possible, so as to comply with EU law' (emphasis added).

However, the UKSC has violated the ECJ's monopoly of interpretation of the EU Treaties by accepting the parties' commonly agreed position on the irrevocability of an Art 50(2) TEU notice at [26] of the Miller Judgment:

In these proceedings, it is common ground that notice under article 50(2) (which we shall call “Notice”) ... once given, it cannot be withdrawn. Especially as it is the Secretary of State’s case that, even if this common ground is mistaken, it would make no difference to the outcome of these proceedings, we are content to proceed on the basis that that is correct, without expressing any view of our own on either point. It follows from this that once the United Kingdom gives Notice, it will inevitably cease at a later date to be a member of the European Union and a party to the EU Treaties (emphases added)

In doing so, the UKSC has infringed its obligation under Art 267(3) TFEU to engage in a preliminary reference to the ECJ concerning the interpretation of Art 50 TEU (for legal background see here and here). This cannot be saved by an argument that, under domestic procedural rules (or conventions), the UKSC had the possibility of taking this approach--and effectively dodging one of the most complex and unpredictable legal issues on which the litigation rested.

There are several reasons for this, but the primary one is that, as matter of EU law, a preliminary reference by the highest court of an EU Member State is unavoidable where the interpretation of EU law is necessary to enable it to give judgement--or, in other words, where the judgment relies on a given interpretation of EU law.

In my view, it is beyond doubt that the UKSC Miller Judgment is based on the interpretation that an Art 50(2) TEU notice is irrevocable, and that this represents the legally binding view of the majority judgment, regardless of the attempt to save the UKSC's view on this point in para [26] -- or, in other words, it is not (logically, legally) true that the UKSC's Miller Judgment operates 'without expressing any view of our own on either point' (ie regarding the revocability or not of the Art 50(2) TEU notice).

There are explicit indications of this interpretation in paras [59], [81], [92] and [104], where the Judgment indicates that

... analyse the effect of the 1972 Act and the arguments as to whether, in the absence of prior authority from Parliament in the form of a statute, the giving of Notice by ministers would be ineffective under the United Kingdom’s constitutional requirements, as it would otherwise impermissibly result in a change in domestic law [59]

 ... A complete withdrawal represents a change which is different not just in degree but in kind from the abrogation of particular rights, duties or rules derived from EU law. It will constitute as significant a constitutional change as that which occurred when EU law was first incorporated in domestic law by the 1972 Act. And, if Notice is given, this change will occur irrespective of whether Parliament repeals the 1972 Act [81]

... There is a substantial difference between (i) ministers having a freely exercisable power to do something whose exercise may have to be subsequently explained to Parliament and (ii) ministers having no power to do that thing unless it is first accorded to them by Parliament. The major practical difference between the two categories, in a case such as this where the exercise of the power is irrevocable, is that the exercise of power in the first category pre-empts any Parliamentary action. When the power relates to an action of such importance to the UK constitution as withdrawing from the Treaties, it would clearly be appropriate for the power to be in the second category [92]

 Although its invocation [of Art 50 TEU] will have the inevitable consequence which Lord Pannick described ... [104, all emphases added]. 

In view of the relevance of the points of irrevocability of the Art 50(2) TEU notice, it is clear to me that the UKSC had an obligation to seek the interpretation of this provision by the ECJ and that, in not doing so, it has breached EU law. Moreover, beyond what some may consider a highly technical or academic point, by not seeking this clarification the UKSC has also done a disservice to the UK Parliament.

Disservice to the UK Parliament

The UK Parliament will imminently enter into debates and legislative action concerning the trigger of the process to withdraw from the EU by serving notice under Art 50(2) TEU. Unless political events unfold in a surprising way, and based on a previous Parliamentary resolution, the UK Parliament should be considered to be politically committed to support the UK Government's stated commitment to trigger Art 50 TEU by the end of March 2017.

However, these debates and eventual Parliamentary decisions will develop under the shadow of uncertainty that remains around the revocability or not of the Article 50(2) TEU. In that regard, the debates and positions expressed by MPs will not be as meaningful as they could if it was clear that the triggering Art 50 TEU would actually put (or not) the UK in the unavoidable course of leaving the EU -- with or without an exit deal, and regardless of the assessment of the fallback position. This can result in the need to make wild assumptions and to necessarily decide on the basis of worse case scenario analysis that may not reflect an alternative (possible) reality of reduced definiteness of the triggering of Art 50 TEU.

The UKSC could have avoided this situation by referring the question for interpretation to the ECJ. On the contrary, by premising its Judgment on the irrevocability of the notice, the UKSC has raised the stakes and the risks of Parliamentary debate even higher and created a situation where decisions are bound to be made in a rushed fashion and in a scenario of all or nothing (perceived) implications of the giving of notice under Art 50(2) TEU. It is hard to see how this can contribute to the practical enablement of Parliamentary sovereignty.

GC rules on possibility to offer summary motivation for procurement decisions where disappointed tenderers have been actively engaged in information exchange (T-419/15)

EU-court-taking-legal-action-against-Monsanto-GMO-seriously-Testbiotech_strict_xxl.jpg

In its Judgment of 17 January 2017 in Cofely Solelec and Others v Parliament, T-419/15, EU:T:2017:8 (available only in French), the General Court (GC) assessed the compatibility with the rules on public procurement by the EU institutions of the partial cancellation of a tender for a works contract by the European Parliament (EP). The interesting detail in the facts of the case is that the EP decided to partially cancel the tender after the award of the contentious lot had already been challenged, as well as the very succinct motivation it provided for such a decision. The reasoning of the GC, even if based on the Financial Regulation, is of general interest concerning the 2014 Public Procurement Package.

In the case, the EP had called for tenders for several lots of works regarding the refurbishment of one of its buildings. One of the lots concerned electrical work. The economic operators whose joint offer had been ranked second opposed the award of the contract on the basis that the winning tender was abnormally low. The EP initially dismissed the allegation of abnormality of the lowest priced offer and intended to proceed to the signature of the contract. This was challenged judicially by the disappointed tenderers, which prompted the EP to reassess the claim of abnormality of the lowest-priced tender. While that challenge was at judicial stage, the EP decided to cancel the tender for that lot. The reasons provided to the disappointed tenderers for such decision were that

After an in-depth analysis of the documents in the file, it appeared that the tender of the successful tenderer was not admissible insofar as the documents submitted concerning the selection criteria did not provide an assurance that they [the criteria] were fully satisfied. The other offers received, including yours, substantially exceeded the estimate of the value of the contract previously relied upon by the contracting authority and are therefore unacceptable (T-419/15, para 56, own translation from French). 

The procedural circumstances of the case are complicated due to the cross-challenges of the award decision to the apparently abnormally low offer and of the subsequent decision to partially cancel the tender, and the fact that disappointed tenderers received different pieces of information in the course of each of the judicial procedures. However, the point in the GC's reasoning I find interesting is that it considers that

59 ... it is settled case-law that the statement of reasons required by Article 296 TFEU must be adapted to the nature of the act in question and must show clearly and unequivocally the reasoning of the institution ... so as to enable the persons concerned to know the reasons for the measure adopted and the competent court to exercise its review power ...
60 As regards the intensity of the statement of reasons, there is no requirement that the decision should specify all the relevant elements of fact and of law. The sufficiency of the statement of reasons given for a decision may be assessed in the light not only of its wording but also of the context in which it was adopted and of all the legal rules governing the matter concerned ... It is sufficient that the decision expounds the main points of law and fact in a succinct but clear and relevant manner ...
61 Furthermore, where a decision has been adopted in a context which is well known to the person concerned, it may be motivated in a succinct manner ...
72 ... the applicants took part in the tender procedure run by the Parliament and alerted the latter several times as to certain irregularities, in particular as regards the tender of the successful tenderer and, consequently, the context in which the contested decisions were adopted was familiar to them.
73 ... in accordance with the case-law cited ... above, the contested decisions could be the subject of a summary statement of reasons (T-419/15, paras 59-61 and 72-73, own translation from French and references to previous case law omitted). 

This is interesting because the GC is creating space for contracting authorities to preserve the confidentiality of some information (in the case, in particular, the way the EP had arrived at the estimate of the contract value, which disclosure was considered damaging of the EP's options to obtain value for money in any future re-run of the tender), but it also seems to create a tricky set of incentives for disappointed tenderers, which will have to assess the extent to which an active participation in information exchange with the contracting authorities reduces their protection in terms of debriefing and rights to challenge procurement decisions.

Interestingly, the Judgment goes on to assess whether the EP erred in its assessment that the offer of the disappointed tenderers was unacceptable due to its high cost (per comparison with the estimate). The analysis is relevant because it concerns the ability of the EP to justify its estimate for the cost of the tendered works in relation to (a) its available budget and (b) to the cost of the offer eventually rejected (both benchmarks being challenged by the disappointed tenderer). This approach to the justification of the cost estimates was implicitly supported by the GC in relation to the obligation to provide reasons (above) by indicating that part of the information to which the disappointed tenderer was privy, and which allowed for the summary motivation of the partial annulment decision, included the fact that the lowest-priced offer was almost €11 million cheaper than its own offer (para 67), and that the lowest-priced offer was "within an acceptable range relative to the controller's estimate of the costs on the basis of the detailed surveys [for the work]" (T-419/15, para 68, own translation from French).

In my view, the key point concerning the justification of the estimates comes at the end of the GC's reasoning, where it actually deactivates any claim based on under-estimation of the cost of the works on the basis of a budgetary logic that is difficult to work around:

107 In any event, in the present case, the tenderers' offer, irrespective of the correctness of the [estimated] value of the contract, was greater than Parliament's available budget, so that the latter could not have been awarded to it.
108 In other words, in view of the absence of sufficient budgetary appropriations allocated by the budgetary authority to the contract at issue, the Parliament's annulment of the tender was a logical, if not necessary, choice (T-419/15, paras 107-108, own translation from French).

As mentioned, from a strict legality assessment, this is a definitive argument. However, practically, it seems difficult to square with procurement practice that does not result in wasted effort and frustration. Given the absolute budgetary constraint, it could be desirable for the contracting authority to pre-disclose this limit, so that no excessive offers are submitted and tenderers that cannot (or do not want to) carry out the work within the allocated budget can spare themselves (and the evaluation team/contracting authority) the trouble. However, this transparency would be undesirable in terms of price signalling and allowing tenderers to engage in limit pricing [at least under some market circumstances; for discussion, see A Sanchez-Graells, Public Procurement and the EU Competition Rules, 2nd edn (Oxford, Hart, 2015) 73 ff].

So one can but wonder whether budgetary rules could be reviewed to create some flexibility in terms of allocation of budget, particularly in projects where the estimation of costs is challenging (which does not mean to say that this was the situation in the specific case). Otherwise, the uneasy relationship between budgetary and procurement rules will continue to create difficult situations (and frustration for practitioners).
 

New edition of Public Procurement Indicators published by the European Commission -- some odd uk numbers

In late December 2016, the European Commission published its Public Procurement Indicators 2015. The statistical information included in this report shows some interesting trends, such as the general increase of procurement expenditure in the EU in 2015 -- which was up by almost 7% from 2014, to reach a total of €450.21 billion -- as well as the continued trend of concentration of procurement expenditure that results from aggregation and/or centralisation of procurement at Member State level.

Regarding the trend towards greater concentration of procurement expenditure in large awards, it is interesting to note that 'at EU level more than one third of the value ... is awarded through contract award notices of 100 million euros or more. This relative concentration of procurement, in large awards, is extremely remarkable in the UK and to a lesser extent in Poland and France. On the opposite side Germany and France concentrate a large fraction of the value procured in the works sector in the smaller size awards'.

This seems surprising because projects of more than €100 million may be relatively common in works (ie infrastructure), as well as large framework agreements for common use equipment (notably, IT hardware), but services contracts of that size would have seemed much less common at first thought (although it is possible that IT expenditure is moving from goods to services as cloud computing and other services are 'virtualised'). In any case, the the fact that the trend is much stronger in the UK than in the rest of the EU (combined) strikes as odd.

Indeed, as the Commission's report stresses, the UK leads the statistics for the award of very large contracts (ie those of a value over €100 million), both for works (66%) and, possibly more remarkable, for services (70%) -- with a smaller but still very significant lead on goods (52%). What is worth emphasising is that the UK's figures are 10 times the magnitude of those for any other Member State (and around 50 to 100 times those of most Member States) both for works and services, and that they double the figures for any other Member State in goods (while still being around 50 to 100 times those of most Member States).

A recalculation of the figures concerning very large contracts excluding data for the UK shows that 22% of procurement expenditure at EU27 level is awarded through contracts of €100 million or more for works and services, and 25% for goods (and, anecdotally, it should be taken into account that a  significant part of the latter is attributable to Italy's Consip centralised procurement activities). Thus, the fact that UK alone can move total figures up by 11% (ie a deviation of 50% of the EU27 statistics) seems quite striking.

Moreover, in general, the UK shows a disproportionately high share of contracts advertised in TED (and the estimated value of its contracts is larger throughout the value scale, with many less small contracts and many more large contracts than the EU average, which has an effect on the obligation to publish notices). This is particularly noticeable when compared to other EU countries with large procurement expenditure -- eg in 2015 the UK advertised an estimated 37% of its public expenditure, whereas Germany advertised less than 10% (see graphs below).

In view of these statistical divergences, a closer look at the UK numbers seems necessary in order to try to understand this trend towards concentrated expenditure through very large contracts. However, there is no detailed information in the report on the basis of which to carry out a qualitative analysis.

Many hypotheses are imaginable, such as the possibility that very large centralised contracts are tendered (for example, by the Crown Commercial Service) but they are not necessarily executed to a large percentage of their estimated value, or that the UK is actually significantly more centralised in terms of procurement than other Member States, particularly in services. Each of these possibilities opens itself up for speculation--for instance, about the reliability of statistical information that could include awarded but unexecuted procurement value (which may be very, extremely relevant in the inminent Brexit-related negotiations, as well as for any reevaluation of GPA coverage both for the EU and the UK) or, on the second scenario, about the drivers for such significant differences in centralisation volumes in different Member States and about the possibility of centralised procurement of services in a way that still allows for proper provision of (public) services to end users.

Either way, I find these issues most intriguing and, in case the issue of unexecuted (contracted) expenditure is included in the statistics, I think that more work should go into the collection of actual information and the publication of raw data that allows for refined analysis--ideally, in relation to the 2016 version of the public procurement indicators.

 

Evidence on Brexit impact on UK-EU trade in services submitted to the House of Lords' Sub-Committee on EU Internal Market

The UK House of Lords' Sub-Committee on EU Internal Market has now published the evidence I submitted to their inquiry Brexit: future trade between the UK and EU in services. Here is the full text (also available in pdf here), which includes some scenarios excluded by yesterday's Theresa May's Brexit Speech (see my thoughts here). Comments would be most welcome, particularly in view of future work related to the Great Repeal Bill and other Brexit-related changes to public procurement regulation in the UK.

Executive Summary

  1. Bilateral UK-EU procurement-related trade can be estimated at around 15% of the total value of procurement, or close to 2.5% of GDP. This includes both direct and indirect cross-border procurement-related trade. The magnitude is larger if access to WTO GPA markets is considered.
  2. The UK’s exposure to public procurement-related trade in services in the EU is particularly relevant; the UK alone accounts for 84 % of the total value procured at EU level in awards of more than 100 million euros (approx. £85 mn).
  3. Losing the possibility of this cross-border trade would clearly be detrimental to the UK public sector, which would be at risk of not obtaining top quality services and/or facing increased prices from reduced competition amongst domestic suppliers. UK businesses would also be negatively affected if they lost the option of direct and indirect trade in services to the EU.
  4. The EU has developed a sophisticated acquis of public procurement rules, which the UK has successfully shaped in successive rounds of negotiations, most recently in the 2011-2014 period leading to the approval of the current EU rules.
  5. The UK has adopted a copy-out approach to the transposition of the EU rules, which ensures that UK businesses only need to know one regulatory regime in order to be able to sell to the public sector both in the UK and in the rest of the European Union.
  6. EU public procurement law ensures that UK businesses have full access to the public sector markets of all other EU Member States, and that EU businesses have full access to the UK public sector markets. This ensures free trade in services in the context of public procurement under conditions of transparency, equal treatment and non-discrimination.
  7. These advantages would be limited or lost if the UK were to lose access to the EU internal market. The extent of that restriction or loss of free public procurement-related trade in services would depend on the future relationship between the UK and the EU, as well as its impact on the UK’s status under the WTO Government Procurement Agreement (GPA).
  8. EEA membership would require full compliance with the EU public procurement acquis and would entail no changes in access to EU and GPA procurement markets.
  9. A tailor-made Free Trade Agreement (FTA) like the recent EU-Ukraine Deep and Comprehensive Free Trade Area (DCFTA), would also require full compliance with the EU public procurement acquis. Access to GPA procurement markets would depend on the UK’s status under WTO GPA.
  10. If the UK sought to rely on the WTO GPA only, it would need to clarify whether it can retain its status as a party in its own right or, having lost derived membership linked to EU membership, seek fresh accession. Either way, the scope of coverage of the reciprocal commitments between the UK and the rest of GPA parties (including the EU) would need to be clarified and probably renegotiated, with the UK facing pressure to accept deeper commitments than currently negotiated by the EU en bloc. The main risk implicit in this option would concern the continuity of access to the procurement markets of GPA parties (including the EU), as well as having to make additional coverage concessions in order to retain current access to those markets.
  11. If the UK sought to reach a solution similar to CETA, it may also be at risk of having to provide more stringent access commitments to the EU than currently. This has been the case of CETA, which is based on the WTO GPA mechanism, and where only Canada made additional coverage concessions to the benefit of EU (including UK) businesses.
  12. ‘Hard Brexit’, ie no trade agreement of any kind combined with loss of WTO GPA membership, would imply loss of access to EU and worldwide procurement markets, for services but also for goods and works. This would likely have a major impact both on the UK public sector and in its business community, particularly that reliant on cross-border direct and indirect procurement-related trade.

Submission

The purpose of this document is to provide the House of Lords EU Internal Market Sub-Committee with evidence of the contribution that the EU public procurement rules make to the facilitation of trade in services between the UK and the rest of the EU. It also aims to highlight the barriers to trade that could arise post-Brexit—which are however contingent on the legal configuration of the future relationship between the UK and the EU and, notably, on the level of access to the internal market.

1. Economic Relevance of Procurement-Related Trade in Services

1.1. Trade in services is facilitated by the EU public procurement rules (described below 2.). Establishing the magnitude of procurement-related trade in services is difficult due to a lack of reliable data and because services can be exported/imported, but they are also susceptible of “localised” provision through the establishment of subsidiaries in other Member States. A UK business wishing to provide services to the public sector in other Member States may thus decide to provide them directly from the UK, or rather to establish a subsidiary, branch or other organisational unit in those Member States. The same applies to EU businesses seeking to provide services to the UK public sector. Both options are direct benefits of access to the EU’s internal market. Therefore, the economic dimension of direct trade in services through imports/exports and indirect trade in services through the exercise of freedom of establishment needs to be jointly taken into account.

1.2. In a recent research briefing,[1] the House of Commons Library (HoCL) indicated that

… the extent of direct cross-border public procurement is limited. An estimated 1.3% of the value of larger UK public sector contracts was awarded directly abroad in 2009-2011. Some 0.8% of the value of larger public contracts secured by UK companies was directly from abroad.

However, this misrepresents the economic importance of cross-border public procurement between the UK and the rest of the EU by suggesting that it only affects between 0.8% and 1.3% of large value procurement contracts. The HoCL research briefing does not mention indirect cross border effects derived from the establishment of EU suppliers in the UK, and UK suppliers in other EU Member States, who then sell from their respective “localised” subsidiaries (for instance, Siemens UK would qualify as a domestic supplier for the purposes of direct cross border tenders, while most people would agree that the Siemens group is German for industrial policy purposes).

1.3. The European Commission published data in 2011 that estimated indirect cross-border procurement to be much closer to 25% in value at EU level.[2] The disaggregated data for the UK showed that the actual economic relevance of cross-border public procurement is around 16.5% of the value of large UK public sector contracts (13.8% by number of contracts). The EU has an average penetration of direct and indirect cross-border procurement of 16.9% by value of contracts (and 13% by number of contracts). Given that procurement expenditure represents around 16% of GDP,[3] bilateral UK-EU procurement-related trade can be estimated at around 15% of the total value of procurement, or close to 2.5% of GDP.

1.4. Similar data for the economic relevance of public procurement-related trade in services under the World Trade Organisation Government Procurement Agreement (WTO GPA; see 2.2. below) is difficult to compile.[4] In any case, bearing in mind that the GPA parties have opened procurement activities worth an estimated US$ 1.7 trillion annually to international competition to suppliers from GPA parties offering goods, services or construction services, and by simple logic, it is plain to see that the magnitude in GDP terms of public procurement-related trade in services is even larger if access to WTO GPA markets is considered.

1.5. The UK’s exposure to public procurement-related trade in services within the EU is particularly relevant in the UK. As stressed by the European Commission in a recent report using 2014 data,[5] 

The concentration of procurement in large notices is outstanding in the UK, particularly in the procurement of services, where the UK alone accounts for 84 % of the total value procured at EU level in awards of more than 100 million euros [(approx. £85 mn)].

1.6. Losing the possibility of this cross-border trade would clearly be detrimental to the UK public sector, which would be at risk of not obtaining top quality services and/or facing increased prices from reduced competition by domestic suppliers. UK businesses would also be negatively affected if they had difficulties engaging in direct and indirect exports of services to the EU.

2. EU Law Facilitating Procurement-Related Trade in Services

2.1. On the basis of the rules on the free movement of goods and services in the Treaty on the Functioning of the European Union, the EU has accumulated a well-developed public procurement acquis, which currently comprises the following instruments:

  • Directive 2014/23/EU on concession contracts[6]
  • Directive 2014/24/EU on public procurement[7]
  • Directive 2014/25/EU on utilities procurement[8]
  • Directive 2009/81/EC on defence and security procurement[9]
  • Remedies Directives, as amended by Directive 2007/66/EC[10]

2.2. The EU public procurement acquis is coordinated with the EU’s international obligations under the World Trade Organisation Government Procurement Agreement (WTO GPA),[11] and compliance with EU law allows its Member States, including the UK, to benefit from the advantages of that international instrument of procurement liberalisation. Therefore, through compliance with the EU public procurement acquis, the UK (both its public sector and its business community) benefit from access to the EU internal market and to the public procurement markets of WTO GPA signatories.[12]

2.3. The UK has been a key player in shaping these rules, most notably in the period between 2011-2014, which lead the adoption of the 2014 Public Procurement Package (ie Directives 2014/23, 2014/24 and 2014/25), with Cabinet Office clearly stressing that the “revised [EU] package represents an excellent overall outcome for the UK, with progress achieved on all of our priority objectives”.[13]

2.4. These EU rules have been transposed in the UK following a copy-out approach. In England and Wales, the transposition has most notably resulted in the Public Contracts Regulations 2015, as amended by the Public Procurement (Amendments, Repeals and Revocations) Regulations 2016. Similar rules have been adopted by the devolved administrations with public procurement powers.[14] Even if there is a perception that EU law (as transposed) imposes significant constraints on the development of effective or efficient procurement in the UK, this perception is unsubstantiated.[15]

2.5. There are numerous other EU law instruments that facilitate procurement-related cross-border trade in services, such as the Services Directive (2006/123/EC),[16] or technical rules establishing the Common Procurement Vocabulary (CPV).[17] This is also facilitated by EU rules on technical standardisation more generally. Even if this may seem more relevant for procurement-related trade in goods, it is still relevant for services in terms of eg general quality assurance systems.

2.6. The rules in the statutory EU public procurement acquis are complemented by a large body of case law of the Court of Justice of the European Union, which has been deciding an average of over 30 public procurement cases per year in recent years.[18] The CJEU case law has extended the general principles of equal treatment and non-discrimination beyond the strict scope of application of the EU public procurement Directives, thus expanding the scope of the EU’s internal market for public procurement.

2.7. Taken as a whole, EU public procurement law, including the case law of the Court of Justice, ensures that UK businesses have full access to the public sector markets of all other EU Member States, and that EU businesses have full access to the UK public sector markets. This ensures free trade in services in the context of public procurement under conditions of transparency, equal treatment and non-discrimination. No tariff or non-tariff measures are allowed.

2.8. Additionally, for UK businesses, given the copy-out approach adopted by the Government for the transposition of the 2014 EU rules, this effectively means that knowledge of a single set of rules—ie the Public Contracts Regulations 2015, which replicate Directive 2014/24/EU[19]—allows them to bid for services contracts in other EU jurisdictions with minimal additional requirements, other than those related to language and the specific constraints of each tender. This has, for instance, clearly supported the creation of a true single public procurement market in the island of Ireland, with strong levels of penetration of Northern Irish exports to the Republic of Ireland estimated at around 58%.

2.9. These advantages would be limited or lost if the UK were to lose access to the EU internal market post-Brexit. The extent of that restriction or loss of free public procurement-related trade in services would depend on the future relationship between the UK and the EU.

3. Alternative UK-EU Relationships and Implications for Trade in Procurement-Related Services

3.1. If the vote to leave the EU in the referendum held on 23 June 2016 leads to the UK withdrawing from the EU, a number of scenarios emerge for the future relationship between the UK and the rest of the EU. Each of these scenarios would have different implications in terms of public procurement-related trade in services.[20]

3.2. If the UK were to retain access to the internal market as a member of the European Economic Area (EEA), there would be no significant substantive changes and business would continue largely as usual. EEA Member States need to comply with the EU public procurement acquis, as all EU public procurement directives are declared texts with EEA relevance. Compliance is supervised by the EFTA Surveillance Authority rather than the European Commission, but both entities work closely in their enforcement efforts. Cases can be brought to the EFTA Court rather than the Court of Justice of the European Union, but the EFTA Court needs to ensure harmonious interpretation of EU and EEA law and, consequently, relies on CJEU case law. In this case, the UK would retain access to EU and GPA procurement markets.

3.3. If the UK were to seek access to the EU’s internal market through a tailor-made Free Trade Agreement (FTA) with the EU, it is also very likely that the EU would insist on the retention of UK public procurement law as is as the continued substantive coordination of EU and UK rules. This is clear, for instance, in the recent EU-Ukraine Deep and Comprehensive Free Trade Area (DCFTA),[21] which Chapter 8 on public procurement requires that

Ukraine will, over several years, adopt current and future EU legislation on public procurement. With the exception of defence procurement, Ukrainian suppliers and service providers will have full access to EU public procurement markets, and EU suppliers and service providers will have the same to the Ukrainian procurement market.

If the UK wanted to retain access to defence procurement (including services), it would need to also include continued compliance with Directive 2009/81 in its tailor-made FTA with the EU. Moreover, entering into a tailor-made FTA with the EU would not ensure access to GPA procurement markets, which would depend on the status under the WTO GPA (see immediately below 3.4.).

3.4. If the UK sought to exclusively rely on WTO GPA membership, there would be difficult legal issues to resolve. First, it would be necessary to determine whether the UK is a party to the WTO GPA in its own right or if its membership derives from its being part of the EU. If the latter, the UK would have to negotiate fresh accession to the WTO GPA, which would imply loss of access to GPA markets in that intervening period. Second, and regardless of continued or new membership, it would be necessary to determine the scope of coverage of the UK’s commitments towards the remaining parties of the GPA, and vice versa. Given the UK’s bargaining position as a sub-part of the EU, it is not out of the question that the UK would be under pressure to accept more stringent commitments to open up its procurement markets to GPA parties than it currently has to do under the scope of coverage negotiated by the EU as a whole. This could trigger protracted negotiations, also negatively impacting on access to GPA procurement markets. Finally, it would be necessary for the WTO GPA parties to accept that the UK’s domestic procurement system meets the relevant requirements. The easiest way of doing so would be to retain the current rules because, as indicated above (2.2.), they are already coordinated with the WTO GPA.

If the UK managed to secure continued or fresh membership of the WTO GPA, and unless it managed to persuade the rest of the WTO GPA parties to alter the current schedules of coverage in a manner that benefitted the UK on balance—which is by no means a given—and to accept its departure from the EU public procurement acquis, it is also likely that there would be scope for relatively minor technical adjustments to UK public procurement law and to the international openness of the UK public procurement markets. Thus, there is not much to be gained in this scenario and the main risk implicit in a future UK-EU relationship based on WTO GPA rules only would concern the continuity of access to the procurement markets of GPA parties (including the EU), as well as the risk of having to make additional coverage concessions in order to retain access to those markets in the present terms.

3.5. This would also apply if the UK were to aim for reciprocal commitments with the EU beyond the WTO GPA but on the basis of the WTO GPA mechanism, as recently achieved by Canada in the EU-Canada Comprehensive Economic and Trade Agreement (CETA).[22] In fact, in CETA, only Canada made additional coverage concessions to the benefit of EU (including UK) businesses, as access to EU public procurement markets for Canadian undertakings was already provided in practice.[23]

3.6. Finally, a scenario of ‘hard Brexit’ ie no trade agreement of any kind, combined with the loss of WTO GPA membership—which can be considered more likely in this scenario due to the EU’s foreseeable unwillingness to recognise the UK’s continued membership (see above 3.4.)—would imply loss of access to EU and worldwide procurement markets, for services but also for goods and works. This would likely have a major impact both on the UK public sector and in its business community, particularly that reliant on cross-border direct and indirect procurement-related trade in services.

4. Final Remarks

Short of ensuring full access to the EU internal market and GPA procurement markets, Brexit will have a negative effect on future public procurement-related trade in services between the UK and EU, as well as between the UK and the rest of GPA signatory parties.

_________________________________________

[1] Commons Briefing papers CBP-7213, Brexit: impact across policy areas, 26 August 2016, available at http://researchbriefings.parliament.uk/ResearchBriefing/Summary/CBP-7213.

[2] See Final report on cross-border procurement above EU thresholds, prepared by Ramboll and HTW Chur for the European Commission, DG Internal Market and Services, March 2011, pp. 36-41, available at http://ec.europa.eu/internal_market/publicprocurement/docs/modernising_rules/cross-border-procurement_en.pdf.

[3] European Commission, DG TRADE, Public Procurement in a nutshell, available at http://ec.europa.eu/trade/policy/accessing-markets/public-procurement/index_en.htm.

[4] For statistical information, see https://www.wto.org/english/tratop_e/gproc_e/gpstat_e.htm.

[5] DG GROW G4 - Innovative and e-Procurement, Public Procurement Indicators 2014, 2 February 2016, p. 2, available at http://ec.europa.eu/DocsRoom/documents/15421/attachments/1/translations/en/renditions/pdf.

[6] OJ L 94, 28.3.2014, p. 1–64. See also Commission Delegated Regulation (EU) 2015/2172 of 24 November 2015 amending Directive 2014/23/EU in respect of the application thresholds for the procedures for the award of contracts, OJ L 307, 25.11.2015, p. 9–10.

[7] OJ L 94, 28.3.2014, p. 65–242. Commission Delegated Regulation (EU) 2015/2170 of 24 November 2015 amending Directive 2014/24/EU in respect of the application thresholds for the procedures for the award of contracts, OJ L 307, 25.11.2015, p. 5–6.

[8] OJ L 94, 28.3.2014, p. 243–374. See also Commission Delegated Regulation (EU) 2015/2171 of 24 November 2015 amending Directive 2014/25/EU in respect of the application thresholds for the procedures for the award of contracts, OJ L 307, 25.11.2015, p. 7–8.

[9] OJ L 216, 20.8.2009, p. 76–136. See also Commission Regulation (EU) 2015/2340 of 15 December 2015 amending Directive 2009/81/EC in respect of the application thresholds for the procedures for the award of contracts, OJ L 330, 16.12.2015, p. 14–15.

[10] OJ L 335, 20.12.2007, p. 31–46. Non-official consolidated versions of the General Remedies Directive (89/665/EEC) and the Utilities Remedies Directive (92/13/EEC) are respectively available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CONSLEG:1989L0665:20080109:en:PDF and http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CONSLEG:1992L0013:20080109:en:PDF. It is worth noting that the European Commission is currently assessing the need for their further revision.

[11] See https://www.wto.org/english/tratop_e/gproc_e/gp_gpa_e.htm.

[12] A full updated list is available at https://www.wto.org/english/tratop_e/gproc_e/memobs_e.htm.

[13] Procurement Policy Note 05/13 – Further progress update on the Modernisation of the EU Procurement Rules, 25 July 2013, https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/225398/PPN_-_outcome_of_negotiations.pdf.

[14] See eg the Public Contracts (Scotland) Regulations 2015.

[15] For details, see http://www.howtocrackanut.com/blog/2016/11/30/brexit-and-public-procurement-some-thoughts-after-kcl-seminar.

[16] OJ L 376, 27.12.2006, p. 36–68.

[17] Commission Regulation (EC) No 213/2008 of 28 November 2007 amending Regulation (EC) No 2195/2002 on the Common Procurement Vocabulary (CPV), OJ L 74, 15.3.2008, p. 1–375.

[18] For more details on the calculations and decisional trends, see my analysis of the CJEU’s 2015 annual report at http://www.howtocrackanut.com/blog/2016/8/24/a-second-look-at-the-cjeus-public-procurement-activity-2006-2015.

[19] For detailed assessment, see the web commentary I co-authored with Dr Pedro Telles (Swansea), which is freely available at www.pcr2015.uk.

[20] For analysis, amongst others, see the opinions of Michael Bowsher QC (http://publicsectorblog.practicallaw.com/procurement-law-after-brexit/), Global Counsel (https://www.global-counsel.co.uk/sites/default/files/special-reports/downloads/Global%20Counsel_Impact_of_Brexit.pdf) or Professor Sue Arrowsmith (https://www.achilles.com/images/locale/en-EN/buyer/pdf/UK/sue-arrowsmith-brexit-whitepaper.pdf).

[21] http://trade.ec.europa.eu/doclib/docs/2013/april/tradoc_150981.pdf.

[22] See http://ec.europa.eu/trade/policy/in-focus/ceta/index_en.htm.

[23] European Commission, DG TRADE, CETA – Summary of the final negotiating results, p. 12, available at http://trade.ec.europa.eu/doclib/docs/2014/december/tradoc_152982.pdf

PM May's Speech has brought limited clarity of Brexit impact on procurement, but can consequences be significant?

In her Brexit speech of earlier today, Theresa May PM has clarified a few things, including that the model for a future relationship between the UK and the EU that she is "proposing cannot mean membership of the single market". She has also indicated that her Government would not consider an open-ended transitional arrangement because that could plunge Britain intopermanent political purgatory”. This seems to indicate a very clear direction towards a so-called hard Brexit that generates risks of an actual cliff edge (or a very short 'smoothing period') for UK and EU economic operators, including the public sector, businesses and consumers.

However, she has also expressed that her plan includes the priority for the UK to "seek the greatest possible access to [the EU's single market] through a new, comprehensive, bold and ambitious Free Trade Agreement". And that she hopes that this can be done in parallel to the Article 50 TEU negotiations, so that it is in place within 2 years. Prof Peers has aptly synthesised what came to mind.

It is difficult to anticipate the implications of all these contradictory goals in the area of public procurement regulation, but three main alternative scenarios seem now on the table:

  1. successful completion of a UK-EU FTA that can be in force at the time the UK leaves the single market, and which allows for continuity of EU and UK commitments under the WTO rules (notably, the Government Procurement Agreement, GPA) [FTA scenario];
  2. no UK-EU FTA (either at all, or because it is incomplete/in negotiation at the time the UK exits the single market), but agreement (not only between UK and EU, but also by their international trading partners) of  'workable' arrangements based on WTO rules (including GPA) [WTO/GPA safety net scenario]; and
  3. no UK-EU FTA and no workable agreement under WTO rules (including GPA) [unregulated international trade scenario].

The implications of each of these scenarios in the area of public procurement would, in my view, be as follows: 

  1. A tailor-made FTA would probably include features similar to the recent EU-Ukraine Deep and Comprehensive Free Trade Area (DCFTA), and this would require full compliance with the EU public procurement acquis. In short, this would imply the continuation of the status quo and no need for reform of the Public Contracts Regulations 2015 (although that would be possible because the current transposition followed an extremely restrictive copy-out approach that severely constraints its potential to unleash better procurement practices and results). 

    Access to GPA procurement markets would depend on the UK’s status under WTO GPA and the continued acceptance of the EU's coverage commitments by the other WTO GPA signatories, but this option could easily secure continued access to GPA markets because the UK and the EU could make a solid case that the trade reality in their procurement markets has not changed in a material way.

    This would be possible if the UK Government accepted the need for continuity in the public procurement area, which is something PM May hinted would be happening on a sectoral basis by stressing that the UK-EU FTA "... may take in elements of current Single Market arrangements in certain areas ... as it makes no sense to start again from scratch when Britain and the remaining Member States have adhered to the same rules for so many years." 
     
  2. Failure to complete an FTA could still allow for WTO GPA-based trade in public procurement markets, not only between the UK and the EU, but in the wider context of GPA markets (although in my view this would be less likely because a breakdown in the trade relations between the UK and the EU would most likely trigger calls for renegotiation, at least of coverage, from other GPA signatories).

    In that case, if the UK sought to rely on the WTO GPA only, it would need to clarify whether it can retain its status as a party in its own right or -- having lost derived membership linked to EU membership -- seek fresh accession to the GPA. Either way, the scope of coverage of the reciprocal commitments between the UK and the rest of GPA parties (including the EU) would need to be clarified and probably renegotiated, with the UK facing pressure to accept deeper commitments than currently negotiated by the EU en bloc (and the EU's commitments may at the same time be also under pressure to be renegotiated due the lower volume of the EU27 procurement markets as compared to the EU28). The main risk for the UK implicit in this option would concern the discontinuity of access to the procurement markets of GPA parties (including the EU), as well as having to make additional coverage concessions in order to retain (similar to) current access to those markets.  

    Additionally, the UK would still need to convince the rest of GPA signatories (including the EU) that its procurement system complies with the general (minimum) requirements of the agreement. The easiest way of doing so would be to retain current rules that implement the EU public procurement acquis, which ensure compliance with the EU’s (and UK's future) international obligations under the WTO GPA. In that regard, the possibility of introducing significant reforms to the Public Contracts Regulations 2015 would also be limited, or at least conditioned by the risk of triggering what could potentially be protracted negotiations on substance of procurement regulation, in addition to the above mentioned negotiations on (adjustment of) coverage.
     
  3. The implications of the final scenario of unregulated international trade are clear, at least from a legal perspective. "Hard Brexit", ie no trade agreement of any kind combined with loss of WTO GPA membership (or a workable arrangement ensuring continued reciprocal favourable treatment while access is (re)gained), would imply loss of access to EU and worldwide procurement markets (either totally or partially). Clearly, it would also provide the UK with an opportunity to close up its procurement markets to non-domestic bidders, but this would severely damage the UK public sector in many different ways, including potential higher prices, which does not seem like a desirable policy road to take. Either way, this would likely have a major impact both on the UK public sector and in its business community, particularly that reliant on cross-border direct and indirect procurement-related trade. At the same time, it would open the possibility of a complete overhaul of public procurement rules in the UK, including the repeal of the Public Contracts Regulations 2015, with or without a replacement. However, it would also imply complete isolation of UK (public procurement) markets and is clearly an undesirable state of things.

All in all, then, it seems that if the UK Government actually seeks to ensure that free trade remains a feature of the UK's economy, particularly through continuity of WTO (GPA) based trade and the conclusion of a "new, comprehensive, bold and ambitious Free Trade Agreement" with the EU, there is limited scope for reform of the Public Contracts Regulations 2015 other than to overcome the self-imposed limitations derived from the copy-out of a set of rules that is meant to be developed and fleshed out by the Member States. If that is seen as a worthwhile exercise, it can start tomorrow and irrespective of Brexit, because the regulatory space exists under currently applicable EU public procurement acquis. I am not optimistic that this will happen, though (and have not been since before the referendum).

World Bank's "Benchmarking Public Procurement 2017"

The World Bank has recently published its report Benchmarking Public Procurement 2017, where it presents a 'cross-country analysis in 180 economies on issues affecting how private sector does business with the government. The report covers two thematic pillars: the procurement process and complaint review mechanisms'.

The information is structured around eight main indicators, which cover the following areas:

  1. Needs assessment, call for tender, and bid preparation: The indicators assess the quality, adequacy, and transparency of the information provided by the procuring entity to prospective bidders.
  2. Bid submission phase: The indicators examine the requirements that suppliers must meet in order to bid effectively and avoid having their bid rejected.
  3. Bid opening, evaluation, and contract award phase: The indicators measure the extent to which the regulatory framework and procedures provide a fair and transparent bid opening and evaluation process, as well as whether, once the best bid has been identified, the contract is awarded transparently and the losing bidders are informed of the procuring entity’s decision.
  4. Content and management of the procurement contract: The indicators focus on several aspects during the contract execution phase related to the modification and termination of the procurement contract, and the procedure for accepting the completion of works.
  5. Performance guarantee: The indicators examine the existence and requirements of the performance guarantee.
  6. Payment of suppliers: The indicators focus on the time and procedure needed for suppliers to receive payment during the contract execution phase.
  7. Complaints submitted to the first-tier review body: The indicators explore the process and characteristics of filing a complaint before the first-tier review body.
  8. Complaints submitted to the second-tier review body: The indicators assess whether the complaining party can appeal a decision before a second-tier review body and, if so, the cost and time spent and characteristics for such a review. 

The report aims to make progress in the much needed collection of more information, particularly of statistical nature, about the procurement systems that exist around the world. In its own words, '[i]t aims to promote evidence-based decision making by governments and to build evidence in areas where few empirical data have been presented so far. As researchers recognize, “the comparison of different forms of regulation and quantitative measurement of the impact of regulatory changes on procurement performance of public entities will help reduce the costs of reform and identify and disseminate best practices.”' [with reference to Yakovlev, Tkachenko, Demidova & Balaeva, 'The Impacts of Different Regulatory Regimes on the Effectiveness of Public Procurement' (2015) 38 (11) International Journal of Public Administration 796-814].

The report also recognises some of its main substantive and methodological limitations (see p.26). However, even taking those into account, the benchmarking exercise seems rather imperfect and with limited potential to inform policy-making and reform. A couple of examples will illustrate why. 

First, in terms of the methodology for the scoring of procurement systems, I am not sure I understand the logic for the award of points or the scale used to weight the different criteria. For instance, when assessing the accessibility of the procurement process, procurement systems are awarded 1 point if bidders are required to register on a government registry of suppliers, and 0 points if there is no registration requirement. To my mind, this is contrary to what logic would dictate because a system that does not require previous or additional registration is more open than one that does.

Similarly, when assessing the existence and requirements for the provision of bid securities, procurement systems get get a score of 1 for either option they provide in a range of questions concerning whether a bid security or a bid declaration is required, whether the bid security amount is no more than a certain percentage of the contract value or value of the submitted bid, or no more than a certain flat amount; whether suppliers have choice regarding the form of bid security instrument; or if bidders are required to post a bid security instrument, whether there is a time frame for the procuring entity to return the instrument. Additionally, procurement systems are awarded an additional maximum of 1 point for each of the forms of bid security instrument they accept: cash deposit, bank guarantee, insurance guarantee (1/3 of a point each). This means that systems that have more flexibility in the way they regulate bid securities will get higher scores (which is fair enough), but that systems that do not require bid securities will get no points. This, for instance, makes the UK (50 points) lag behind Spain (94 points) in this indicator, despite the fact that the UK is recorded as having no bid security requirement and Spain being recorded as requiring a bid security proportionate to the value of the contract (I am not assessing this information which, at least in the case of Spain, requires some nuances). once again, this is contrary to what logic would dictate because procurement systems that do not require bid securities are more open and accessible (particularly to SMEs).

Second, in terms of the comparisons that can be made with the scores as published, I am not sure that the way the information is presented can actually help understand the drivers of different scores for different countries. Most points are awarded on the basis of a yes/no answer to given questions. Given that some questions are rather open-ended or simply confusing (eg the question concerning Criteria for bid evaluation queries whether the procurement system includes "Price and other qualitative elements", but all procurement systems get a score of 1 regardless of the answer), their ability to allow for comparisons is minimal. Moreover, the individual scoring for each criterion is not provided, which prevents direct comparisons even where questions are narrower and actually award different scores to different answers.

Overall, sadly, I am afraid that the report Benchmarking Public Procurement 2017 can only be seen as a first step towards creating a useful system and scoring matrix to benchmark all public procurement systems in the world. I would think that this is possible, particularly once the field work of information collection is in place (unless it was collected as direct responses to the questionnaire linked to the scoring rule) and that the published version of the report can be significantly improved solely on the basis of a better analysis of the raw information collected by the World Bank team. On that point, it is a shame that this information is not published by the World Bank and I would invite them to reconsider the possibility of publishing the database of raw information, so that more specific proposals on how to improve the scoring method without having to collect additional information can be developed.

ECJ creates randomness in right to challenge procurement decisions by excluded tenderers (C-355/15)

In its Judgment of 21 December 2016 in Technische Gebäudebetreuung and Caverion Österreich, C-355/15, EU:C:2016:988, the European Court of Justice (ECJ) offered additional interpretation of the rules on active standing to challenge public procurement decisions under the Remedies Directive (RD) and, in particular, its Article 1(3), according to which 'Member States shall ensure that the review procedures are available, under detailed rules which the Member States may establish, at least to any person having or having had an interest in obtaining a particular contract and who has been or risks being harmed by an alleged infringement'.

This provision had been interpreted in broad terms ('favor revisionis') in Fastweb (C‑100/12, EU:C:2013:448, see here), where the ECJ strengthened the right of non-compliant tenderers to challenge procurement decisions. It is in comparison to Fastweb that Technische Gebäudebetreuung and Caverion Österreich raises some tricky issues--and, once more, it is surprising that this ECJ judgment was adopted without an Advocate General opinion.

In the case at hand, and given the wording of the Austrian transposition of Art 1(3) RD granting active standing to 'An[y] undertaking which had an interest in the conclusion of a contract...', the legal question for the ECJ concerned a new aspect of the concept of 'any person having or having had an interest in obtaining a particular contract', as it relates to economic operators that have participated in the tender, but are no longer under active consideration by the contracting authority.

The interpretive difficulty stemmed in part from the contrast between the open wording of Art 1(3) RD and the seemingly more limited concept that could be extracted from Art 2a(2) RD, when it establishes a standstill obligation in relation only to concerned tenderers, which are defined as those who 'have not yet been definitively excluded. An exclusion is definitive if it has been notified to the tenderers concerned and has either been considered lawful by an independent review body or can no longer be subject to a review procedure'. Given that Art 2a(1) RD establishes that 'Member States shall ensure that the persons referred to in Article 1(3) have sufficient time for effective review of the contract award decisions taken by contracting authorities, by adopting the necessary provisions respecting the minimum conditions set out in paragraph 2 of this Article', the link between the general rule on active standing in Art 1(3) RD and the more limited rule on standstill in Art 2a(2) that aims to make that active standing effective does raise some complex issues.

In Technische Gebäudebetreuung and Caverion Österreich, the question arose from the fact that the challenger of the procurement decision had been excluded from the procedure by a decision of the contracting authority that had become final (after two appeals) at the time of the challenge. The Austrian review courts considered that the finality of the exclusion extinguished the right to challenge the award decision because 'the rights of a tenderer whose bid has been properly excluded cannot be infringed by illegalities relating to the procedure followed to select another bid for the purposes of awarding the contract' (C-355/15, para 16).

In order to determine the compatibility of this position with EU law, the ECJ broke down the issue in two parts. It first distinguished the current case from Fastweb. It then proceeded to clarify the purpose of the challenge rights provided by Art 1(3) RD. While each of the two parts of the reasoning make some sense independently, their lack of coordination can create difficult cases under spurious circumstances.

In distinguishing the cases, the ECJ indicated that

29 ...  the judgment of ... Fastweb ... gave concrete expression to the requirements of the third subparagraph of Article 1(1) and Article 1(3) of Directive 89/665 in a situation in which, following a public procurement procedure, two tenderers bring an action for review, each seeking the exclusion of the other. In such a situation, both of the tenderers have an interest in obtaining a particular contract.
30      However, the situation at issue in the main proceedings is very clearly distinguishable from the situations at issue in the two cases giving rise to the judgments of ... Fastweb and ... PFE (C‑689/13, EU:C:2016:199).
31      First, the bids of the tenderers concerned in [Fastweb and PFE] had not been the subject of an exclusion decision of the contracting authority, unlike the bid submitted by the consortium in the main proceedings in the present case.
32      Secondly, it was in the course of the same, single set of review proceedings relating to the award decision that, in both cases, each tenderer challenged the validity of the other tenderer’s bid, each competitor having a legitimate interest in the exclusion of the bid submitted by the other, which may lead to a finding that the contracting authority is unable to select a lawful bid ... In the main proceedings in the present case, by contrast, the consortium brought an action, first, against the exclusion decision adopted in respect of it and, secondly, against the award decision, and it is in the course of that second set of proceedings that it contends that the successful tenderer’s bid is unlawful.
33      It follows that the principle of case-law stemming from the judgments of [Fastweb and PFE] does not apply to the procedure and litigation at issue in the main proceedings (C-355/15, paras 29-33, references omitted).

Despite being very formalistic and relying on procedural aspects of the litigation rather than on the material situation (ie, tenders with only two bidders in which each holds an interest in the exclusion of the other so that, in case of dual exclusion, the contracting authority is obliged to re-run the procedure and, thus, each has a fresh opportunity to participate), this is not an unreasonable approach and the ECJ seems clear in establishing an implicit condition for active standing that requires the contracting authority itself to not have excluded the tenderer (or its offer) at the time where the challenge of the award decision takes place. This is however a restriction of the (potential) widest interpretation of Art 1(3) RD. And this restriction brings complications in light of the second part of the analysis carried out by the ECJ in Technische Gebäudebetreuung and Caverion Österreich.

Indeed, in addressing the specific issue of the finality of exclusion decisions that exclude the right to challenge under Art 1(3) RD, the ECJ considered that

34 ... as is apparent from Article 1(3) and Article 2a of Directive 89/665, that directive ensures effective review of unlawful decisions adopted in the context of a public procurement procedure, by enabling any excluded tenderer to challenge not only the exclusion decision, but also, as long as that challenge has not been resolved, the subsequent decisions which would harm it if its exclusion were annulled.
35 In those circumstances, Article 1(3) of that directive cannot be interpreted as precluding a tenderer such as the consortium from being refused access to the review of the award decision, provided that it must be considered a definitively excluded tenderer within the meaning of the second subparagraph of Article 2a(2) of that directive (C-355/15, paras 29-33, emphases added).

In my view, this interpretation is criticisable both in own terms, and due to the effects it creates. The ECJ has adopted an interpretation of Art 1(3) that is conditioned by Art 2a(2)--that is, a sort of systemic interpretation where the special rule may be seen to exclude or restrict the general rule--without first addressing the possible coordination of both provisions without the second altering the scope of application of the first one--ie, in a true systemic interpretation.

This excludes an alternative, broader interpretation of the rules on active standing in the Remedies Directive that I would have much rather preferred, which would have determined that all economic operators having had an interest in the award of the contract (included definitely excluded ones) have the right to challenge the award decision under Art 1(3) RD, even if only those that are concerned tenderers or candidates benefit from the facilitative procedural measures derived from standstill under Art 2a(2) RD [see A Sanchez-Graells, Public Procurement and the EU Competition Rules, 2nd edn (Oxford, Hart, 2015) 439-441]. This would have respected the fact that, in the revision of the RD in 2007 (when Art 2a(2) was introduced), the wording of the relevant part of Art 1(3) was not amended. It would also not diminished or altered the effectiveness of Art 2a(2) RD, as the standstill period would in any case not benefited excluded tenderers ro candidates, who would have to overcome the additional burden of following the tender procedure very closely when they intended to challenge the final award decision.

Additionally, the position adopted by the ECJ in Technische Gebäudebetreuung and Caverion Österreich creates an element of randomness derived from the uncertainty around decision times for challenges, appeals (and further appeals) of exclusion decisions. Thus, in swift jurisdictions where exclusion decisions can very quickly become final, the rights to challenge award decisions by tenderers excluded by the contracting authority can be effectively suppressed. In contrast, in slower jurisdictions where finality of exclusion decisions takes longer to reach, tenderers excluded by the contracting authority will still have the opportunity to challenge award decisions. In either case, there is no requirement for a coordination of both procedures, so it could well be that the challenge brought by an excluded tenderer is decided before an eventual confirmation of the exclusion decision, which seems to create an undesirable situation under the logic of the ECJ in Technische Gebäudebetreuung and Caverion Österreich. Overall, this Judgment creates this element of randomness in the recognition or not of active standing to challenge award decisions to tenderers excluded by the contracting authority, which is undesirable.

More generally, this case indicates once more the shortcomings of the system created by the Remedies Directive, which is patchy and incomplete, and requires a fundamental revision [see A Sanchez-Graells, "If It Ain't Broke, Don't Fix It'? EU Requirements of Administrative Oversight and Judicial Protection for Public Contracts", S Torricelli & F Folliot Lalliot (eds), Administrative oversight and judicial protection for public contracts (Larcier, 2017) forthcoming]. If nothing else, to clarify whether this is solely about justiciability of review rights of economic operators that can have an interest in being awarded that specific contract under the conditions in which it is tendered (a narrow interpretation), or whether it serves broader purposes of control and review of procurement activity, as a substitute for faltering public oversight of this important public sector function (a broad interpretation). There are arguments both ways, but not having this very basic and foundational aspect clear does create problems as the case law of the ECJ continues shaping the system one preliminary reference at a time...

Wish list for 2017: My Top 10 priorities for the European Commission’s future activity in public procurement

Now that 2016 is drawing to a close, and after having engaged in a large number of discussions and exchanges of views with academics and practitioners at a number of conferences, workshops and expert meetings during the year, I have sat down to write my wish list of where I would like the European Commission to concentrate its future activity in the area of public procurement. Some of these suggestions could also serve to set agendas at national level. although my preference would be for centralised action at EU level.

These suggestions only represent my personal views, and in particular do not bind the European Commission’s Stakeholder Expert Group in Public Procurement of which I am but a member. However, some of the suggestions are supported by other members of the group in their individual capacity, and these are issues which I will push for in the activities of the group in 2017.

My wish list of top 10 priorities for future action is as follows:

1. Ensure full and adequate transposition of the 2014 Public Procurement Package, and provide guidance on the direct effect of the substantive rules to support contracting authorities in Member States where transposition is being delayed. At the time of writing, 14 Member States have fully or partially failed to transpose the new Directives (see here, and take into account that Finland adopted transposition measures on 13 December 2016). The correctness and completeness of the transposition in the remaining Member States also triggers some questions. Working towards speedy and proper transposition across all EU Member States is of utmost importance in order to ensure that the intended benefits of the 2014 reform are unlocked. It is also relevant to ensure that the direct effect of the 2014 Public Procurement Package is ensured in the absence of transposition to domestic law.

2. Reform the Remedies Directives to coordinate them with the new rules in the substantive instruments comprising the 2014 Public Procurement Package.[1] In particular, further clarification needs to be provided on the remedies applicable to call-offs within framework agreements and dynamic purchasing systems, as well as for contract modification and contract termination disputes.

3. Provide additional guidance on the development of inter partes procedures where contracting authorities aim to take decisions that would imply the impossibility for undertakings and tenderers to participate or continue participating in tenders for public contracts. This is particularly relevant in relation to exclusion rules and the management of conflicts of interest, and could use the existing rules on the assessment of apparently abnormally low tenders as a blueprint.

4. Develop effective policies concerning procurement information. This should include provision of guidance on reporting obligations under Articles 84 and 85 of Directive 2014/24/EU, as well as developing the policy on public contract registries announced as part of the 2015 strategy ‘Upgrading the Single Market: more opportunities for people and business’ in a way that ensures an appropriate balance between transparency of procurement processes and the associated expenditure of public funds with the protection of commercial and competition-sensitive information.[2] This should be done in light of the transposition of Directive 2016/943/EU on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure.

5. Provide guidance on the interpretation of Article 12 of Directive 2014/24/EU and the interaction between the in-house and the public-public cooperation exemptions it consolidates. This should be done through a thorough revision of the 2011 Commission Staff Working Paper concerning the application of EU public procurement law to relations between contracting authorities. This guidance should also extend to Article 17 of Directive 2014/23/EU and to the related rules in Articles 28 to 30 of Directive 2014/25/EU.

6. Provide additional guidance on centralised and collaborative procurement, including an assessment of the competition risks and potential negative impacts of centralised and collaborative public procurement, and develop recommendations for the effective oversight of centralised and collaborative purchasing by both national competition authorities and audit/controlling authorities. This should include providing more transparency on the European Commission’s work with the CPBs Public Procurement Network, as well as on the status of the actions plan(s) underpinning the strategic goal of facilitating aggregation of demand.[3]

7. Provide guidance on the interpretation of Articles 72 and 73 of Directive 2014/24/EU concerning contractual modification and termination. In particular, provide guidance on the use of umbrella modification clauses and the interaction between different grounds of justification for contract modifications, as well as on the effects of contractual termination that are required in case of mandatory termination due to breaches of EU law. This should be coordinated with the reform of the Remedies Directive (above 2) in order to ensure consistency of legal effects derived from contractual ineffectiveness and contractual termination.

8. Provide additional guidance on the interaction between public procurement and State aid rules, and ensure the consistent application of the recent 2016 Commission Notice on the notion of State aid as referred to in Article 107(1) TFUE with public procurement enforcement. This particularly concerns the substantive tests applicable to the identification of cross-border interest/effects.[4] This also concerns additional guidance on the substantive standards applicable to the assessment of aid for SGEI and NESGI, where the interaction between the ECJ’s Judgments in Altmark (C-280/00, EU:C:2003:415), Spezzino (C-113/13, EU:C:2014:2440) / CASTA (C-50/14, EU:C:2016:56), and Zweckverband Tierkörperbeseitigung (C-446/14 P, EU:C:2016:97) is rather unclear.

9. Continue to support the transition towards eProcurement and the development of open access, free to use technical solutions and standards. The work of the Commission should concentrate on ensuring that technological barriers do not arise from the transition to eProcurement and that interoperability is ensured in both the short and the long run.[5] Work in this area could also include creating pilot experiments with public sector virtual markets on the basis of dynamic purchasing systems and electronic catalogues, which could be run entirely electronically.

10. Significantly reform the Internal Market Scoreboard for Public Procurement, so as to avoid embedding undesirable policy pushes, such as the unjustified push for aggregation of more than 10% of public sector procurement expenditure. Carefully assess the desirability and utility of similar ongoing projects in the Public Procurement Action Plan—such as “Developing an index for rating Contracting Authorities according to their performance ("Trip advisor")—and seriously consider abandoning them to concentrate on more useful initiatives.

______________

[1] See A Sanchez-Graells, “‘If It Ain't Broke, Don't Fix It'? EU Requirements of Administrative Oversight and Judicial Protection for Public Contracts”, in S Torricelli & F Folliot Lalliot (eds), Administrative oversight and judicial protection for public contracts (Larcier, 2017) forthcoming. Available at https://ssrn.com/abstract=2821828.

[2] See A Sanchez-Graells, “Centralised Procurement Registers and their Transparency Implications”, Discussion Non-Paper for the European Commission Stakeholder Expert Group on Public Procurement, 19 September 2015. Available at http://www.howtocrackanut.com/blog/2015/09/why-are-public-contracts-registers.html.

[3] As briefly described in “Public buyers save money with cooperative procurement”, 1 December 2016, http://ec.europa.eu/growth/tools-databases/newsroom/cf/itemdetail.cfm?item_id=9013.

[4] See A Sanchez-Graells, “Commission Notice on Notion of State Aid shows Contradictions with EU Public Procurement Rules, in Particular Concerning Aid and Contracts for Local SGEI”, 20 May 2016, http://www.howtocrackanut.com/blog/2016/5/20/commission-notice-on-notion-of-state-aid-shows-contradictions-with-eu-public-procurement-rules

[5] See P Ferk, “E-Procurement between EU Objectives and the Implementation Procedures in the Member States—Article 22(1) of the 2014 Directive”, in GS Ølykke & A Sanchez-Graells (eds), Reformation or Deformation of the EU Public Procurement Rules (Edward Elgar, 2016) 101-124.

New paper: Competition Infringements and Procurement Blacklisting

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I have uploaded my last working paper of 2016 on SSRN. It is entitled "Competition Infringements and Procurement Blacklisting" and will appear in the Competition Law Journal next year. Its abstract is as follows:

In this article I explore the rules for the blacklisting of competition infringers under relevant EU and UK public procurement law, including their interpretation by the European Court of Justice. I also consider the practical difficulties for their enforcement by procurement professionals in the UK and suggest additional roles that the Competition and Markets Authority (CMA) and Crown Commercial Service (CCS) could have in order to facilitate their effectiveness. Finally, I also stress the existence of a trade-off between a more active enforcement of procurement blacklisting rules and the attractiveness of the CMA’s leniency policy. By way of concluding remarks, I set out a blueprint for targeted policy reform. I submit that this should include the development of mechanisms for the provision of CMA support to procurement professionals that identify indicia of bid rigging, the development of a policy on the imposition of procurement blacklisting as a sanction for competition law infringers, and the creation of a UK-wide blacklisting register operated by CCS.

The full reference for the paper is: Sanchez-Graells, Albert, Competition Infringements and Procurement Blacklisting (December 14, 2016). Forthcoming in the Competition Law Journal.. Available at SSRN: https://ssrn.com/abstract=2885278.

ECJ avoids providing guidance on intensity of judicial review of procurement decisions by sticking to strictly formalistic approach: The Gaping hole remains (C-171/15)

In its Judgment of 14 December 2016, Connexxion Taxi Services, C-171/15, EU:C:2016:948, the European Court of Justice (ECJ) has provided clarification on whether contracting authorities can decide to subject their decisions to exclude economic operators from procurement procedures to a proportionality assessment even where such assessment would deviate from the strict rules created in the tender documentation by the contracting authorities themselves.

In the case at hand, a Dutch contracting authority had published tender documents that seemed to create an automatic obligation to exclude by stating that: 'A tender to which a ground for exclusion applies shall be set aside and shall not be eligible for further (substantive) assessment'. However, the contracting authority subsequently sought to rely on generally applicable Dutch administrative law (in particular, the Explanatory Memorandum of the law transposing the 2004 public procurement Directive) to subject the exclusion decision to a proportionality assessment. On the basis of that proportionality analysis, the contracting authority decided not to exclude the tenderer and to award it the contract.

This triggered the challenge by a competing tenderer, which claimed that, having found that the tenderer had been guilty of grave professional misconduct, the contracting authority was not in a position to make an assessment of proportionality. That assessment would have already been carried out by including the misconduct as an absolute ground for exclusion in the descriptive document. Given the wording of the latter, it was argued that it would be contrary to the principles of public access, transparency and equality in matters of administrative procurement for the contracting authority to have the power to assess the proportionality of the ground for exclusion.

The Dutch referring court asked the ECJ to consider whether Art 45(2) of Directive 2004/18/EC precluded a contracting authority from being obliged to assess under national law, and in accordance with the principle of proportionality, whether a tenderer which had been guilty of grave professional misconduct should be excluded from a contract. The referring court put particular stress on the fact that the ECJ had not adjudicated on the importance to be attached to the fact that, in the tender conditions, the contracting authority had provided for the rejection, without any examination of the substance, of any tender to which a ground of exclusion applies. In answering those questions, the ECJ decided to stick very closely to two of its lines of case law that, ultimately, create a very difficult (dis)functional situation.

First, following precedents in La Cascina and Others, C‑226/04 and C‑228/04, EU:C:2006:94, and in Consorzio Stabile Libor Lavori Pubblici, C‑358/12, EU:C:2014:2063, the ECJ reiterated that the discretionary exclusion grounds regulated in Art 45(2) Dir 2004/18 (and now in art 57(4) Dir 2014/24) do 'not provide for uniform application at EU level of the grounds of exclusion it mentions, since the Member States may choose not to apply those grounds of exclusion at all or to incorporate them into national law with varying degrees of rigour according to legal, economic or social considerations prevailing at national level. In that context, the Member States have the power to make the criteria laid down in Article 45(2) less onerous or more flexible' (C-171/15, para 29). This led the ECJ to establish that

31 As far as concerns the grounds for excluding a tenderer which has been guilty of grave professional misconduct from a contract, it is clear from the order for reference that [Dutch] legislation requires the contracting authority concerned, which establishes that the tenderer has been guilty of such misconduct, to determine, in accordance with the principle of proportionality, whether the tenderer should in fact be excluded.
32 Thus, it appears that that assessment of the proportionality of the exclusion makes the application of the ground of exclusion relating to grave professional misconduct laid down in Article 45(2)(d) of Directive 2004/18 more flexible ... Furthermore, it follows from recital 2 thereof that the principle of proportionality applies in a general manner to public procurement procedures (C-171/15, paras 31-32, emphasis added).

Ultimately, then, national legislation which requires a contracting authority to assess, in accordance with the principle of proportionality, whether it is in fact appropriate to exclude from a public contract a tenderer which has been guilty of grave professional misconduct is compatible with EU public procurement law (C-171/15, para 33).

Second, and in stark contrast with this seemingly functional and principles-oriented interpretation of the rules in Directive 2004/18/EC, the ECJ then moved on to adopt a very formalistic approach when considering the specific situation where the contracting authority would have excluded the possibility of such proportionality assessment in the tender documentation by establishing that exclusion on specific grounds would not be subjected to any substantive assessment. It may have been relevant at this point to know with more precision whether that would have been illegal under Dutch law for the tender documentation could be seen as contra legem (as, in my view, it would have been eg under Spanish law due to the public administration's duty to conduct its business with subjection to the applicable laws and regulations).

Be it as it may, the ECJ framed the issue in the following terms:

 36 It is conceivable that, when the contract documents are drafted, the contracting authority concerned may take the view, in accordance with the nature of that contract, the sensitive nature of the services which are its subject, and the requirements of professional honesty and reliability of the economic operators which arise from that, that the commission of grave professional misconduct must result in the automatic rejection of the tender and the exclusion of the tenderer at fault, provided that the principle of proportionality is observed when the seriousness of that misconduct is assessed.
37 Such a clause, inserted into the contract documents in unambiguous terms ... enables all economic operators which are reasonably well informed exercising ordinary care to be apprised of the requirements of the contracting authority and the conditions of the contract so they may act accordingly (C-171/15, paras 36-37, emphasis added).

I find these passages, and in particular para 36, very confusing. It seems to indicate that the contracting authority, despite the discretion it has in deciding to include as applicable the ground of discretionary exclusion due to grave professional misconduct in the tender documentation or not, remains bound to ensure that 'the principle of proportionality is observed when the seriousness of that misconduct is assessed'. That would, in and of itself, exclude the possibility of predetermining that the exclusion on that ground will be absolute and not subjected to any further (substantive) assessment. Therefore, making this be followed by para 37, where the contrary underlying position exists in the determination that setting a clause of automatic exclusion in unambiguous terms provides tenderers with a clear view of the requirements, is at least disconcerting.

The ECJ then decided to follow very formalistic precedents whereby 'the contracting authority must comply strictly with the criteria which it has itself laid down (see, to that effect, judgment of 10 October 2013, Manova, C‑336/12, EU:C:2013:647, paragraph 40 and the case-law cited) in the light, in particular, of Annex VII A, paragraph 17, to Directive 2004/18' (C-171/15, para 38). It also added that, following its more recent Judgment in Pizzo, C‑27/15, EU:C:2016:404, 'the principle of equal treatment requires tenderers to be afforded equality of opportunity when formulating their tenders, which therefore implies that the bids of all tenderers must be subject to the same conditions' and that 'the obligation of transparency requires that all the conditions and detailed rules of the award procedure must be drawn up in a clear, precise and unequivocal manner in the contract notice or specifications so that, first, all reasonably informed tenderers exercising ordinary care can understand their exact significance and interpret them in the same way and, second, the contracting authority is able to ascertain whether the tenders submitted satisfy the criteria applying to the contract in question' (for discussion, see here).

On the basis of this, the ECJ creates an argument whereby tenderers from different Member States will be less likely to submit tenders when they are affected by an exclusion ground because they may not be aware of the possibility of their exclusion actually being subjected to a proportionality assessment despite the explicit terms of the tender documents, which the ECJ considers domestic tenders would do. From that, the ECJ concludes that 'the assessment of the exclusion at issue in the light of the principle of proportionality, where the tender conditions of the contract concerned provide for the rejection of tenders which are covered by such an exclusion clause without any assessment of that principle, is liable to place the economic operators concerned in an uncertain position and adversely affect the principle of equal treatment and compliance with the obligation of transparency' (see C-171/15, paras 41-43). Ultimately, then, the ECJ considers that the decision to subject the decision whether to exclude the tenderer to a proportionality assessment despite the explicit terms of the tender documents was contrary to EU public procurement law.

Critical remarks

I find the Connexxion Taxi Services Judgment very confusing because it seems to answer two interconnected questions about the relevance and effectiveness of the general principles of public procurement in an intrinsically contradictory manner, and it seems to me that the ECJ has taken another step down the formalist road. In the case at hand, and following the proposals of Advocate General Campos Sánchez-Bordona (see here), I considered that it must be right that contracting authorities are always under a general obligation to act in a proportionate manner and, consequently, each decision they adopt needs to be proportionate under the circumstances and pro-competitive, and that ultimately 'a contracting authority must retain the power to assess, on a case-by-case basis, the gravity of the circumstances that would lead to exclusion of the tenderer. And ... it must also balance them against the effects that such exclusion would have on competition' [see A Sanchez-Graells, Public procurement and the EU competition rules, 2nd edn (Oxford, Hart, 2015) 293, references omitted].  

Despite the fact that the Connexxion Taxi Services Judgment sticks to the traditional formalist approach whereby the Court does not allow contracting authorities to deviate from the strictures of the published tender documentation, and this must at this stage not come as a surprise, the decision strikes as particularly odd because the ECJ does not seem to give much weight to the general principle of proportionality--either as enacted under the disputed Dutch rules, or more generally under the EU public procurement rules themselves--despite having accepted that the general principle can (and should?) control all procurement decisions. Remarkably, the ECJ deviated from the more progressive and flexible approach advanced by the AG and also created a strange focus of analysis by moving from the assessment of the decision of the contracting authority to the potential incentives of participation for non-domestic economic operators in a way that I also find very formalistic and potentially misguided.

Considering Connexxion Taxi ServicesManova and other precedents together, what seems clear is that contracting authorities can only reduce the scope of their discretion by self-imposed restrictions published in the tender documents. Thus, they would be better off by publishing bare bones tender documents and then exercising administrative discretion subject only to compliance with general principles of public procurement, as well as applicable domestic rules. However, this would fly on the face of Pizzo where the way the contracting authority justifies its decisions does not result immediately from the tender documents, which then gives contracting authorities the contrary incentive to reiterate all domestic rules in the tender documentation.

Other than contradictory, these sets of case law are also extremely formalistic and ultimately built on a non-functional obsession with the integration of the single market that can get on the way of the development of sound public procurement practice. Ultimately, the general principles of public procurement should be there to create sufficient checks and balances and, in their generality, they should rank higher than tender documents. Actually, it is not foreign to the ECJ case law to consider that tender requirements that are disproportionate or discriminatory cannot be included in the tender documentation (or need to be set aside, or ultimately determine the ineffectiveness of the procurement exercise). Thus, it would be desirable for that logical hierarchy to remain a constant, even if it means that cross-border participation in procurement processes does not come at zero transaction costs and that interested undertakings need to make themselves familiar with the domestic rules of the jurisdiction in which they are tendering.

Beyond that, it also seems to me that the ECJ is inadvertently creating an absolute need for an exclusion-related special procedural phase, where tenderers other than those affected by potential exclusion have a justiciable right to force the contracting authority to review the circumstances of other tenderers. This is not necessarily an overall undesirable development, but it can be problematic in many ways, not least because the EU substantive and procedural rules are not adapted to that function [see A Sanchez-Graells, “‘If It Ain't Broke, Don't Fix It'? EU Requirements of Administrative Oversight and Judicial Protection for Public Contracts”, in S Torricelli & F Folliot Lalliot (eds), Administrative oversight and judicial protection for public contracts (Larcier, 2017) forthcoming]. 

Last, but not least, it is also worth noting that, by answering in the way it has, the ECJ has avoided the need to provide clarification on the requirements of intensity of judicial review of public procurement decisions at Member State level, on which AG Campos Sánchez-Bordona had put together a rather stringent and not uncontroversial proposal (see here). Unfortunately, then, given the ECJ's unwillingness to answer that question, we will continue puzzledly looking at the gaping hole that Prof Caranta identified in the ECJ's jurisprudence concerning public procurement remedies [see R Caranta, 'Many Different Paths, but Are They All Leading to Effectiveness?', in S Treumer & F Lichère (eds), Enforcement of the EU Public Procurement Rules, vol 3 European Procurement Law Series (Copenhagen, DJØF Publishing, 2011) 53, 84].

 

Joint control of in-house entities: ECJ issues additional guidance on limits to exceptions to public procurement obligations, but are they cumulative? (C-553/15)

In its Judgment of 8 December 2016 in Undis Servizi, C-553/15, EU:C:2016:935, the European Court of Justice (ECJ) offered additional guidance on the limits of the in-house exception to the obligation to tender public contracts subjected to the relevant EU rules, thus offering an extension of its well-known Teckal  case law (C-107/98, EU:C:1999:562) [for general discussion, see A Sanchez-Graells, Public procurement and the EU competition rules, 2nd edn (Oxford, Hart, 2015) 265-272].

Even if the case was decided in relation to Directive 2004/18/EC--or, more precisely, solely on the basis of the Teckal case law--the Undis Judgment may be relevant for the future interpretation of Article 12 of  and, in particular, regarding the accumulation of the in-house and the public-public cooperation exceptions that it regulates. 

On close reading, Undis Servizi is a rather puzzling case, not because of the answers provided by the ECJ, but due to the way the questions are structured and answered, as well as due to the scarcity of detail in the description of the factual circumstances of the case and the specific claims raised by Undis. It is also surprising that there was no Advocate General Opinion, particularly in view of the specific queries concerning the future interpretation of Art 12 Dir 2014/24 raised by the referring court. The following reflects my understanding of the situation as described by the ECJ--which may however not reflect the reality of the Italian case that triggered the Judgment.

Background and general remarks

The traditional position under the Teckal doctrine has been to exceptionally exempt the direct award of contracts to in-house entities from compliance with the EU rules only where the contracting authority or authorities exercises control over that entity that was similar to the control exercised over its (their) own departments, and where the controlled entity carries out the essential part of its activities with the controlling authority or authorities (or, conversely, where the controlled entity only engages in ancillary or marginal market activities).

On this occasion, the ECJ focused on the second element of the Teckal test (ie in the determination of the intensity of the non-public activities), which has traditionally been understood to require the volume of activities developed by the in-house entity in the market (ie, outside of the perimeter of the relationships covered by the similarity of control of its public shareholders) to be ancillary and marginal. This has now been (somehow) codified in Art 12 Dir 2014/24, which allows the in-house entity to carry out up to 20% of its activities outside the performance of tasks entrusted to it by the controlling contracting authority (or authorities) or by other legal persons controlled by that contracting authority (or authorities).

The need to evaluate the intensity of the public/non-public activities of the controlled entity triggers a difficulty in the calculation of the relevant turnover for the purposes of the assessment of the traditional Teckal requirement that the in-house entity carries out the essential part of its activities with the controlling authority or authorities, as well as the new statutory 80/20 threshold under Art 12 Dir 2014/24. In particular, the issue concerns the interpretation and application of the more developed Carbotermo test, according to which ‘the decisive turnover is that which the undertaking in question achieves pursuant to decisions to award contracts taken by the supervisory authority, including the turnover achieved with users in the implementation of such decisions’ (C‑340/04, EU:C:2006:308, para 65, emphasis added).

This may trigger some difficulties in cases of mixed in-house and public-public cooperation, where a group of contracting authorities decide to engage in public-public cooperation a la Commission v Germany (C-480/06, EU:C:2009:357), and then the leading contracting authority proceeds to an in-house award for the execution of the activity in the common interest to one of its (solely or jointly) controlled entities. In case some of the contracting authorities doe not participate in the (joint) control of the in-house entity, the application of the Carbotermo test raises issues as to whether any payments that may be made to the in-house entity by the non-controlling contracting authority fall within the category of 'turnover achieved by users as a result of the decision to award contracts by the controlling contracting authority' or not. In a nutshell, I think that this was the legal difficulty raised by Undis, even if this is not formulated in so many words and, in fact, the public-public cooperation element of the case is rather fuzzy.

Upon analysis of the circumstances of the Undis case (discussed below), the ECJ determined that, despite the fact that they were provided to other contracting authorities--ie not carried out in the (private) market--some of the activities undertaken by the in-house entity as a result of a direct requirement had to be considered 'activities carried out for third parties' (that is, activities which run against a finding that the controlled entity carries out the essential part of its activities with the controlling authority or authorities). This comes to clarify that the distinction of the relevant turnover by its origin follows a rather a narrow understanding of the 'circle of influence' of the controlling entities over the in-house undertaking--or, in other words, it follows the understanding that the in-house entity needs to be an instrument of (self)organization of the relevant contracting authority or authorities. This is also strongly linked in Undis to the peculiarity that the contracting authority imposing the obligation on the in-house entity was not part of the circle of jointly controlling authorities, but rather an administrative aggregation of those and other contracting authorities (ie a higher administration).

In particular, it is worth stressing that the ECJ ruled that 'in order to determine whether the contractor carries out the essential part of its activity for the contracting authority, including local authorities which are its controlling shareholders, an activity imposed on that contractor by a non-shareholder public authority for the benefit of local authorities which are also not shareholders of that contractor and do not exercise any control over it must not be taken into account, since that activity must be regarded as being carried out for third parties'. The following tries to clarify the reasons for this unsurprising finding, as well as the implications it may (or not) have in the interpretation of Art 12 Dir 2014/24.

UNDIS: Is IT Carbotermo plain and simple?

In Undis, the factual situation was as follows. Cogesa was a wholly public capital company owned by several municipalities of the Abruzzo Region (Italy). On 30 October 2014, the local authorities with shares in Cogesa entered into an agreement to exercise jointly over that body a control similar to that exercised over their own departments. By Integrated Environmental Authorisation No 9/11, the Abruzzo Region required Cogesa, in accordance with the principles of self-sufficiency, proximity and subsidiarity, to treat and recover the urban waste of certain municipalities of that region which were not shareholders of that company (see C-553/15, paras 11-13).

Undis, a potentially interested tenderer in the waste management contracts directly awarded to Cogesa, challenged these schemes on the grounds that the entrustment to Cogesa was contrary to the Teckal doctrine. For our purposes, it is relevant to stress that Undis challenged, in particular, that the criterion of intensity of the public/non-public activities of Cogesa was met, on the basis that 'Cogesa’s financial statements covering the years 2011 to 2013 indicated that only 50% of its overall activity had been performed with shareholder local authorities, given that activities carried out for the benefit of non-shareholder municipalities had to be included in that overall activity' (C-553/15, para 15).

In short, then, the legal issue for the ECJ was to determine whether the direct requirement by the Abruzzo Region (which did not itself hold any shares) for Cogesa to manage waste of municipalities in the region other than its own shareholders could be saved from a finding that it implied an illegal direct award under the EU rules because, even if the criterion of similarity of control was met (which was also disputed), Cogesa was not carrying out the essential part of its activities with its controlling authorities. In that regard, and after stressing that the in-house doctrine must be constructed narrowly because it creates an exception to the general rules and objectives of EU public procurement law, the ECJ determined that

32 ... it is essential that the contractor’s activity be principally devoted to the controlling authority or authorities; the nature of any other activity may only be marginal. In order to determine whether that is the case, the court having jurisdiction must take into account all the facts of the case, both qualitative and quantitative. In that regard, the relevant turnover is the turnover that that contractor achieves pursuant to the award decisions taken by that or those controlling authorities ...
33      The requirement that the person at issue performs the essential part of its activities with the controlling authority or authorities is designed to ensure that Directive 2004/18 remains applicable in the event that an undertaking controlled by one or more authorities is active in the market, and therefore liable to be in competition with other undertakings. An undertaking is not necessarily deprived of freedom of action merely because the decisions concerning it are controlled by the controlling municipal authority or authorities, if it can still carry out a large part of its economic activities with other operators. By contrast, where that undertaking’s services are mostly intended for that authority or those authorities alone, it seems justified that that undertaking should not be subject to the restrictions of Directive 2004/18, since they are in place to preserve a state of competition which, in that case, no longer has any raison d’être ...
34      ... any activity of the contractor which is devoted to persons other than those which control it, namely persons without any relationship of control in regard to that entity, including public authorities, must be regarded as being carried out for the benefit of a third party.
35      Consequently ... the local authorities which are not shareholders of Cogesa must be regarded as third parties. ... there is no control relationship between those local authorities and that company, with the result that the specific internal link between the contracting authority and the contractor, which according to the case-law of the Court justifies the exception for ‘in-house’ awards, is lacking.
36      Therefore, in order to determine whether Cogesa performs the essential part of its activity with the local authorities which control it, the activity which that company devotes to non-shareholder local authorities must be regarded as being carried out for the benefit of third parties. It is for the referring court to examine whether that latter activity can be regarded as merely marginal in comparison with the activity of Cogesa with the controlling local authorities, in accordance with the Court’s case-law on so-called ‘in-house’ awards.
37      That finding cannot be invalidated by the fact ... that Cogesa’s activity carried out for the benefit of the non-shareholder local authorities is imposed by a public authority, which is also not a shareholder of that company. Although it imposed that activity upon Cogesa, it is apparent from the information in the decision to refer that that public authority is not a shareholder of that company and does not exercise any control over it within the meaning of the Court’s case-law on so-called ‘in-house’ awards. In the absence of any control by that public authority, the activity which it imposes on Cogesa must be regarded as an activity carried out for third parties (c-553/15, paras 32-37, references omitted and emphases added).

This seems to me to be a clearly predictable answer to the preliminary reference by the ECJ, and one that is in line with its Teckal-Carbotermo case law, which was however designed for straightforward situations of vertical and direct (sole or joint) control by the contracting authority over the in-house entity. However, the applicability of this test under Art 12 Dir 2014/24 may create problems if the ECJ does not alter its interpretive approach.

Art 12 Dir 2014/24: how do we square the new circle?

Firstly, it seems problematic to consider that the Undis refinement of the Carbotermo test will survive the entry into force of the rules in Dir 2014/24. In that regard, it is necessary to stress that the transition from the simple in-house model in the Teckal case law to the more complex in-house architecture in Dir 2014/24 now allows for inverted and indirect control relationships. In particular, under Art 12(2) Dir 2014/24, the control criterion is deemed to also apply where a controlled legal person which is a contracting authority awards a contract to its controlling contracting authority, or to another legal person controlled by the same contracting authority, provided that there is no direct private capital participation in the legal person being awarded the public contract with the exception of non-controlling and non-blocking forms of private capital participation required by national legislative provisions, in conformity with the Treaties, which do not exert a decisive influence on the controlled legal person. The situation can be further complicated in cases of public-public cooperation under Art 12(4) Dir 2014/24 that may then incorporate some elements of in-house under Art 12(1) or Art 12(3) Dir 2014/24.

In that regard, it would seem that the functional criterion set by the Undis Judgment--as was the case in Carbotermo--is that the split between essential/ancillary or 80/20 levels of activity needs to follow precisely the contracts which direct award is saved by the in-house rules. Or, in other words, that the essential part of the activities (or 80% of turnover) needs to be achieved within the 'circle of influence' of the controlling entities (and its/their extended 'public-house') and the in-house undertaking.

Secondly, the fact that the Undis Judgment relies rather heavily on the point that the Abruzzo Region did not hold shares in Cogesa is troubling and somehow confusing (see para 37). I struggle to see how the ECJ could have decided that should the Region hold shares in its capital, it could then entrust Cogesa with the waste services of municipalities that did not themselves hold shares, this could be exempted from the EU rules and this would then make that activity not be classified as 'activities carried out for third parties'. Or, in other words, that in the future the ECJ could consider exempted from compliance with Dir 2014/24 the direct awards carried out by a contracting authority for the provision of services for other contracting authorities that do not have joint control over the in-house undertaking (then under Art 12 Dir 2014/24) if the 80/20 turnover split is respected--bearing in mind that the turnover of those activities would not be deemed to derive from 'activities carried out for third parties'.

This would seem to be in stark contrast with the other position held by the ECJ in Cogesa, whereby 'any activity of the contractor which is devoted to persons other than those which control it, namely persons without any relationship of control in regard to that entity, including public authorities, must be regarded as being carried out for the benefit of a third party' (para 34). But this could aim to be saved through a joint or cumulative application of the in-house and public-public exemptions, in particular by stressing that the market activity thresholds in Art 12(1) & (3) for the purposes of the in-house exception refer to the volume of activity of the controlled entity, whereas the threshold in Art 12(4) for the purposes of the public-public cooperation exemption requires that 'the participating contracting authorities perform on the open market less than 20 % of the activities concerned by the cooperation'. In my view, this would be a functionally incorrect reading of the new rules, but one that could carry some weight from a positivistic interpretation.

Ultimately, I guess that my confusion is about the likely way in which the ECJ will see the interaction of the in-house exemption in Art 12(1) to (3) and the public-public exemption of Art 12(4) Dir 2014/24. Read a contrario, para 37 of Undis may be seen as an indication that the accumulation of both exemptions is possible (which I would not favour, from the perspective of avoiding distortions of competition and the exclusion of significant volumes of public expenditure from EU public procurement rules and the ensuing checks and balances). It may also be just a mirage and that the ECJ will keep both exceptions separate in the future following the approach in para 34 of Undis (for which I would vouch). Either way, I also see increasing risks of State aid in these scenarios [on which see also GS Ølykke, "Commission Notice on the notion of state aid as referred to in article 107(1) TFEU - is the conduct of a public procurement procedure sufficient to eliminate the risk of granting state aid?", P.P.L.R. 2016, 5, 197-212]. Definitely a space to watch.

Project Completed: Full Commentary to UK Public Contracts Regulations in Open Access

Given the time of the year, when to do lists get dusted off and rearranged to cram in all these things we thought we would do 'by the end of the year', completing a 2-year research project feels really good. I can't but feel proud of and accomplished with the publication of the Public Contracts Regulations Commentary co-authored with Dr Pedro Telles [Albert Sanchez-Graells & Pedro Telles, (2016) Commentary to the Public Contracts Regulations 2015, available at: www.pcr2015.uk].

As Pedro says, we will carry on working on its improvement and update as things develop, and we would appreciate feedback and comments on how to make it more relevant for practitioners, challenging for academics and accessible for students (not an easy mix). So please be in touch.

Framework agreements should not be used improperly or in such a way as to prevent, restrict or distort competition [guest post* BY DR KIRSI-MARIA HALONEN]

A case from Supreme Administrative Court in Finland KHO 2016:182

The tension between centralization, large framework agreements and the competition principle has as of lately been increasingly discussed by academics, but also by national legislators. The new Procurement Directive 2014/24 aims, among other objectives, to enhance SME participation in public tenders by setting out rules on the division into lots. These issues have not yet been directly addressed in the Court of Justice case law. Nevertheless, in the recent ruling KHO 2016:182, the Finnish Supreme Administrative Court (korkein hallinto-oikeus) enforced the principle that “[f]ramework agreements should not be used improperly or in such a way as to prevent, restrict or distort competition”, which is codified in s.31(2) of the current Finnish Act on Public Contracts (laki julkisista hankinnoista 2007/348) and included in the recital (61) of Directive 2014/24. In this regard, the Supreme Administrative Court found that the decision to award “too-large” a framework agreement for health care and hospital supplies created barriers to bidding for most undertakings and was unduly restricting competition. It thus cancelled the decision (for those readers who can read either Finnish or Swedish, you can reach the case in Finnish and in Swedish). 

This case, regardless of being handled in one of the smallest EU member states by population and with a language regime not easily accessible for others, has created a lot of discussion among practitioners and academics alike. Therefore, Albert kindly asked me to shed some light on this case, where the competition principle has finally broken into the Finnish public procurement law regime and decreased contracting authority’s level of discretion regarding the terms of a competition-restrictive public tender [for which he has been constantly arguing, see A Sanchez-Graells, Public Procurement and the EU Competition Rules, 2nd edn (Oxford, Hart, 2015) 355 and ff, specifically on framework agreements].

TENDER PROCEDURE

In the case at hand, KL-Kuntahankinnat Oy, a central purchasing body for Finnish municipalities, run, on behalf of a hospital district and three municipalities, a framework agreement award procedure on health care and hospital supplies of 12 different product categories including stock-management and home delivery services. According to the terms of the call for tenders, other clients of KL-Kuntahankinnat Oy could also participate in the framework agreement at a later stage. The list of potential “other clients” of KL-Kuntahankinnat Oy was rather vast, and it included, among others, all Finnish municipalities. The framework agreement envisaged term was of four years.

The bidders could not tender for separate lots, but were rather required to submit a full-scale bid covering stock-management and home delivery services and all 12 product categories with a minimum of 5,000 items. As a cherry on top, this framework agreement on all possible health care and hospital supplies (and with the potential to have all Finnish municipalities or hospital districts as clients) was going to be awarded only to a single economic operator. In short, then, the framework agreement was bound to create a funnel for all hospital and health care supplies to be concentrated on a single supplier for a period of 4 years.

When submitting their bids, bidders were to provide two references on contracts of similar nature for the past three years. Both of these references were required to include products of at least eight of the 12 product categories included in the current contract award. Additionally, one of these references was required to include stock-management services. It soon emerged that the requirement of references that would cover eight categories could not be met by most of the potentially interested bidders. A majority of potential bidders only operated within one, two or maximum three product categories. As a result, these reference requirements led to the exclusion of all bidders except for two wholesale distributors of health care supplies.

MARKET COURT (FIRST INSTANCE)

Four bidders excluded from the contract award procedure initiated judicial proceedings in the Finnish Market Court arguing that the central purchasing body KL-Kuntahankinnat Oy had not only breached the principle of non-discrimination but also unduly restricted competition. The Market Court rejected the claims and considered that the central purchasing body had discretion over the product categories to be included in the framework agreement, as well as on whether or not to divide the contract into lots. In accordance with the arguments presented by the central purchasing body, the Market Court accepted that any economic operator had a chance to build consortiums or arrange for the coverage of missing product categories through sub-contracting. In addition, the Market Court did not find the reference requirements disproportionate, given the account the value and extent of the framework agreement.

SUPREME ADMINISTRATIVE COURT

The four companies appealed against the Market Court’s decision to the Finnish Supreme Administrative Court. They argued that KL-Kuntahankinnat Oy’s tender procedure and the ensuing framework agreement discriminated (ie de fact excluded) all economic operators other than wholesale distributors, and that this led to an undue restriction of competition.

In the joint appeal of Bayer Oy, Coloplast Oy, Oy SCA Hygiene Products Ab and Steripolar Oy, these companies submitted that the 5,000 products included in the framework did not form a coherent subject matter of a contract. The new agreement was significantly broader than any earlier framework agreement, combining products that previously were purchased through 10 different contracts or framework arrangements. Consequently, only two wholesale distributors had a true chance even to submit a bid in compliance with the rules set out in the call for tenders. The other bidders had no chance to succeed as there was no possibility to tender for separate lots.

The companies emphasized that the arguments presented by the contracting authority on the possibility to build consortiums or resort to sub-contracting in order to fulfill requirements were not reasonable or feasible, as it would have required a co-operation of 10-12 different companies or with the wholesale distributors themselves. Establishing a large consortium with both multinational companies and SMEs would have required a lot of time, money and effort, but also a common IT-system, customer service function and logistics.

1. The need to identify the users of the framework agreement

The Supreme Administrative Court stated that a contracting authority has an obligation to provide adequate information on the contract to be awarded already in the contract notice. By reserving a possibility for any other Finnish municipality and other contracting authorities to enter into the framework agreement at a later stage, the central purchasing body had breached the principle of openness and transparency by failing to provide adequate information on the scope of the framework agreement in question.

2. Restriction of Competition

The central purchasing body, KL-Kuntahankinnat Oy, argued in the Supreme Administrative Court that it had defined the scope of the framework agreement based on the needs of its clients. The award of the whole framework agreement to a single provider was considered to be the most economically advantageous alternative. The central purchasing body objected the claims on undue restriction of competition emphasizing that it had informed the potential bidders of the terms of the contract award in advance and encouraged them to establish consortia or sub-contracting arrangements in order to meet the requirements included in the call for tenders.  

The Court did not support such views and stated that the scope of contract and the requirement of a common IT-system, logistics and customer service, was too extensive to ensure equal opportunities of economic operators to offer supplies and services. Consequently the requirements set out in the call for tenders had led to an undue restriction of competition. According to the Court, the possibility to rely on the capacities of others did not remove the discriminatory, disproportionate and competition restrictive features of the tender procedure. These negative effects of the framework agreement with a single provider were considered especially severe due to the length of the contract term of four years.

CONCLUDING REMARKS

The Supreme Administrative Court’s ruling on the relation of the competition principle and large framework agreements will surely give a lot of food for thought, especially within central purchasing bodies and large volume contracting authorities. It is still a reality that foreign undertakings rarely submit bids called by Finnish contracting authorities. Regardless of the rules applied to the single market, in a rather small market at the North-East border of Europe, the relevant market is often in practice equivalent to the domestic market. Hence, the consequences of closing the Finnish market for four years could likely lead to closing down businesses and market exit by a number of economic operators. This can hardly be seen as the most economically advantageous solution for any society.

The Supreme Administrative Court’s ruling must therefore be praised, not only from a competition perspective, but also for enhancing transparency by setting rules on the identification of the actual users of the framework agreements. This is necessary in order to avoid framework agreements that could potentially be used by any public authority within any member state, bearing in mind that the amount of large framework agreements are likely to increase in the future as Directive 2014/24 sets out a possibility to purchase through any central purchasing body situated in any member state. 

Kirsi-Maria Halonen

The author of this post,  Dr. Kirsi-Maria Halonen holds a Ph.D. in Public Procurement Law and is currently working as a University Lecturer in Commercial Law at the University of Lapland, Finland. Her Ph.D. dissertation concerned the consequences of contractual ineffectiveness of a public contract between contracting parties. She is a member of the European Procurement Law Group (EPLG), the President of Finnish Public Procurement Association and an editorial board member of the Swedish Public Procurement Law Journal (Upphandlingsrättslig tidskrift, UrT) and a Finnish law journal on commercial law, Liikejuridiikka.

In addition to public procurement law, Kirsi-Maria is interested in contract law, tort law, corruption and transparency matters as well as state aid rules. She is the author of several articles (both in English and in Finnish) and a few books (in Finnish). Currently she is working in a research project for the Swedish Competition Authority (Konkurrensverket) on separate operational units within contracting authorities. Below some selected publications in English by the author:

K-M.Halonen, Disclosure Rules In EU Public Procurement – Balancing Between Competition and Transparency, the Journal of Public Procurement, Vol. 16, Number 4, Winter 2016, pp. 528–553.

K-M.Halonen, Is the remedy of contractual ineffectiveness truly effective in Finland? EPPPL - European Procurement & Public Private Partnership Law Review 4/2015, pp. 310–315.

K-M.Halonen, The liability of a contracting authority for an infringement of public procurement rules leading to a contract’s ineffectiveness- A Finnish approach, Upphandlingsrättslig tidskrift (UrT) 3/2015, 227–245.

K-M.Halonen, Shielding Against Damages for Ineffectiveness: The Limitations of Liability Available for Contracting Authorities - A Finnish Approach. Public Procurement Law Review (P.P.L.R.) 2015, 4, 111-121.

* Guest blogging at HTCAN: If you would like to contribute a blog post for How to Crack a Nut, please feel free to get in touch at a.sanchez-graells@bristol.ac.uk. Your proposals and contributions will be most warmly welcomed!

 

 

EU law-making in the shadow of the CJEU case law: looking at the “trilogue” black box

This blog first appeared in Elgar Blog on 7 December 2016 as part of our promotion of the recently published book Grith Skovgaard Ølykke and Albert Sanchez-Graells (eds), Reformation or Deformation of the EU Public Procurement Rules (Edward Elgar, 2016). You can now also read Chapter 1: The EU legislative process. An introduction from a political science perspective free on Elgaronline.

After six decades of economic and legal integration, when the European Union (EU) seeks to adopt new rules or to revise existing ones, it hardly ever operates on a clean slate. EU law-making is not only constrained by the political and economic realities of the time, but also by the pre-existing acquis communautaire of rules and general principles as interpreted by the Court of Justice of the European Union (CJEU). By any account, the CJEU has been a great force in the development of EU law, and its case law has pushed the policy-making agenda in rather clear, if controversial ways. EU law-makers thus operate in the shadow of the CJEU case law. This influences law-makers’ starting points and conditions the final solutions to be politically agreed, which will unavoidably be open to scrutiny (and quashing) by the CJEU.

In that space amongst the shadows of the CJEU case law, EU law-makers interact in an increasingly informal manner. They seek ways of flexibilising the legislative process so as to achieve easier and swifter compromises and overcome the criticism of immobilism, sometimes at the cost of renewed criticism of a democratic deficit that the Lisbon Treaty aimed to do away with. Indeed, even if the ordinary legislative procedure is heavily regulated by the EU Treaties and should channel most of the EU’s law-making, informal EU law-making is on the rise. As recently as July 2016, this led the European Ombudsman to call for more transparency of informal negotiations between the European Commission, European Parliament and the Council of the EU, also known as “trilogues” meetings.

It is no exaggeration to say that such “trilogues” are the black box of EU law-making. Under their current operation, it is possible to observe what comes in—legislative proposals are published by the Commission and initial reports by both Council and Parliament are also published—and what comes out of it—in the form of legislation eventually published in the Official Journal of the European Union. But, even after carrying out significant research efforts, it is impossible to crack what happens within the black box and to trace the origin and reasons behind important amendments to proposed legislation, as well as the way in which the final text is drafted.

This creates potential legal uncertainty in terms of the likely interpretation of the texts, which sometimes deviate from previous case law of the CJEU in unexplained ways. It also makes for difficult political assessments of the balance of interests that went into EU law-making and the weight that competing EU, national and group interests carried in shaping the new or revised rules. It can also significantly diminish the technical quality of the final rules, particularly where the trilogues are structured in sequence or address issues in a piece meal fashion, which prevents a final check for internal consistency and eventually leads to difficult systematic interpretation issues.

The case study of the reform of the EU public procurement rules in the period 2011-2014 clearly evidences these issues. The results of our two year research project, now published as Reformation or Deformation of the EU Public Procurement Rules, show both that the entirety of the legislative process was influenced by the CJEU case law, and that some of the most remarkable modifications of the pre-existing EU public procurement rules came about in an unexplained way at trilogue stage. As Dr Grith Skovgaard Ølykke and I stress in our conclusions,

The informal part of the procedure taking place between the 2011 Proposal and the first reading and adoption of the 2014 Directive prevented a repetition of the lengthy process of adopting the 2004 Directive (four years and a full-fledged ordinary legislative procedure, several amended proposals, conciliation and all). However, the early retreat to the trilogue and, hence, informality, significantly reduced transparency compared to that available in the legislative procedure leading to the adoption of the 2004 Directive, where e.g. the amended proposals contain the Commission’s argumentation for accepting proposed amendments or not.

… this still does not clarify the role and influence of the Commission in the post-Lisbon trilogue … Indeed, as stressed by the [European] Parliament itself, ‘given the Commission’s important and active role during Council working party (and even COREPER) discussions, its status as “honest broker” during trilogue negotiations is sometimes questioned in practice’.

A close analysis of the results of our research project helps gain a better understanding of the influence of the CJEU case law in EU law-making, both shaping it and as a benchmark from which policy-makers sometimes try very hard to deviate. However, the results of the research project also stress the limitations of an analysis of the travaux preparatoires and the negotiations throughout the legislative process when important changes and their reasons cannot be observed because they took place in the trilogue black box.

These insights will be interesting in guiding legal interpretive efforts, both in the area of EU public procurement law and more broadly. They will also be high quality and detailed evidence of the need to reform the way trilogues operate, both from a perspective of ensuring high standards of governance through accountability and transparency as stressed by the European Ombudsman, as well as from the perspective of preserving the value of interpretive aids in the context of an ever increasingly complex acquis communautaire.

Interesting AG Sharpston's Opinion on Lithuanian rules on subcontracting (C-298/15) -- warning on the use & transposition of 63(2) Dir 2014/24 & 79(3) Dir 2014/25?

In her Opinion in Borta, C-298/15, EU:C:2016:921, AG Sharpston assessed, amongst other things, the compatibility with EU law of a prohibition to subcontract part of a public works contract not covered by the relevant EU public procurement directive (in the case, Dir 2004/17). Her assessment thus relies on fundamental rules and general principles of the TFEU (in particular the free movement principles in Articles 49 and 56 TFEU).  

The dispute concerned a Lithuanian tender for the construction of a quay at the port of Klaipėda that ended up in litigation, not least due to a relevant change of participation requirements after the tender had been launched. In my view, the interesting point is that the Supreme Court of Lithuania raised of its own motion the question whether EU public procurement law precludes a provision of Lithuanian law that prohibits subcontracting ‘the main work’ in the context of public works contracts.

This concerns Art 24(5) of the Lithuanian Law on public procurement, according to which the procurement documents require the candidate or tenderer to specify in its tender any proposed subcontractors and may require the candidate or tenderer to specify the share of the contract that it is intended to subcontract to those subcontractors. However, where subcontractors are invited to carry out a works contract, the main work, as specified by the contracting authority, must be performed by the supplier.

Procedural aspects

The admissibility of this referral of its own motion by the Supreme Court of Lithuania could be considered problematic because Art 24(5) of the Law on public procurement was not clearly applicable to the dispute (as stressed in the AGO, C-298/15, para 40). However, AG Sharpston considers that the ECJ has jurisdiction to address the question because 

According to settled case-law, the Court cannot give a ruling on a question referred by a national court where it is quite obvious that the interpretation or the assessment of the validity of a provision of EU law sought by the national court bears no relation to the actual nature of the case or to the subject matter of the main action. That is not however the case here. Paragraph 4.3 of the tender specifications, which lies at the centre of the dispute in the main proceedings, contains an express reference to Article 24(5) of the Law on public procurement. Against that background, it does not appear that [restriction on subcontracting in Article 24(5) of the Law on public procurement] manifestly bears no relation to the actual nature or the subject matter of the action and that question is therefore admissible (AGO, C-298/15, para 41, references omitted and emphasis added).

From a procedural perspective, this is interesting in itself and shows the wide scope for the referral of questions for a preliminary ruling by the ECJ by the highest courts of the Member States even where the clarification of those questions is not core, central or essential to the main dispute. In a different context, this is of relevance for the Brexit litigation before the UK Supreme Court (for discussion see here and here). More generally, the contours of the preliminary reference mechanism seem clearly wide and facilitative of inter-judicial dialogue, as supported by the recently revised Recommendations to national courts and tribunals, in relation to the initiation of preliminary ruling proceedings.

Substantive aspects

Moving on to the assessment of the compatibility with EU law of the prohibition to subcontract the main work under Art 24(5) of the Lithuanian Law on public procurement, there is an interesting preliminary point to note:

The Lithuanian Government submitted at the hearing that Article 24(5) of the Law on public procurement transposed the new rule on subcontracting in Article 79(3) of Directive 2014/25/EU before the expiry of the period prescribed for transposing that directive and that, consequently, the Court should examine the present reference from the perspective of that directive only ... The Commission argued that, on the contrary, Directive 2014/25 could not be taken into account. First, Article 24(5) of the Law on public procurement was passed before that directive was adopted. Second, Lithuania had omitted to notify the measures transposing Directive 2014/25 into Lithuanian law to the Commission (AGO, C-298/15, para 25, references omitted).

AG Sharpston is clear in excluding this analytical approach (which may have resulted in a different outcome of the case) on the basis that

As the Court has held recently in relation to Directive 2014/24, to apply that directive before the expiry of the period prescribed for its transposition would prevent not only the Member States but also contracting authorities and economic operators from benefiting from a sufficient period in which to adapt to the new provisions it introduced. ... to do so would also be inconsistent with the principle of legal certainty. The same applies by analogy to Directive 2014/25 (AGO, C-298/15, para 27, references omitted).

Thus, the analysis of the Lithuanian rule had to be carried out in relation with the EU public procurement acquis at the time of launching the tender: ie, Dir 2004/17. However, given that the value of the contract remained below its quantitative thresholds, and in view of the fact that it had cross-border interest (para 37), the rule had to be

examined against the background of the general principles of transparency and equal treatment arising from Articles 49 and 56 TFEU, which must be respected when awarding public contracts. Given that Articles 49 and 56 TFEU apply ... the [contracting authority] is required to respect the prohibition on discrimination on the grounds of nationality and the obligation as to transparency which those articles lay down (AGO, C-298/15, para 38, references omitted).

In carrying out that assessment, AG Sharpston reverted to the general functional approach to the EU regulation of below threshold public procurement:

Articles 49 and 56 TFEU preclude any national measure which, even though it is applicable without discrimination on grounds of nationality, is liable to prohibit, impede or render less attractive the exercise by nationals of the European Union of the freedom of establishment and the freedom to provide services guaranteed by those provisions.
As regards public contracts and the freedom of establishment and the freedom to provide services, the European Union is concerned to ensure the widest possible participation by tenderers in a call for tenders, even where directives on public procurement are not applicable. That is in the interest of the contracting authority itself, which will thus have greater choice as to the most advantageous tender which is most suitable for its needs. One of the principal functions of the principle of the equal treatment of tenderers and the corollary obligation of transparency is thus to ensure the free movement of services and the opening-up of undistorted competition in all the Member States (AGO, C-298/15, paras 43-44, references omitted).

After clarifying that the prohibition to subcontract the main work under Art 24(5) of the Lithuanian Law on public procurement 'restricts the freedom to provide services and the freedom of establishment' (para 46), she also stressed that 'such a restriction may be justified in so far as it pursues a legitimate objective in the public interest, and to the extent that it complies with the principle of proportionality in that it is suitable for securing the attainment of that objective and does not go beyond what is necessary in order to attain it' (para 47).

In that connection, it is interesting to note that the AG stresses that one of the elements to be taken into account is that 'the contracting authority is entitled to prohibit the use of subcontractors whose capacities could not be verified during the examination of tenders and selection of the contractor for the performance of essential parts of the contract' (para 49, with reference to Siemens and ARGE Telekom, C‑314/01, EU:C:2004:159, paragraph 45, and Wrocław - Miasto na prawach powiatu, C‑406/14, EU:C:2016:562, paragraph 34--and see here). 

Applying this test, AG Sharpston established that

First, that restriction applies even where the contracting authority is in fact in a position to verify the technical and economic capacity of subcontractors during the contract award procedure. An alternative to that restriction would (for example) have been to require the main contractor to identify subcontractors when submitting his tender and to demonstrate both that he will actually have available to him the resources of those subcontractors necessary for the performance of the contract and that those subcontractors are suitable for carrying out the tasks he intends to entrust to them.
Second, Article 24(5) is also both too rigid and too vague to satisfy the proportionality test. Although contracting authorities appear to enjoy flexibility when defining, for each contract, what ‘the main work’ is, the restriction on subcontracting resulting from that provision is defined in particularly broad terms. It applies regardless of the subject matter of the public works contract and is binding upon contracting authorities when they conclude any type of public works contract, even when they may consider that there is no obvious reason for imposing such a restriction at all.
... the restriction on subcontracting in Article 24(5) of the Law on public procurement differs in that regard from Article 79(3) of Directive 2014/25. That provision merely enables a contracting authority, in particular, to require that certain critical tasks be performed directly by the tenderer itself. Contracting authorities may thus assess whether such a limitation is opportune, depending on the circumstances. It follows that, even if, as the Lithuanian Government submits, Article 24(5) of the Law on public procurement were to be regarded as transposing Article 79(3) of Directive 2014/25 into Lithuanian law, that transposition would be incorrect.
For those reasons ... in the context of a public contract not subject to Directive 2004/17 or Directive 2004/18, but which has a clear cross-border interest, the prohibition on discrimination on the grounds of nationality and the obligation of transparency which arise under Articles 49 and 56 TFEU preclude a national rule such as that contained in Article 24(5) of the Law on public procurement, under which the tenderer has itself to carry out the ‘main work’, as identified by the contracting authority, without it being possible to subcontract that part of the contract (AGO, C-298/15, paras 51-54, references omitted and emphasis added).

This is interesting because, even if Dir 2014/25 (and 2014/24) was not relevant to the case, it indicates the direction in which a proportionality assessment of the rule in Art 79(3) Dir 2014/25 and Art 63(2) Dir 2014/24--as transposed into domestic law and as applied by contracting authorities--is likely to be carried out in the future [with a view to minimise their scope, which I would favour, see A Sanchez-Graells, Public Procurement and the EU Competition Rules, 2nd edn (Oxford, Hart, 2015) 353-354].