The principle of competition is dead. Long live the principle of competition (recording)

Here is the recording for the first part of today’s seminar ‘The principle of competition is dead. Long live the principle of competition’, with renewed thanks to Roberto Caranta, Trygve Harlem Losnedahl and Dagne Sabockis for sharing their great insights. A transcript is available here, as well as the slides I used. As always, comments welcome and more than happy to continue the discussion!

The principle of competition is dead. Long live the principle of competition (Free webinar)

Free webinar: 22 March 2024 *revised time* 1pm UK / 2pm CET / 3pm EET. Registration here.

The role of competition in public procurement regulation continues to be debated. While it is generally accepted that the proper functioning of procurement markets requires some level of competition – and the European Court of Auditors has recently pointed out that current levels of competition for public contracts in the EU are not satisfactory – the 'legal ranking' and normative weight of competition concerns are much less settled.

This has been evidenced in a recent wave of academic discussion on whether there is a general principle of competition at all in Directive 2014/24/EU, what is its normative status and how it ranks vis-à-vis sustainability and environmental considerations, and what are its practical implications for the interpretation and application of EU public procurement law.

Bringing together voices representing a wide range of views, this webinar will explore these issues and provide a space for reflective discussion on competition and public procurement. The webinar won't settle the debate, but hopefully it will allow us to take stock and outline thoughts for the next wave of discussion. It will also provide an opportunity for an interactive Q&A.

Speakers:

  • Prof Roberto Caranta, Full Professor of Administrative Law, University of Turin.

  • Mr Trygve Harlem Losnedahl, PhD researcher, University of Oslo.

  • Dr Dagne Sabockis, Senior Associate, Vinge law firm; Stockholm School of Economics.

  • Prof Albert Sanchez-Graells, Professor of Economic Law, University of Bristol.

Pre- or post-reading:

UK's 'pro-innovation approach' to AI regulation won't do, particularly for public sector digitalisation

Regulating artificial intelligence (AI) has become the challenge of the time. This is a crucial area of regulatory development and there are increasing calls—including from those driving the development of AI—for robust regulatory and governance systems. In this context, more details have now emerged on the UK’s approach to AI regulation.

Swimming against the tide, and seeking to diverge from the EU’s regulatory agenda and the EU AI Act, the UK announced a light-touch ‘pro-innovation approach’ in its July 2022 AI regulation policy paper. In March 2023, the same approach was supported by a Report of the Government Chief Scientific Adviser (the ‘GCSA Report’), and is now further developed in the White Paper ‘AI regulation: a pro-innovation approach’ (the ‘AI WP’). The UK Government has launched a public consultation that will run until 21 June 2023.

Given the relevance of the issue, it can be expected that the public consultation will attract a large volume of submissions, and that the ‘pro-innovation approach’ will be heavily criticised. Indeed, there is an on-going preparatory Parliamentary Inquiry on the Governance of AI that has already collected a wealth of evidence exploring the pros and cons of the regulatory approach outlined there. Moreover, initial reactions eg by the Public Law Project, the Ada Lovelace Institute, or the Royal Statistical Society have been (to different degrees) critical of the lack of regulatory ambition in the AI WP—while, as could be expected, think tanks closely linked to the development of the policy, such as the Alan Turing Institute, have expressed more positive views.

Whether the regulatory approach will shift as a result of the expected pushback is unclear. However, given that the AI WP follows the same deregulatory approach first suggested in 2018 and is strongly politically/policy entrenched—for the UK Government has self-assessed this approach as ‘world leading’ and claims it will ‘turbocharge economic growth’—it is doubtful that much will necessarily change as a result of the public consultation.

That does not mean we should not engage with the public consultation, but the opposite. In the face of the UK Government’s dereliction of duty, or lack of ideas, it is more important than ever that there is a robust pushback against the deregulatory approach being pursued. Especially in the context of public sector digitalisation and the adoption of AI by the public administration and in the provision of public services, where the Government (unsurprisingly) is unwilling to create regulatory safeguards to protect citizens from its own action.

In this blogpost, I sketch my main areas of concern with the ‘pro-innovation approach’ in the GCSA Report and AI WP, which I will further develop for submission to the public consultation, building on earlier views. Feedback and comments would be gratefully received: a.sanchez-graells@bristol.ac.uk.

The ‘pro-innovation approach’ in the GCSA Report — squaring the circle?

In addition to proposals on the intellectual property (IP) regulation of generative AI, the opening up of public sector data, transport-related, or cyber security interventions, the GCSA Report focuses on ‘core’ regulatory and governance issues. The report stresses that regulatory fragmentation is one of the key challenges, as is the difficulty for the public sector in ‘attracting and retaining individuals with relevant skills and talent in a competitive environment with the private sector, especially those with expertise in AI, data analytics, and responsible data governance‘ (at 5). The report also further hints at the need to boost public sector digital capabilities by stressing that ‘the government and regulators should rapidly build capability and know-how to enable them to positively shape regulatory frameworks at the right time‘ (at 13).

Although the rationale is not very clearly stated, to bridge regulatory fragmentation and facilitate the pooling of digital capabilities from across existing regulators, the report makes a central proposal to create a multi-regulator AI sandbox (at 6-8). The report suggests that it could be convened by the Digital Regulatory Cooperation Forum (DRCF)—which brings together four key regulators (the Information Commissioner’s Office (ICO), Office of Communications (Ofcom), the Competition and Markets Authority (CMA) and the Financial Conduct Authority (FCA))—and that DRCF should look at ways of ‘bringing in other relevant regulators to encourage join up’ (at 7).

The report recommends that the AI sandbox should operate on the basis of a ‘commitment from the participant regulators to make joined-up decisions on regulations or licences at the end of each sandbox process and a clear feedback loop to inform the design or reform of regulatory frameworks based on the insights gathered. Regulators should also collaborate with standards bodies to consider where standards could act as an alternative or underpin outcome-focused regulation’ (at 7).

Therefore, the AI sandbox would not only be multi-regulator, but also encompass (in some way) standard-setting bodies (presumably UK ones only, though), without issues of public-private interaction in decision-making implying the exercise of regulatory public powers, or issues around regulatory capture and risks of commercial determination, being considered at all. The report in general is extremely industry-orientated, eg in stressing in relation to the overarching pacing problem that ‘for emerging digital technologies, the industry view is clear: there is a greater risk from regulating too early’ (at 5), without this being in any way balanced with clear (non-industry) views that the biggest risk is actually in regulating too late and that we are collectively frog-boiling into a ‘runaway AI’ fiasco.

Moreover, confusingly, despite the fact that the sandbox would be hosted by DRCF (of which the ICO is a leading member), the GCSA Report indicates that the AI sandbox ‘could link closely with the ICO sandbox on personal data applications’ (at 8). The fact that the report is itself unclear as to whether eg AI applications with data protection implications should be subjected to one or two sandboxes, or the extent to which the general AI sandbox would need to be integrated with sectoral sandboxes for non-AI regulatory experimentation, already indicates the complexity and dubious practical viability of the suggested approach.

It is also unclear why multiple sector regulators should be involved in any given iteration of a single AI sandbox where there may be no projects within their regulatory remit and expertise. The alternative approach of having an open or rolling AI sandbox mechanism led by a single AI authority, which would then draw expertise and work in collaboration with the relevant sector regulator as appropriate on a per-project basis, seems preferable. While some DRCF members could be expected to have to participate in a majority of sandbox projects (eg CMA and ICO), others would probably have a much less constant presence (eg Ofcom, or certainly the FCA).

Remarkably, despite this recognition of the functional need for a centralised regulatory approach and a single point of contact (primarily for industry’s convenience), the GCSA Report implicitly supports the 2022 AI regulation policy paper’s approach to not creating an overarching cross-sectoral AI regulator. The GCSA Report tries to create a ‘non-institutionalised centralised regulatory function’, nested under DRCF. In practice, however, implementing the recommendation for a single AI sandbox would create the need for the further development of the governance structures of the DRCF (especially if it was to grow by including many other sectoral regulators), or whichever institution ‘hosted it’, or else risk creating a non-institutional AI regulator with the related difficulties in ensuring accountability. This would add a layer of deregulation to the deregulatory effect that the sandbox itself creates (see eg Ranchordas (2021)).

The GCSA Report seems to try to square the circle of regulatory fragmentation by relying on cooperation as a centralising regulatory device, but it does this solely for the industry’s benefit and convenience, without paying any consideration to the future effectiveness of the regulatory framework. This is hard to understand, given the report’s identification of conflicting regulatory constraints, or in its terminology ‘incentives’: ‘The rewards for regulators to take risks and authorise new and innovative products and applications are not clear-cut, and regulators report that they can struggle to trade off the different objectives covered by their mandates. This can include delivery against safety, competition objectives, or consumer and environmental protection, and can lead to regulator behaviour and decisions that prioritise further minimising risk over supporting innovation and investment. There needs to be an appropriate balance between the assessment of risk and benefit’ (at 5).

This not only frames risk-minimisation as a negative regulatory outcome (and further feeds into the narrative that precautionary regulatory approaches are somehow not legitimate because they run against industry goals—which deserves strong pushback, see eg Kaminski (2022)), but also shows a main gap in the report’s proposal for the single AI sandbox. If each regulator has conflicting constraints, what evidence (if any) is there that collaborative decision-making will reduce, rather than exacerbate, such regulatory clashes? Are decisions meant to be arrived at by majority voting or in any other way expected to deactivate (some or most) regulatory requirements in view of (perceived) gains in relation to other regulatory goals? Why has there been no consideration of eg the problems encountered by concurrency mechanisms in the application of sectoral and competition rules (see eg Dunne (2014), (2020) and (2021)), as an obvious and immediate precedent of the same type of regulatory coordination problems?

The GCSA report also seems to assume that collaboration through the AI sandbox would be resource neutral for participating regulators, whereas it seems reasonable to presume that this additional layer of regulation (even if not institutionalised) would require further resources. And, in any case, there does not seem to be much consideration as to the viability of asking of resource-strapped regulators to create an AI sandbox where they can (easily) be out-skilled and over-powered by industry participants.

In my view, the GCSA Report already points at significant weaknesses in the resistance to creating any new authorities, despite the obvious functional need for centralised regulation, which is one of the main weaknesses, or the single biggest weakness, in the AI WP—as well as in relation to a lack of strategic planning around public sector digital capabilities, despite well-recognised challenges (see eg Committee of Public Accounts (2021)).

The ‘pro-innovation approach’ in the AI WP — a regulatory blackhole, privatisation of ai regulation, or both

The AI WP envisages an ‘innovative approach to AI regulation [that] uses a principles-based framework for regulators to interpret and apply to AI within their remits’ (para 36). It expects the framework to ‘pro-innovation, proportionate, trustworthy, adaptable, clear and collaborative’ (para 37). As will become clear, however, such ‘innovative approach’ solely amounts to the formulation of high-level, broad, open-textured and incommensurable principles to inform a soft law push to the development of regulatory practices aligned with such principles in a highly fragmented and incomplete regulatory landscape.

The regulatory framework would be built on four planks (para 38): [i] an AI definition (paras 39-42); [ii] a context-specific approach (ie a ‘used-based’ approach, rather than a ‘technology-led’ approach, see paras 45-47); [iii] a set of cross-sectoral principles to guide regulator responses to AI risks and opportunities (paras 48-54); and [iv] new central functions to support regulators to deliver the AI regulatory framework (paras 70-73). In reality, though, there will be only two ‘pillars’ of the regulatory framework and they do not involve any new institutions or rules. The AI WP vision thus largely seems to be that AI can be regulated in the UK in a world-leading manner without doing anything much at all.

AI Definition

The UK’s definition of AI will trigger substantive discussions, especially as it seeks to build it around ‘the two characteristics that generate the need for a bespoke regulatory response’: ‘adaptivity’ and ‘autonomy’ (para 39). Discussing the definitional issue is beyond the scope of this post but, on the specific identification of the ‘autonomy’ of AI, it is worth highlighting that this is an arguably flawed regulatory approach to AI (see Soh (2023)).

No new institutions

The AI WP makes clear that the UK Government has no plans to create any new AI regulator, either with a cross-sectoral (eg general AI authority) or sectoral remit (eg an ‘AI in the public sector authority’, as I advocate for). The Ministerial Foreword to the AI WP already stresses that ‘[t]o ensure our regulatory framework is effective, we will leverage the expertise of our world class regulators. They understand the risks in their sectors and are best placed to take a proportionate approach to regulating AI’ (at p2). The AI WP further stresses that ‘[c]reating a new AI-specific, cross-sector regulator would introduce complexity and confusion, undermining and likely conflicting with the work of our existing expert regulators’ (para 47). This however seems to presume that a new cross-sector AI regulator would be unable to coordinate with existing regulators, despite the institutional architecture of the regulatory framework foreseen in the AI WP entirely relying on inter-regulator collaboration (!).

No new rules

There will also not be new legislation underpinning regulatory activity, although the Government claims that the WP AI, ‘alongside empowering regulators to take a lead, [is] also setting expectations‘ (at p3). The AI WP claims to develop a regulatory framework underpinned by five principles to guide and inform the responsible development and use of AI in all sectors of the economy: [i] Safety, security and robustness; [ii] Appropriate transparency and explainability; [iii] Fairness; [iv] Accountability and governance; and [v] Contestability and redress (para 10). However, they will not be put on a statutory footing (initially); ‘the principles will be issued on a non-statutory basis and implemented by existing regulators’ (para 11). While there is some detail on the intended meaning of these principles (see para 52 and Annex A), the principles necessarily lack precision and, worse, there is a conflation of the principles with other (existing) regulatory requirements.

For example, it is surprising that the AI WP describes fairness as implying that ‘AI systems should (sic) not undermine the legal rights of individuals or organisations, discriminate unfairly against individuals or create unfair market outcomes‘ (emphasis added), and stresses the expectation ‘that regulators’ interpretations of fairness will include consideration of compliance with relevant law and regulation’ (para 52). This encapsulates the risks that principles-based AI regulation ends up eroding compliance with and enforcement of current statutory obligations. A principle of AI fairness cannot modify or exclude existing legal obligations, and it should not risk doing so either.

Moreover, the AI WP suggests that, even if the principles are supported by a statutory duty for regulators to have regard to them, ‘while the duty to have due regard would require regulators to demonstrate that they had taken account of the principles, it may be the case that not every regulator will need to introduce measures to implement every principle’ (para 58). This conflates two issues. On the one hand, the need for activity subjected to regulatory supervision to comply with all principles and, on the other, the need for a regulator to take corrective action in relation to any of the principles. It should be clear that regulators have a duty to ensure that all principles are complied with in their regulatory remit, which does not seem to entirely or clearly follow from the weaker duty to have due regard to the principles.

perpetuating regulatory gaps, in particular regarding public sector digitalisation

As a consequence of the lack of creation of new regulators and the absence of new legislation, it is unclear whether the ‘regulatory strategy’ in the AI WP will have any real world effects within existing regulatory frameworks, especially as the most ambitious intervention is to create ‘a statutory duty on regulators requiring them to have due regard to the principles’ (para 12)—but the Government may decide not to introduce it if ‘monitoring of the effectiveness of the initial, non-statutory framework suggests that a statutory duty is unnecessary‘ (para 59).

However, what is already clear that there is no new AI regulation in the horizon despite the fact that the AI WP recognises that ‘some AI risks arise across, or in the gaps between, existing regulatory remits‘ (para 27), that ‘there may be AI-related risks that do not clearly fall within the remits of the UK’s existing regulators’ (para 64), and the obvious and worrying existence of high risks to fundamental rights and values (para 4 and paras 22-25). The AI WP is naïve, to say the least, in setting out that ‘[w]here prioritised risks fall within a gap in the legal landscape, regulators will need to collaborate with government to identify potential actions. This may include identifying iterations to the framework such as changes to regulators’ remits, updates to the Regulators’ Code, or additional legislative intervention’ (para 65).

Hoping that such risk identification and gap analysis will take place without assigning specific responsibility for it—and seeking to exempt the Government from such responsibility—seems a bit too much to ask. In fact, this is at odds with the graphic depiction of how the AI WP expects the system to operate. As noted in (1) in the graph below, it is clear that the identification of risks that are cross-cutting or new (unregulated) risks that warrant intervention is assigned to a ‘central risk function’ (more below), not the regulators. Importantly, the AI WP indicates that such central function ‘will be provided from within government’ (para 15 and below). Which then raises two questions: (a) who will have the responsibility to proactively screen for such risks, if anyone, and (b) how has the Government not already taken action to close the gaps it recognises exists in the current legal landscape?

AI WP Figure 2: Central risks function activities.

This perpetuates the current regulatory gaps, in particular in sectors without a regulator or with regulators with very narrow mandates—such as the public sector and, to a large extent, public services. Importantly, this approach does not create any prohibition of impermissible AI uses, nor sets any (workable) set of minimum requirements for the deployment of AI in high-risk uses, specially in the public sector. The contrast with the EU AI Act could not be starker and, in this aspect in particular, UK citizens should be very worried that the UK Government is not committing to any safeguards in the way technology can be used in eg determining access to public services, or by the law enforcement and judicial system. More generally, it is very worrying that the AI WP does not foresee any safeguards in relation to the quickly accelerating digitalisation of the public sector.

Loose central coordination leading to ai regulation privatisation

Remarkably, and in a similar functional disconnect as that of the GCSA Report (above), the decision not to create any new regulator/s (para 15) is taken in the same breath as the AI WP recognises that the small coordination layer within the regulatory architecture proposed in the 2022 AI regulation policy paper (ie, largely, the approach underpinning the DRCF) has been heavily criticised (para 13). The AI WP recognises that ‘the DRCF was not created to support the delivery of all the functions we have identified or the implementation of our proposed regulatory framework for AI’ (para 74).

The AI WP also stresses how ‘[w]hile some regulators already work together to ensure regulatory coherence for AI through formal networks like the AI and digital regulations service in the health sector and the Digital Regulation Cooperation Forum (DRCF), other regulators have limited capacity and access to AI expertise. This creates the risk of inconsistent enforcement across regulators. There is also a risk that some regulators could begin to dominate and interpret the scope of their remit or role more broadly than may have been intended in order to fill perceived gaps in a way that increases incoherence and uncertainty’ (para 29), which points at a strong functional need for a centralised approach to AI regulation.

To try and mitigate those regulatory risks and shortcomings, the AI WP proposes the creation of ‘a number of central support functions’, such as [i} a central monitoring function of overall regulatory framework’s effectiveness and the implementation of the principles; [ii] central risk monitoring and assessment; [iii] horizon scanning; [iv] supporting testbeds and sandboxes; [v] advocacy, education and awareness-raising initiatives; or [vi] promoting interoperability with international regulatory frameworks (para 14, see also para 73). Cryptically, the AI WP indicates that ‘central support functions will initially be provided from within government but will leverage existing activities and expertise from across the broader economy’ (para 15). Quite how this can be effectively done outwith a clearly defined, adequately resourced and durable institutional framework is anybody’s guess. In fact, the AI WP recognises that this approach ‘needs to evolve’ and that Government needs to understand how ‘existing regulatory forums could be expanded to include the full range of regulators‘, what ‘additional expertise government may need’, and the ‘most effective way to convene input from across industry and consumers to ensure a broad range of opinions‘ (para 77).

While the creation of a regulator seems a rather obvious answer to all these questions, the AI WP has rejected it in unequivocal terms. Is the AI WP a U-turn waiting to happen? Is the mention that ‘[a]s we enter a new phase we will review the role of the AI Council and consider how best to engage expertise to support the implementation of the regulatory framework’ (para 78) a placeholder for an imminent project to rejig the AI Council and turn it into an AI regulator? What is the place and role of the Office for AI and the Centre for Data Ethics and Innovation in all this?

Moreover, the AI WP indicates that the ‘proposed framework is aligned with, and supplemented by, a variety of tools for trustworthy AI, such as assurance techniques, voluntary guidance and technical standards. Government will promote the use of such tools’ (para 16). Relatedly, the AI WP relies on those mechanisms to avoid addressing issues of accountability across AI life cycle, indicating that ‘[t]ools for trustworthy AI like assurance techniques and technical standards can support supply chain risk management. These tools can also drive the uptake and adoption of AI by building justified trust in these systems, giving users confidence that key AI-related risks have been identified, addressed and mitigated across the supply chain’ (para 84). Those tools are discussed in much more detail in part 4 of the AI WP (paras 106 ff). Annex A also creates a backdoor for technical standards to directly become the operationalisation of the general principles on which the regulatory framework is based, by explicitly identifying standards regulators may want to consider ‘to clarify regulatory guidance and support the implementation of risk treatment measures’.

This approach to the offloading of tricky regulatory issues to the emergence of private-sector led standards is simply an exercise in the transfer of regulatory power to those setting such standards, guidance and assurance techniques and, ultimately, a privatisation of AI regulation.

A different approach to sandboxes and testbeds?

The Government will take forward the GCSA recommendation to establish a regulatory sandbox for AI, which ‘will bring together regulators to support innovators directly and help them get their products to market. The sandbox will also enable us to understand how regulation interacts with new technologies and refine this interaction where necessary’ (p2). This thus is bound to hardwire some of the issues mentioned above in relation to the GCSA proposal, as well as being reflective of the general pro-industry approach of the AI WP, which is obvious in the framing that the regulators are expected to ‘support innovators directly and help them get their products to market’. Industrial policy seems to be shoehorned and mainstreamed across all areas of regulatory activity, at least in relation to AI (but it can then easily bleed into non-AI-related regulatory activities).

While the AI WP indicates the commitment to implement the AI sandbox recommended in the GCSA Report, it is by no means clear that the implementation will be in the way proposed in the report (ie a multi-regulator sandbox nested under DRCF, with an expectation that it would develop a crucial coordination and regulatory centralisation effect). The AI WP indicates that the Government still has to explore ‘what service focus would be most useful to industry’ in relation to AI sandboxes (para 96), but it sets out the intention to ‘focus an initial pilot on a single sector, multiple regulator sandbox’ (para 97), which diverges from the approach in the GCSA Report, which would be that of a sandbox for ‘multiple sectors, multiple regulators’. While the public consultation intends to gather feedback on which industry sector is the most appropriate, I would bet that the financial services sector will be chosen and that the ‘regulatory innovation’ will simply result in some closer cooperation between the ICO and FCA.

Regulator capabilities — ai regulation on a shoestring?

The AI WP turns to the issue of regulator capabilities and stresses that ‘While our approach does not currently involve or anticipate extending any regulator’s remit, regulating AI uses effectively will require many of our regulators to acquire new skills and expertise’ (para 102), and that the Government has ‘identified potential capability gaps among many, but not all, regulators’ (para 103).

To try to (start to) address this fundamental issue in the context of a devolved and decentralised regulatory framework, the AI WP indicates that the Government will explore, for example, whether it is ‘appropriate to establish a common pool of expertise that could establish best practice for supporting innovation through regulatory approaches and make it easier for regulators to work with each other on common issues. An alternative approach would be to explore and facilitate collaborative initiatives between regulators – including, where appropriate, further supporting existing initiatives such as the DRCF – to share skills and expertise’ (para 105).

While the creation of ‘common regulatory capacity’ has been advocated by the Alan Turing Institute, and while this (or inter-regulator secondments, for example) could be a short term fix, it seems that this tries to address the obvious challenge of adequately resourcing regulatory bodies without a medium and long-term strategy to build up the digital capability of the public sector, and to perpetuate the current approach to AI regulation on a shoestring. The governance and organisational implications arising from the creation of common pool of expertise need careful consideration, in particular as some of the likely dysfunctionalities are only marginally smaller than current over-reliance on external consultants, or the ‘salami-slicing’ approach to regulatory and policy interventions that seems to bleed from the ’agile’ management of technological projects into the realm of regulatory activity, which however requires institutional memory and the embedding of knowledge and expertise.

Procurement centralisation, digital technologies and competition (new working paper)

Source: Wikipedia.

I have just uploaded on SSRN the new working paper ‘Competition Implications of Procurement Digitalisation and the Procurement of Digital Technologies by Central Purchasing Bodies’, which I will present at the conference on “Centralization and new trends" to be held at the University of Copenhagen on 25-26 April 2023 (there is still time to register!).

The paper builds on my ongoing research on digital technologies and procurement governance, and focuses on the interaction between the strategic goals of procurement centralisation and digitalisation set by the European Commission in its 2017 public procurement strategy.

The paper identifies different ways in which current trends of procurement digitalisation and the challenges in procuring digital technologies push for further procurement centralisation. This is in particular to facilitate the extraction of insights from big data held by central purchasing bodies (CPBs); build public sector digital capabilities; and boost procurement’s regulatory gatekeeping potential. The paper then explores the competition implications of this technology-driven push for further procurement centralisation, in both ‘standard’ and digital markets.

The paper concludes by stressing the need to bring CPBs within the remit of competition law (which I had already advocated eg here), the opportunity to consider allocating CPB data management to a separate competent body under the Data Governance Act, and the related need to develop an effective system of mandatory requirements and external oversight of public sector digitalisation processes, specially to constrain CPBs’ (unbridled) digital regulatory power.

The full working paper reference is: A Sanchez-Graells, Albert, ‘Competition Implications of Procurement Digitalisation and the Procurement of Digital Technologies by Central Purchasing Bodies’ (March 2, 2023), Available at SSRN: https://ssrn.com/abstract=4376037. As always, any feedback most welcome: a.sanchez-graells@bristol.ac.uk.

More Nuanced Procurement Transparency to Protect Competition: Has the Court of Justice Hit the Brakes on Open Procurement Data in Antea Polska (C-54/21)?

** This comment was first published as an Op-Ed for EU Law Live on 8 December 2022 (see formatted version). I am reposting it here in case of broader interest. **

In Antea Polska (C-54/21), the Court of Justice provided further clarification of the duties incumbent on contracting authorities to protect the confidentiality of different types of information disclosed by economic operators during tender procedures for the award of public contracts. Managing access to such information is challenging. On the one hand, some of the information will have commercial value and be sensitive from a market competition perspective, or for other reasons. On the other hand, disappointed tenderers can only scrutinise and challenge procurement decisions reliant on that information if they can access it as part of the duty to give reasons incumbent on the contracting authority. There is thus a clash of private interests that the public buyer needs to mediate as the holder of the information.

However, in recent times, procurement transparency has also gained a governance dimension that far exceeds the narrow confines of the tender procedures and related disputes. Open contracting approaches have focused on procurement transparency as a public governance tool, emphasising the public interest in the availability of such information. This creates two overlapping tracks for discussions on procurement transparency and its limitations: a track concerning private interests, and a track concerning the public interest. In this Op-Ed, I examine the judgment of Court of Justice in Antea Polska from both perspectives. I first consider the implications of the judgment for the public interest track, ie the open data context. I then focus on the specifics of the judgment in the private interest track, ie the narrower regulation of access to remedies in procurement. I conclude with some broader reflections on the need to develop the institutional mechanisms and guidance required by the nuanced approach to procurement transparency demanded by the Court of Justice, which is where both tracks converge.

Procurement Transparency and Public Interest

In the aftermath of the covid-19 pandemic, procurement transparency became a mainstream topic. Irregularities and corruption in the extremely urgent direct award of contracts could only be identified where information was made public, sometimes after extensive litigation to force disclosure. And the evidence that slowly emerged was concerning. The improper allocation of public funds through awards not subjected to most (or any) of the usual checks and balances renewed concerns about corruption and maladministration in procurement. This brought the spotlight back on proactive procurement transparency as a governance tool and sparked new interest in open data approaches. These would generate access to (until then) confidential procurement information without the need for an explicit request by the interested party.

A path towards ‘open by default’ procurement data has been plotted in the Open Data Directive, the Data Governance Act, and the new rules on Procurement eForms. Combined, these measures impose minimum open data requirements and allow for further ‘permissioned’ openness, including the granting of access to information subject to the rights of others—eg on grounds of commercial confidentiality, the protection of intellectual property (IP) or personal data (see here for discussion). In line with broader data strategies (notably, the 2020 Data Strategy), EU digital law seems to gear procurement towards encouraging ‘maximum transparency’—which would thus be expected to become the new norm soon (although I have my doubts, see here).

However, such ‘maximum transparency’ approach does not fit well the informational economics of procurement. Procurement is at its core an information or data-intensive exercise, as public buyers use tenders and negotiations to extract private information from willing economic operators to identify the contractor that can best satisfy the relevant needs. Subjecting the private information revealed in procurement procedures to maximum (or full) transparency would thus be problematic, as the risk of disclosure could have chilling and anticompetitive effects. This has long been established in principle in EU procurement law—and more generally in freedom of information law—although the limits to (on-demand and proactive) procurement transparency remain disputed and have generated wide variation across EU jurisdictions (for extensive discussion, see the contributions to Halonen, Caranta & Sanchez-Graells, Transparency in EU Procurements (2019)).

The Court’s Take

The Court of Justice’s case law has progressively made a dent on ‘maximum transparency’ approaches to confidential procurement information. Following its earlier Judgment in Klaipėdos regiono atliekų tvarkymo centras (C-927/19), the Court of Justice has now provided additional clarification on the limits to disclosure of information submitted by tenderers in public procurement procedures in its Judgment in Antea Polska. From the open data perspective, the Court’s approach to the protection of public interests in the opacity of confidential information are relevant.

Firstly, the Court of Justice has clearly endorsed limitations to procurement transparency justified by the informational economics of procurement. The Court has been clear that ‘the principal objective of the EU rules on public procurement is to ensure undistorted competition, and that, in order to achieve that objective, it is important that the contracting authorities do not release information relating to public procurement procedures which could be used to distort competition, whether in an ongoing procurement procedure or in subsequent procedures. Since public procurement procedures are founded on a relationship of trust between the contracting authorities and participating economic operators, those operators must be able to communicate any relevant information to the contracting authorities in such a procedure, without fear that the authorities will communicate to third parties items of information whose disclosure could be damaging to those operators’; Antea Polska (C-54/21, para 49). Without perhaps explicitly saying it, the Court has established the protection of competition and the fostering of trust in procurement procedures as elements inherently placed within the broader public interest in the proper functioning of public procurement mechanisms.

Second, the Court has recognised that ‘it is permissible for each Member State to strike a balance between the confidentiality [of procurement information] and the rules of national law pursuing other legitimate interests, including that … of ensuring “access to information”, in order to ensure the greatest possible transparency in public procurement procedures’; Antea Polska (C-54/21, para 57). However, in that regard, the exercise of such discretion cannot impinge on the effectiveness of the EU procurement rules seeking to align practice with the informational economics of procurement (ie to protect competition and the trust required to facilitate the revelation of private information, as above) to the extent that they also protect public interests (or private interests with a clear impact on the broader public interest, as above). Consequently, the Court stressed that ‘[n]ational legislation which requires publicising of any information which has been communicated to the contracting authority by all tenderers, including the successful tenderer, with the sole exception of information covered by the [narrowly defined] concept of trade secrets [in the Trade Secrets Directive], is liable to prevent the contracting authority … from deciding not to disclose certain information pursuant to interests or objectives [such as the protection of competition or commercial interests, but also the preservation of law enforcement procedures or the public interest], where that information does not fall within that concept of a trade secret’; Antea Polska (C-54/21, para 62).

In my view, the Court is clear that a ‘maximum transparency’ approach is not permissible and has stressed the duties incumbent on contracting authorities to protect public and private interests opposed to transparency. This is very much in line with the nuanced approach it has taken in another notable recent Judgment concerning open beneficial ownership data: Luxembourg Business Registers (C‑37/20 and C‑601/20) (see here for discussion). In Antea Polska, the Court has emphasised the need for case-by-case analysis of the competing interests in the confidentiality or disclosure of certain information.

This could have a significant impact on open data initiatives. First, it comes to severely limit ‘open by default’ approaches. Second, if contracting authorities find themselves unable to engage with nuanced analysis of the implications of information disclosure, they may easily ‘clam up’ and perpetuate (or resort back to) generally opaque approaches to procurement disclosure. Developing adequate institutional mechanisms and guidance will thus be paramount (as below).

Procurement Transparency and Private Interest

In its more detailed analysis of the specific information that contracting authorities need to preserve in order to align their practice with the informational economics of procurement (ie to promote trust and to protect market competition), the Court’s views in Antea Polska are also interesting but more problematic. The starting point is that the contracting authority cannot simply take an economic operator’s claim that a specific piece of information has commercial value or is protected by IP rights and must thus be kept confidential (Antea Polska, C-54/21, para 65), as that could generate excessive opacity and impinge of the procedural rights of competing tenderers. Moving beyond this blanket approach requires case-by-case analysis.

Concerning information over which confidentiality is claimed on the basis of its commercial value, the Court has stressed that ‘[t]he disclosure of information sent to the contracting authority in the context of a public procurement procedure cannot be refused if that information, although relevant to the procurement procedure in question, has no commercial value in the wider context of the activities of those economic operators’; Antea Polska (C-54/21, para 78). This requires the contracting authority to be able to assess the commercial value of the information. In the case, the dispute concerned whether the names of employees and subcontractors of the winning tenderer should be disclosed or not. The Court found that ‘in so far as it is plausible that the tenderer and the experts or subcontractors proposed by it have created a synergy with commercial value, it cannot be ruled out that access to the name-specific data relating to those commitments must be refused on the basis of the prohibition on disclosure’; Antea Polska (C-54/21, para 79). This points to the emergence of a sort of rebuttable presumption of commercial value that will be in practice very difficult to overcome by a contracting authority seeking to disclose information—either motu proprio, or on the request of a disappointed tenderer.

Concerning information over which confidentiality is claimed on the basis that it is protected by an IP right, in particular by copyright, the Court stressed that it is unlikely that copyright protection will apply to ‘technical or methodological solutions’ of procurement relevance (Antea Polska, C-54/21, para 82). Furthermore, ‘irrespective of whether they constitute or contain elements protected by an intellectual property right, the design of the projects planned to be carried out under the public contract and the description of the manner of performance of the relevant works or services may … have a commercial value which would be unduly undermined if that design and that description were disclosed as they stand. Their publication may, in such a case, be liable to distort competition, in particular by reducing the ability of the economic operator concerned to distinguish itself using the same design and description in future public procurement procedures’; Antea Polska (C-54/21, para 83). Again, this points to the emergence of a rebuttable presumption of commercial value and anticompetitive potential that will also be very difficult to rebut in practice.

The Court has also stressed that keeping this type of information confidential does not entirely bar disclosure. To discharge their duty to give reasons and facilitate access to remedies by disappointed tenderers, contracting authorities are under an obligation to disclose, to the extent possible, the ‘essential content’ of the protected information; Antea Polska (C-54/21, paras 80 and 84). Determining such essential content and ensuring that the relevant underlying (competing) rights are adequately protected will also pose a challenge to contracting authorities.

In sum, the Court has stressed that preserving competing interests related to the disclosure of confidential information in procurement requires the contracting authority to ‘assess whether that information has a commercial value outside the scope of the public contract in question, where its disclosure might undermine legitimate commercial concerns or fair competition. The contracting authority may, moreover, refuse to grant access to that information where, even though it does not have such commercial value, its disclosure would impede law enforcement or would be contrary to the public interest. A contracting authority must, where full access to information is refused, grant that tenderer access to the essential content of that information, so that observance of the right to an effective remedy is ensured’; Antea Polska (C-54/21, para 85). Once again, developing adequate institutional mechanisms and guidance will thus be paramount (as below).

Investing in the Way Forward

As I have argued elsewhere, and the Antea Polska Judgment has made abundantly clear, under EU procurement (and digital) law, it is simply not possible to create a system that makes all procurement data open. Conversely, the Judgment also makes clear that it is not possible to operate a system that keeps all procurement data confidential (Antea Polska, C-54/21, para 68).

Procurement data governance therefore requires the careful management of a system of multi-tiered access to different types of information at different times, by different stakeholders and under different conditions. This will require investing in data and analysis capabilities by public buyers, which can no longer treat the regulation of confidentiality in procurement as an afterthought or secondary consideration. In the data economy, public buyers need to create the required institutional mechanisms to discharge their growing data governance obligations.

Moreover, and crucially, creating adequate data governance approaches requires the development of useful guidance by the European Commission and national competition authorities, as well as procurement oversight bodies. The Court of Justice’s growing case law points to the potential emergence of (difficult to challenge) rebuttable presumptions of justified confidentiality that could easily result in high levels of procurement opacity. To promote a better balance of the competing public and private interests, a more nuanced approach needs to be supported by actionable guidance. This will be very important across all EU jurisdictions, as it is not only jurisdictions that had embraced ‘maximum transparency’ that now need to correct course—but also those that continue to lag in the disclosure of procurement information. Ensuring a level playing field in procurement data governance depends on the harmonisation of currently widely diverging practices. Procurement digitalisation thus offers an opportunity that needs to be pursued.

UK Procurement Bill, general principles and additivity -- why there is no such risk

© hehaden / Flickr.

Those following the commentary on the UK Procurement Bill will have noticed the discussions concerning the absence of a clause on the general principles of procurement [see e.g. K McGaughey, ‘Losing your principles – some early thoughts on the Procurement Bill’ (13 May 2022) http://shorturl.at/tFJP2]. In fact, there is already a proposed amendment by Baroness Hayman seeking to introduce the principles as initially envisaged in the green paper, which risks losing the additions that resulted from the public consultation. However, it is not certain that the amendment will make it to the final version of the future Act. One of the reasons behind resisting the inclusion of general principles seems to be a concern by legislative drafters that it would generate additivity — which I understand as the risk of creating self-standing obligations beyond those explicitly imposed by the specific provisions of the primary (and future secondary) legislation.

In my view, the inclusion of general principles cannot generate such a risk of additivity, as the role and function of those principles is to act as interpretive guides for the provisions in the legislation. They can hardly be seen as gap fillers or generators of self-standing obligations. Conversely, the absence of such general principles can be problematic, not only for creating a vacuum of interpretive guidance, but also for seemingly signalling a deviation from global standards.

Below are the reasons why I think the general principles of procurement, and in particular those of transparency and competition, should be included in an amended Bill before it completes its Parliamentary procedure.

General principles as global standards

Transparency and competition are crucial and intertwined general principles and/or goals in every procurement legislative framework. However, both are missing in the Procurement Bill, which thus lags international standards and best practice.

The fundamental importance of transparency and competition is recognised at the higher level of international legislation, starting with the United Nations Convention Against Corruption (UNCAC), which Article 9(1) explicitly requires signatory States (including the UK) to ‘take the necessary steps to establish appropriate systems of procurement, based on transparency, competition and objective criteria in decision-making, that are effective, inter alia, in preventing corruption’.

The same applies to the World Trade Organisation Government Procurement Agreement (WTO GPA), which explicitly links to UNCAC and translates its requirements into Art IV(4), which binds its parties (including the UK) to ensure that ‘A procuring entity shall conduct covered procurement in a transparent and impartial manner that: a) is consistent with this Agreement, using methods such as open tendering, selective tendering and limited tendering; b) avoids conflicts of interest; and c) prevents corrupt practices’.

There should thus be no question that the UK is bound under international law to ensure that its procurement is based on principles of transparency, competition and objectivity.

The UNCITRAL Model Law on public procurement also places transparency as a general goal amongst the overarching objectives of any domestic legislation enacting it. The preamble clearly sets out that the enacting State: ‘considers it desirable to regulate procurement so as to promote the objectives of: … (c) Promoting competition among suppliers and contractors for the supply of the subject matter of the procurement; … [and] (f) Achieving transparency in the procedures relating to procurement.’ Even if the Procurement Bill is not enacting the UNCITRAL Model Law, it can reasonably be expected to meet the best practices it highlights, not least because this is a benchmark that will be used to assess the quality of the UK procurement legislation post-reform.

Inclusion of the principle of transparency in the Bill

The intended inclusion of a principle/goal of transparency was clear in the Transforming Public Procurement Green Paper of December 2020 (para 27), and there was no indication of a change of position in the government’s response to the public consultation in December 2021 (para 33). Moreover, the response clarified that ‘The transparency principle previously proposed will set a minimum standard in terms of the quality and accessibility of information where there is a publication obligation elsewhere in the Bill’ (para 35).

The inclusion of an explicit principle of transparency was thus not meant to (or arguably capable of) generating additional self-standing obligations, but simply to establish an interpretive guideline in line with international obligations and best practice benchmarks. If there are concerns that the principle can in itself generate additivity over and above the specific transparency obligations in the Bill, it should be stressed that the existence of an explicit principle of transparency in the Public Contracts Regulations 2015 (reg.18(1)) has not led to an expansion of the transparency duties under the current regime. To the contrary, where such expansion has arguably taken place, it has been on the basis of common law doctrines (see e.g. R (Good Law Project & Others) v Secretary of State for Health and Social Care [2021] EWHC 346 (Admin) [at 132 ff]). 

Moreover, there are safeguards in the Bill preventing a maximalist interpretation of transparency requirements. Clause 85 (General exemptions from duties to publish or disclose information) affords the government the possibility to withhold information for specific purposes. This would thus ensure that there is no risk of additivity from the inclusion of a general principle dictating that data should be made transparent.

The inclusion of the principle of transparency has been supported by the entire spectrum of academic commentators, including those of a pro-deregulation persuasion (e.g. S Arrowsmith ‘Transforming Public Procurement Law after Brexit: Early Reflections on the Government’s Green Paper’ (Dec 2020) at 4). I have also stressed how, in the absence of a reform of e.g. the Freedom of Information Act 2000, the inclusion of a transparency principle will not generate meaningful practical changes to the existing disclosure obligations (e.g. A Sanchez-Graells, ‘The UK’s Green Paper on Post-Brexit Public Procurement Reform: Transformation or Overcomplication?’ (Jan 2021) at 6).

Inclusion of the principle of competition in the Bill

The principle of competition was not included in the Transforming Public Procurement Green Paper of December 2020. However, following submissions by the Competition and Markets Authority and commentators such as myself (see here for details), the government’s response to the public consultation of December 2021 indicated in no ambiguous terms that ‘We will introduce an additional objective of promoting the importance of open and fair competition that will draw together a number of different threads in the Green Paper that encourage competitive procurement’ (para 39).

The inclusion of an explicit principle of competition was thus also not meant to (or arguably capable of) generating additional self-standing obligations, but simply to establish an interpretive guideline in line with international obligations and best practice benchmarks. Similarly to the analysis above in relation to the principle of transparency, the existence of a principle of competition (or a narrower prohibition on the artificial narrowing of competition, as others interpret it) can hardly be seen as capable of generating self-standing obligations (for discussion, see A Sanchez-Graells, ‘Initial comments on the UK’s Procurement Bill: A lukewarm assessment’ (May 2022) 7).

Even where recent UK case law has derived obligations from general principles (R (Good Law Project and EveryDoctor) v Secretary of State for Health and Social Care [2022] EWHC 46 (TCC)), the obligations did not derive from the principle of competition, or the other principles (especially equal treatment) themselves, but from an essentialisation of the general requirements of procurement leading to the identification of ‘an irreducible minimum standard of objective fairness that applies to such procurements, even in the absence of open competition’ (at para 334, see my criticism here). As above, this does not point out to an additivity risk resulting from the general principle of competition, but rather from broader judicial considerations of the proper way in which procurement needs to be conducted.

It is worth reiterating that the importance of the inclusion of the principle of competition in the Bill was underlined by the Competition and Markets Authority, in particular in relation to its interaction with the principle of transparency: ‘Transparency can play a vital role in effective public procurement by dispelling perceptions of favouritism and maintaining trust in the procurement process – which in turn encourages competitors to contest the market. However, higher levels of transparency can also make collusion between bidders easier to sustain ... The CMA considers it essential that public procurement officials are aware of the link between collusion and transparency and report any suspicious activity by suppliers to the CMA. … The CMA proposes that … the new regulatory framework for public procurement should include a further principle of ‘effective competition’: Effective competition - procurement should promote healthy, competitive markets, which in turn drive better value for money and reduce the risk of illegal bid-rigging cartel.’ (at paras 3.2 and 3.3).

The inclusion of the principle of transparency thus needs to be twinned to the introduction of the principle of competition (for discussion of the interaction between the triad of overarching principles of competition, transparency, and integrity, see Steve Schooner, ‘Desiderata: Objectives for a System of Government Contract Law‘ (March 2002) 3 ff).

Implications and final thoughts 

Given the UK’s international commitments and the universal recognition of the importance of enshrining the general principles of transparency and competition in procurement legislation, their absence in the Procurement Bill can:

  1. generate doubts as to the intended transparency and pro-competition orientation of the system—which could be used e.g. in the context of the WTO GPA by trading partners seeking to raise issues with the UK’s position in the agreement; as well as

  2. push for a pro-competition and/or transparency-regarding interpretation of other general goals included in the Bill and, in particular, the ones in clause 11(1)(a) of ‘delivering value for money’, clause 11(1)(c) of ‘sharing information for the purpose of allowing suppliers and others to understand the authority’s procurement policies and decisions’, and clause 11(1)(d) of ‘acting, and being seen to act, with integrity’. Such interpretation could, coupled with common law doctrines and other precedent (as above), generate additional (self-standing) obligations in a way that the more generic principles of transparency and competition may not. And, even if they did, there would be no risk of additivity compared to the original text of the Bill.

There is thus no clear advantage to the omission of the principles, whereas their explicit inclusion would facilitate alignment of the Procurement Bill with the international standards and regulatory benchmarks it will be assessed against. The explicit inclusion of the principles of transparency and competition is thus the preferable regulatory approach.

In my view, the easiest way of ensuring the introduction of both principles would be to alter the amendment proposed by Baroness Hayman as follows (with bold indicating changes or additions):

After Clause 10

BARONESS HAYMAN OF ULLOCK

Insert the following new Clause

“Procurement principles

(1) In carrying out a procurement, a contracting authority must pursue the following principles—

(a) [omit]
(b) value for money, by having regard to the optimal whole-life blend of economy, efficiency and effectiveness that achieves the intended outcome of the business case,
(c) transparency, by acting openly to underpin accountability for public money, anti-corruption and the effectiveness of procurements,
(d) integrity, by providing good management, preventing misconduct, and control in order to prevent fraud and corruption,
(e) equal treatment of suppliers, by ensuring that decision-making is impartial and without conflict of interest,
(f) non-discrimination, by ensuring that decision-making is not discriminatory, and
(g) effective competition, by ensuring that procurement does not artificially narrow competition for a specific contract, promotes healthy, competitive markets, and reduces the risk of illegal bid-rigging cartels.”

As there is no good reason why a contracting authority should not be able to act in accordance with those principles, I would advocate for a deletion of the second paragraph of the amendment as proposed.

New paper on competition and procurement regulation -- in memory of Professor Steen Treumer

Image credits: Steve Johnson.

Last year brought the saddest news with the passing of Professor Steen Treumer after a long illness. Steen was a procurement colossus and a fantastic academic. I was extremely lucky to count him amongst my mentors and champions, especially at the very early stages of my research and academic career, before he had to take a step back to focus on his health. I am particularly grateful to him for having opened the door of the European Procurement Law Group to me. And for his generosity in providing feedback, job and promotion references, and thoughtful and clever advice without ever asking for or expecting anything in return.

It is nigh impossible to do justice to the intellectual contribution Steen made to the procurement field and the influence his approach had on the research of others such as myself. It is now a humbling honour to have been invited to contribute to an edited collection in his memory (a Mindeskrift). If he could read my contribution, I am not sure Steen would agree with what I say in the paper, but we would certainly have an interesting and stimulating discussion on the basis of the sharp comments (even some devil’s advocate ones) he would surely come up with. I hope you will find the contribution worth discussing too.

Probably unsurprisingly, the paper is entitled ‘Competition and procurement regulation: a goal, a principle, a requirement, or all of the above?’ and its abstract is below. In the paper, I use the background of recent developments in UK and EU case law, as well as the UK’s procurement rulebook reform process, to reframe the issue of the role of competition in procurement regulation. While I do not provide any insights I had not already developed in earlier writing, I bring some scattered parts of my scholarship together and hopefully clarify a few things along the way. The paper may be particularly interesting to those looking for an entry point to the discussion on the role of competition in public procurement, but hopefully there is also something for those already well versed on the topic. As always, comments most welcome: a.sanchez-graells@bristol.ac.uk.

In this contribution, I reflect on the role of competition in public procurement regulation and, more specifically, on whether competition should be treated as a regulatory goal, as a general principle of public procurement law, as a specific (implicit or explicit) requirement in discrete legal provisions, or all of the above. This is an issue I had the pleasure and honour of discussing with Professor Steen Treumer back in 2009, when I was a PhD student visiting the Copenhagen Business School. While Steen never revealed to me what he really thought, his probing questions continue to help me think of this issue, which remains at the core of my research efforts. This contribution shows that the role of competition keeps cropping up in procurement regulation and litigation, as evidenced in recent UK developments. This is thus an evergreen research topic, which were Steen’s favourites.

The full citation is: Sanchez-Graells, Albert, ‘Competition and procurement regulation: a goal, a principle, a requirement, or all of the above?’, to be published in Steen Treumer’s Mindeskrift edited by Carina Risvig Hamer, Erik Bertelsen, Marta Andhov, and Roberto Caranta (Ex Tuto Publishing, forthcoming 2022). Available at SSRN: https://ssrn.com/abstract=4012022.

Short comments on the proposed regulation on foreign subsidies distorting the internal market, as it relates to procurement

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The European Commission is currently consulting on its recent Proposal for a Regulation on foreign subsidies distorting the internal market (COM(2021) 223 final, 5 May 2021). The public consultation will be open until 15 July 2021. I have just submitted my views on chapter four of the proposal, which concerns the rules for the analysis of foreign subsidies distorting tenders for contracts with a value above €250 million. The feedback form only allows for 4,000-character submissions, so here are mine. As always, comments welcome: a.sanchez-graells@bristol.ac.uk.

The proposed Regulation on foreign subsidies distorting the internal market (RFSDIT) is both (1) undesirable and (2) problematic, in particular as it concerns the investigation of foreign subsidies linked to public procurement procedures. The following is limited to chapter 4.

1. Primarily, ch 4 RFSDIT is undesirable because it adds a layer of scrutiny and red tape that will affect high-value tenders submitted by tenderers from jurisdictions that have either signed up to the WTO Government Procurement Agreement, or that have a plurilateral or bilateral trade agreement covering procurement with the EU. Tenderers from other jurisdictions can already be excluded on the basis of the current rules (see Art 25 Dir 2014/24; Art 43 Dir 2014/25), as emphasised in the Commission's 2019 guidance on the participation of third-country bidders and goods in the EU procurement market. First, the (inadvertent) targeting of GPA- or FTA-originated tenders is in itself undesirable on trade policy terms and could erode third countries' bilateral relationships with the EU within the GPA framework, as well as under the relevant FTA (or the UK TCA) even if those already include subsidy-related provisions. Second, it is also undesirable due to the technical shortcomings of the proposal, as below, as there could be a basis for claims of unequal treatment concerning the non-scrutiny of EU-originated tenders that are tainted by illegal State aid. Finally, it is also undesirable because the ex ante nature of ch 4 screening can dissuade economic operators from participating in public tenders even if they think that subsidies they have received could overcome the tests in Arts 3-5 RFSDIT. Recipients of foreign subsidies may rather forgo their chances of being awarded a public contract than trigger an investigation they could avoid under the general motu proprio regime. Such loss of international competition is to the EU public buyers' detriment.

2. Ch 4 RFSDIT is also highly problematic because of its incompatibility with the mechanisms in the EU procurement Directives, as well as the inconsistency of approach with the rest of the chapters in the RFSDIT. First, the proposed rules are incompatible with the trigger for an investigation of the distortive effects of State aid granted to an EU-based tenderer, which derives from the prima facie abnormally low character of its tender (ALT) (see Art 69 Dir 2014/24). EU-generated non-ALT bids are not screened for receipt of (illegal) State aid, even if they can be 'winning tenders' in a given procedure. As above, this can trigger claims of discrimination against non-EU generated tenders. Second, procurement case law pre-empts tenderers from offering commitments related to the tender at hand to the Commission's satisfaction without materially altering their tenders. Such changes would be impermissible under EU procurement law. This is an inescapable limit, which is partly but insufficiently acknowledged in Art 30(1) RFSDIT. This means that any tender where the Commission found an unbalanced distortion of the internal market would lead to the inevitable exclusion of the tender. This is at odds with the appearance of 'correctability' created by Art 30 RFSDIT. This evidences the inadequacy of applying a merger or State aid control logic to the public procurement context. Third, the relative intensity of the foreign subsidy is much lower for procurement than for concentrations under the RFSDIT. Art 18(3) creates a safe harbour of up to 10% of the value of a concentration. Art 27(2) contains no parallel rule. Thus, Art 3(2) offers the only (soft) safe harbour for procurement, which means that subsidies of 2% or less of the tender value would be caught. The reason for this different treatment under RFSDIT opens it to challenge on proportionality grounds. Moreover, it is unclear how a 2% subsidy could create a situation comparable to that of an ALT, which further reinforces concerns of unequal treatment, as above.

'Public procurement' for Global Dictionary of Competition Law

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I have been invited to contribute an entry on ‘public procurement’ for a new Global Dictionary of Competition Law (Concurrences Books, forthcoming). The initial draft of the entry is below. Comments welcome: a.sanchez-graells@bristol.ac.uk.

Public Procurement
Albert Sanchez-Graells
University of Bristol Law School

Definition

Public procurement rules govern the award of government or public contracts for the acquisition of supplies, works or services, including the direct provision of public services to citizens. Public procurement rules seek to foster effective competition for public contracts to generate value for money, and to harness competition as an anticorruption tool to ensure integrity and probity in the expenditure of public funds. The main challenges to effective competition in public procurement settings are bid rigging (or collusion among bidders), which risk is heightened by the transparency inherent to procurement processes, and anticompetitive requirements imposed by the public buyer.

Commentary

The effectiveness of public procurement and its ability to deliver value for money depend on the existence of two layers of competition: competition in the market for the goods, works or services to be acquired, and competition within the tender for a specific contract. While most competition analysis focuses on the existence (or absence) of competition within the tender and tends to assimilate this with models of competition for the market, this is a short-sighted approach. Except for very rare public contracts for goods, services or works for which the public buyer is a monopsonist—mainly in sectors such as defence—most public tenders take place in a framework of competition in the market, and one with many private and public buyers seeking to purchase from a range of potential suppliers (for example, tenders for the acquisition of cloud services, general supplies, or school meals). Therefore, it is important not only to ensure that procurement rules and administrative practices prevent distortions of competition within a given tender, but also that they do not generate negative knock-on effects on (dynamic) competition in the relevant market.

The most commonly discussed distortion of competition within a public tender concerns anticompetitive agreements between bidders (bid rigging) that seek to manipulate the competition for the public contract and to extract excessive rents from the public buyer. The mechanics of bid rigging schemes are widely understood, including predominant strategies such as cover bidding, bid suppression, bid rotation and market allocation. However, these anticompetitive practices are also difficult to prevent in oligopolistic or concentrated markets because the transparency inherent to public tenders significantly facilitates monitoring of the cartelists’ bidding behaviour, and because the atomisation of public tenders requires a significant investment in market screening tools to spot suspicious patterns across regional markets and over time. Fighting cartels in public procurement settings has become a high priority for most competition authorities in recent years, in part as a result of the OECD’s work on this area—see its 2012 Recommendation on Fighting Bid Rigging in Public Procurement—as well as the push by the International Competition Network. There is also hope in the development of effective systems of automated screening and red flags where public procurement is conducted electronically (of which there is longstanding experience eg in Korea in relation to its eProcurement platform KONEPS), but these require a solid procurement data architecture which absence has marred recent attempts in jurisdictions such as the UK and its now abandoned ‘Screening for cartels’ tool.

An additional difficulty in ensuring effective competition within a given tender derives from the unclear boundary between anticompetitive practices such as bid rigging and procompetitive cooperation through teaming, joint bidding and subcontracting arrangements between bidders. There is currently significant debate about the limits to cooperation between (potential) competitors in the context of procurement procedures, as well as whether it should be treated as a restriction of competition by object or by effect for the purposes of Article 101 TFEU. The debate is particularly alive in Scandinavian countries, following a 2016 Decision by the EFTA Court in the Ski and Follo Taxi case, and a more recent 2019 Judgment by the Danish Supreme Court in the Road Markings case, which has led to a revision of the Danish Competition and Consumer Authority’s guidelines on joint bidding. The main points of contention about the state of the law concern the counterfactual to be used to determine that joint bidders are (potential) competitors, as well as the measurement of any efficiencies passed on to the public buyer.

In order to empower public buyers to self-protect against bid rigging and to strengthen the effectiveness of competition law in public procurement settings, EU procurement rules have created discretionary grounds for the exclusion of bidders ‘where the contracting authority has sufficiently plausible indications to conclude that the economic operator has entered into agreements with other economic operators aimed at distorting competition’, as well as in cases ‘where the contracting authority can demonstrate by appropriate means that the economic operator is guilty of grave professional misconduct, which renders its integrity questionable’—which the Court of Justice of the EU has interpreted as inclusive of non-procurement related breaches of competition law (Generali-Providencia Biztosító). Recent Court of Justice case law has clarified the extent to which these exclusion grounds are applicable where bidders have benefitted from leniency, as well as the intensity of the duty to cooperate incumbent upon bidders seeking to avoid exclusion through self-cleaning measures (Vossloh Laeis). The system created under the EU rules is converging with those of other major jurisdictions, such as the US, where the Federal Acquisitions Regulations allow for similar approaches to assessing the responsiveness (or reliability) of bidders engaged in anticompetitive practices.

Beyond the abovementioned issues, which are all concerned with bidder behaviour, it is important to stress that competition within a public tender can be restricted through decisions made by the public buyer, such as the imposition of excessive participation requirements, the choice of suppliers in less than fully open procedures or foreclosure through eg the use of excessively broad and excessively long framework agreements. Such restrictions of competition can not only generate losses of value for money in the allocation of the specific contract, but also have negative effects on dynamic competition in the relevant market. Unfortunately, the direct application of competition law (ie Article 102 TFEU) to the public buyer has been excluded by the case law of the Court of Justice, except in rather rare situations where the public buyer is engaged in downstream market activities (FENIN). However, a principle of competition has been explicitly enshrined in EU public procurement law to prevent public buyers from ‘artificially narrowing competition’, in particular where ‘the design of the procurement is made with the intention of unduly favouring or disadvantaging certain economic operators’. This is a promising tool to prevent publicly-generated restrictions of competition in public procurement settings, although its interpretation generates some difficulties and its application is yet to be tested in the EU Courts.

Case References

Case C-205/03 P FENIN v Commission, EU:C:2006:453.

Case C-470/13 Generali-Providencia Biztosító, EU:C:2014:2469.

Case C-124/17 Vossloh Laeis, EU:C:2018:855.

EFTA Court, Judgment in Case E-3/16, Ski Taxi SA, Follo Taxi SA og Ski Follo Taxidrift AS v Staten v/Konkurransetilsynet, 22 December2016.

Danish Supreme Court, Judgment in the Road Markings case, 27 November 2019. The case is not available in English, but a comprehensive discussion by Heidi Sander Løjmand can be found at https://www.howtocrackanut.com/blog/2019/11/28/the-danish-supreme-courts-ruling-in-the-road-marking-case-the-end-of-a-joint-bidding-era-guest-post-by-heidi-sander-ljmand-msc [accessed 22 Jan 2021].

Bibliography

Robert Anderson, William Kovacic and Anna Caroline Müller, Promoting Competition and Deterring Corruption in Public Procurement Markets: Synergies with Trade Liberalisation (2016) http://e15initiative.org/publications/promoting-competition-and-deterring-corruption-in-public-procurement-markets-synergies-with-trade-liberalisation/ [accessed 22 Jan 2021].

Alison Jones, ‘Spotlight on Cartels: Bid Rigging Affecting Public Procurement’ (Concurrentialiste, 16 Nov 2020) https://leconcurrentialiste.com/jones-bid-rigging/ [accessed 22 Jan 2021].

Katarzyna Kuźma and Wojciech Hartung, Combating Collusion in Public Procurement. Legal Limitations on Joint Bidding (Edward Elgar 2020).

Albert Sanchez-Graells, Public Procurement and the EU Competition Rules (2nd edn, Hart 2015), Chapter 5.

Albert Sanchez-Graells, ‘“Screening for Cartels” in Public Procurement: Cheating at Solitaire to Sell Fool’s Gold?’ (2019) 10(4) Journal of European Competition Law & Practice 199-211.

Regulatory trends in public procurement from a competition lens -- 3 short, provocative presentations

I was asked to record three short (and provocative) presentations on some procurement regulatory trends seen from a competition lens. I thought this could be of some interest, so I am sharing them here. The three presentations and the three sets of slides should be available through the links below. Please email me (a.sanchez-graells@bristol.ac.uk) in case of any technical difficulty accessing them, or with any feedback. I hope to start some discussion through the comments section, so please feel free to participate!

1. Transparent procurement: some reflections on its inherent tensions

This short presentation reflects on the tensions between transparency and competition in procurement, with a particular focus on the heightened risks posed by the 'open contracting' movement. It advocates a more nuanced approach to the regulation of procurement transparency in the age of big data [slides].

2. Smart, streamlined procurement: too high hopes for procurement?

This presentation discusses some of the implications and risks resulting from recent regulatory trends in public procurement, from a competition perspective. It focuses on procurement centralisation and the use of procurement to deliver horizontal policies as two of the most salient regulatory trends. It stresses the need for more effective oversight of these more complex forms of procurement [slides].

3. Effective procurement oversight: what to look for & who should do it?

This presentation addresses some of the challenges in creating an effective procurement oversight system. It concentrates on the availability of high quality data, its access by relevant institutions and stakeholders, and the need for a joined up and collaborative approach where multiple entities have oversight powers/duties. It pays particular attention the need for collaboration between contracting authorities and competition authorities [slides].

Interesting paper on effects of open procurement data on outcomes: Duguay, Rauter & Samuels (2019)

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A recently published working paper has assessed the impact of increased availability of procurement data on competition for public contracts and on procurement outcomes in the EU context: R Duguay, T Rauter & D Samuels, ‘The Impact of Open Data on Public Procurement’ (November 22, 2019).

Duguay, Rauter & Samuels concentrate on the increased availability of TED data in a (more) user-friendly format in July 2015 (when the data started being available for a bulk download on CSV format) to assess the effects that easier access to procurement data has on the functioning of procurement markets and on procurement outcomes. The paper is very interesting and their results are quite striking.

However, it is important to stress the important caveat that their analysis is still based on TED data and, thus, potentially affected by the quality shortcomings of that data. As mentioned in other occasions, the TED database has problems because it is constructed as a result of the self-declaration of data by the contracting authorities of the Member States, which makes its content very inhomogeneous and difficult to analyse, including significant problems of under-inclusiveness, definitional fuzziness and the lack of filtering of errors—as recognised, repeatedly, in the methodology underpinning the SMSPP itself (see here and here).

With that in mind, however, it is interesting to look closely at their findings.

A seemingly striking insight derived from the paper is that ‘the new European government contracting provisions have anti-competitive effects‘ (at 17). This is in the context of an analysis of the ‘likelihood that government agencies allocate public contracts through an open procedure‘ and should thus not be surprising, given the flexibilisation in the use of procedures involving negotiations. However, even with this regulatory effect, the authors find that more open data triggers more use of open procedures, in particular in EU countries with weaker institutional frameworks (at 18-19, and see below). This could be symptomatic of the fact that more complexity in procurement subjected to higher levels of transparency pushes for a risk-averse approach to procurement compliance. The same would be supported by their finding of higher levels of award of contracts on the basis of price-only award criteria (at 25, and see below).

This tension between procurement complexity and transparency is generally strongly evidenced in the paper.

On the one hand, and in line with claims of the pro-competitive nature of more openness in procurement data (note, not of more openness or transparency of contract opportunities), the authors find that

  • the likelihood of competitive bidding increases sharply for TED contracts around July 2015 and that this increase persists through the end of our sample period [ie to the end of 2018] (at 18);

  • open procurement data leads government officials to implement more competitive bidding processes [ie open procedures], and that this increase in competitive bidding is driven by countries that do not have the institutions to effectively monitor public officials (at 19);

  • the number of bids increases sharply for TED contracts soon after the open data initiative, and this increase persists throughout our sample period (at 20);

  • public officials are 8.7 percentage points more likely to award government contracts to new vendors after the open data initiative (at 21);

  • contract values fall by approximately 8% ... after the open data initiative (at 23).

On the other hand, and also in line with theoretical expectations of a degradation of procurement decisions subjected to higher levels of transparency (and the fact that this transparency does not concern contract opportunities, but more general open procurement data), the authors also find that

  • [the results] are inconsistent with the idea that easier access to procurement data fosters cross-border competition throughout the European Union … open procurement data fosters local competition among vendors by reducing barriers to entry but does not promote cross-border competition across the European single market (at 22);

  • after the open data initiative, the likelihood of a contract modification increases by 2.9 percentage points for contracts above TED publication thresholds (at 24);

  • after the open data initiative, public officials are 38% ... more likely to award contracts above TED publication thresholds exclusively based on price (at 25);

  • the performance ... is significantly worse if price was the only award criterion in the allocation decision (at 26);

  • the increase in modifications is driven by contracts awarded to new government suppliers, consistent with information asymmetries contributing to the observed deterioration in contract performance. Moreover, this evidence suggests that procurement relationships before the open data initiative were not necessarily corrupt or otherwise inefficient (at 26);

  • the decline in contract performance is stronger for complex procurements, consistent with project complexity exacerbating the potential allocative distortions of open procurement data (at 27).

Their overall conclusion is that

Comparing government contracts above and below EU publication thresholds, we find that increasing the public accessibility of procurement data raises the likelihood of having competitive bidding processes, increases the number of bids per contract, and facilitates market entry by new vendors. After the open data initiative, procurement prices decrease and EU government agencies are more likely to award contracts to the lowest bidder. However, the increased competition comes at the expense of lower contract performance, particularly if suppliers are new, procurement projects are complex, and contracts are awarded solely based on price.

Overall, our results suggest that open data on procurement awards facilitates competition and lowers ex-ante procurement prices, but does not necessarily increase allocative efficiency in government contracting (at 27-28, emphases added).

I find these results striking and difficult to assess from the perspective of evidence-based policy-making. There are two issues of particular concern/interest to me.

One, the finding that more availability of data does not generate more cross-border procurement, and that the push for more competitive (ie open) procedures is mostly appreciable in countries with weaker institutional frameworks. This could support the position that institutional robustness is an alternative to data transparency, which would significantly alter the prioritisation of systemic procurement reforms and take the sides of systems that favour strong institutional oversight in a context of relative opacity.

Second, that transparency exacerbates problems at execution phase, in particular in complex projects and/or projects with new suppliers. This would take the wind out of the sails of reform and policy-making approaches concentrating on perceived or apparent competition for the contract at award stage, and rather force a refocus on an analysis of procurement outcomes at the end of the relevant project. This would also side with approaches that would advocate for more robust institutional approaches to contract design and performance management, rather than relying on transparency to correct contract execution problems.

The mixed results of the paper are also interesting in the context of the long-term effect of more open procurement data on competition, as well as on cartelisation and bid rigging risks, which are not assessed in the paper.

On the round, I think that the paper offers some interesting evidence to back up that there is a need to reconsider the level of transparency given to procurement data. I do not think this should stop the development of an improved procurement data architecture in the EU. To the contrary. I think this should reignite and prioritise discussions concerning the level of disclosure or public access to that information (ie its openness), which cannot be simply assumed to be positive in what, in my view, is currently an excessively simplistic approach in leading policy-making and think tank proposals. For more (but not new) discussion, see here and here.

Public consultation on procurement planning by the Spanish Competition Authority now open (until 20/12)

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The Spanish Competition Authority (Comisión Nacional de los Mercados y la Competencia, CNMC) is in the process of revising its 2011 Guide on public procurement and competition to reflect recent developments and the change of regulatory framework derived from the transposition of the 2014 EU Public Procurement Package [for a critical assessment of the original guide, in Spanish, see A Sanchez-Graells, ‘Una Visión Crítica de la 'Guía Sobre Contratación Pública y Competencia' Publicada por la CNC’ (2011) 21 Gaceta Jurídica de la Unión Europea y de la Competencia 15-31].

The CNMC plans to update their guidance in steps, and has started the process by focusing on procurement planning. In order to gather input into the formulation of guidance on procurement planning from a competition perspective, the CNMC has published a short preliminary working paper (in Spanish), is holding a public conference on 3 December (in which I am honoured to participate), and has also opened a public consultation (closes 20 Dec 2019).

Even thought, unfortunately, this is a process mainly conducted in Spanish, I am sure the CNMC would welcome any contributions on best procurement planning practices and on the impact of planning on competition via email: dp.ayudaseinformesnormativos@cnmc.es (subject: “Consulta pública Planificación de la contratación pública", indicating whether your contribution can be published or should remain confidential). In case of interest, below is my own contribution to the public consultation (in Spanish).

Competition and public procurement: a mind map

I have been asked to teach a workshop on competition and public procurement for an audience of postgraduate students and practitioners in this week’s session of the Competition Specialist Advanced Degree convened by Prof Antonio Robles Martin-Laborda at Universidad Carlos III of Madrid.

It has been some time since I last taught the topic, so I had to reconstruct my mind map in preparation for the workshop. This is a sketch of what I have come up with (not mind-blowing graphics…). Some additional bullet-points of the key issues in each of the areas of interaction and cross-references to papers where I have developed my ideas regarding each of the topics are below.

Mind map.png

Bid rigging

  • In principle, this is the least controversial area of competition and procurement interaction; bid rigging being an instance of anticompetitive conduct ‘by object’ (under Art 101(1) TFEU) (see here for discussion)

  • Fighting bid rigging in procurement is high on competition authority’s enforcement agendas

  • Procurement structurally increases likelihood of collusion; which is partially compensated by the counter-incentive created by the rules on exclusion of competition infringers (Art 57(4)(c) and (d) Dir 2014/24/EU), provided leniency does not negate its effects

Joint tendering

  • Analytical difficulties to establish a boundary between bid rigging (object-based analysis) and anticompetitive collaboration for the submission of joint tenders

  • Emerging approach to the treatment of joint bidding as a restriction of competition by object (cf EFTA Court Ski Taxi, 2018 Danish guidelines, see also here for analysis of their draft)

  • Particular complications concern the analysis of potential competition under Art 101(1) and 101(3) TFEU, in particular in cases where this is both used to subsume the practice under prohibition in Art 101(1) and also to assess whether the restriction is indispensable to the generation of efficiencies (or whether there were less restrictive forms to achieve them) under Art 101(3) TFEU (see here and here).

Exclusion & self-cleaning

  • Conceptual difficulties with boundary between Art 57(4)(c) and (d) of Directive 2014/24/EU, as well as applicable tests (see here)

  • Application complicated in leniency cases (see eg Vossloh Laeis, C-124/17, EU:C:2018:855, as well as due to different approaches to judicial and administrative finality (see eg Meca, C-41/18, EU:C:2019:507, not available in English)

  • These difficulties are particularly complex once the rules are implemented at the national level, as evidenced by the on-going Spanish sainete in the railroad electrification works cartel (see here and here)

Public buyer power

  • Inapplicability of EU antitrust rules (ie Art 101 and 102 TFEU) directly to the public buyer, given the FENIN-Selex case law (see here)

  • However, potential clawback under EasyPay’s strictest approach to separation test (see here)

CPBs

  • Difficult exemption from EU antitrust rules even under FENIN, given exclusive activity (see here and here)

  • Very minimal regulation and oversight, especially in the context of their cross-border activities (see here, here and here)

SGEI & In-house

  • Interaction complicated in these settings, both in terms of State aid rules (see here), as well as in potential accumulation of conflicting rules under Articles 102 and 106(2) TFEU (ie publicly-mandated or generated abuses of a dominant position)

  • Increasingly complicated tests to assess SGEI entrustment (Altmark, Spezzino, German slaughterhouses)

  • Move towards declaration of some types of procurement (eProcurement, centralised procurement) as an SGEI themselves

State aid (more generally)

  • Difficulties remain after the 2016 Commission notice on the notion of aid (see here)

Abnormally low tenders

  • Difficulties also remain after Art 69 Directive 2014/24/EU, in particular concerning those tainted by State aid (see here)

  • Mechanism hardly used to monitor ‘adequate competition’ or to prevent predatory pricing

Contract changes

  • Difficult analogical application of notice on notion of aid and almost impossible market benchmark in most cases

  • Similarly complicated interaction between merger control and public procurement rules on change of contractor, although these are partially alleviated by Art 72(1)(d)(ii) Dir 2014/24/EU (but cfr ‘economic operator that fulfils the criteria for qualitative selection initially established provided that this does not entail other substantial modifications to the contract and is not aimed at circumventing the application of this Directive’)

Principle of competition

  • Established in Art 18(1)II Dir 2014/24/EU, has the potential to be the gangway between competition and procurement spheres of EU economic law

  • Difficulties in its interpretation (see here), as well as in its application (see here)





Public procurement digitalisation: A step forward or two steps back? [guest post by Dr Kirsi-Maria Halonen]

In this guest post, Dr Kirsi-Maria Halonen offers some exploratory thoughts on the digitalisation of public procurement, its difficulties and some governance and competition implications. This post is based on the presentation she gave at a Finnish legal research seminar “Oikeustieteen päivät”, Aalto University, on 28-29 September 2019.

Digitalisation of procurement - background and goals

Digitalisation and e-procurement are considered to enhance the efficiency of the procurement process in the EU’s internal market. In line with the European Commission’s 2017 Procurement Strategy, procurement digitalisation can unlock better and faster transparency across the internal market, thus ensuring the possibility for economic operators to become aware of business opportunities, the facilitation of access to public tenders and the dissemination of information on the conditions of the award of public contracts.

Beyond mere transparency gains, procurement digitalisation is also expected to Increase the integrity of the awarding process and the public officials involved, thus fostering corruption prevention and good administrative practices. Finally, digitalisation is also expected to open new, more efficient monitoring possibilities both before and after contract execution, as well as the deployment of advanced big data analytics.

Directive 2014/24/EU and procurement digitalisation

Digitalisation and e-procurement are some of the main goals of Directive 2014/24/EU. Since October 2018, these rules impose the mandatory use of electronic communications throughout the whole public contract award procedure (eCommunication), the submission of tenders in electronic form (eSubmission) and created detailed rules for procedures meant solely for eProcurement, as well as simplified information exchange mechanisms (such as the ESPD) to facilitate electronic processing of procurement information.

Although the digital requirements in the Directive do not yet cover pre-award market consultations or post-award contracts and contract amendments, there are some trends to indicate that these may be the next areas of digitalisation of procurement.

State of the art at Member State level

Many Member States have taken digitalisation and transparency in public procurement even further than the requirements of Directive 2014/24/EU. Many contracting authorities use eProcurement systems for the management of the entire life-cycle of the tendering process. In Finland, there is now consolidated experience with not only an eProcurement system, but also with an open access Government spend database. Similarly, Portugal, Spain, Italy, Slovakia and Poland have also created open access contract registers for all public contracts and contract amendments.

Additionally, many Member States are committed to wider transparency outside the procurement procedures. For example, there is an emerging practice of publication of pre-tendering market consultation documents or audio/video meeting records. It is also increasingly common to provide open access to contract performance documents, such as bills, payments and performance acceptance (eg the UK national action plan on open contracting).

Concerns and opportunities in the digitalisation of procurement

Given the current trends of development of digital procurement, it is necessary to reflect not only on the opportunities that the roll-out of these technologies creates, but also some concerns that arise from increased transparency and the implications of this different mode of procurement governance. Below are some thoughts on four interrelated dimensions: corruption, SME participation, adoption of blockchain-base and algorithmic tools, and competition for public contracts.

Corruption

Public Procurement and other commercial relationships (eg real estate development) between public and private sector are most vulnerable to corruption (as repeatedly stressed by the OECD, Transparency International, Finnish National Bureau of Investigation, etc). In that regard, it seems clear that the digitalisation of procurement and the increased transparency it brings with it can prevent corruption and boost integrity. Companies across the EU become aware of the contract award, so there is less room for national arrangements and protectionism. Digitalisation can make tendering less bureaucratic, thus lessening the need and room for bribes. eProcurement can also prevent (improper) direct communication between the contracting authority and potential tenderers. Finally, the mere existence of electronic documentation makes it easier to track and request documents at a later stage: illegal purchases are not that easy to “hide”.

Yet, even after the roll-out of electronic documentation and contract registers, there will remain issues such as dealing with receipts or fabricating needs for additional purchases, which are recurring problems in many countries. Therefore, while digitalisation can reduce the scope and risk of corruption, it is no substitute for other checks and balances on the proper operation of the procurement function and the underlying expenditure of public funds.

SME participation

One of the goals of Directive 2014/24/EU was to foster procurement digitalisation to facilitate SME participation by making tendering less bureaucratic . However, tendering is still very bureaucratic. Sometimes it is difficult for economic operators to find the “right” contracts, as it requires experience not only in identifying, but also in interpreting contract notices. Moreover, the effects of digitalisation are still local due to language barriers – eg in Finland, tendering documents are mostly in Finnish.

Moreover, the uncertainty of winning and the need to put resources into tendering are the main reasons for not-bidding by SMEs (Jääskeläinen & Tukiainen, 2018); and this is not resolved by digital tools. On the contrary, and in a compounding manner, SMEs can be disadvantaged in eProcurement settings. SMEs rarely can compete in price, but the use of e-procurement systems "favours" the use of a price only criterion (in comparison to price-quality-ratio) as quality assessment requires manual assessment of tenders. The net effect of digitalisation on SME participation is thus less than clear cut.

Blockchain-based and algorithmic tools

The digitalisation of procurement creates new possibilities for the use of algorithms: it opens endless possibilities to implement algorithmic test for choosing “the best tender” and to automate the procurement of basic products and services; it allows for enhanced control of price adjustments in e-catalogues (which currently requires manual labor); and it can facilitate monitoring: eg finding signs for bid rigging, cartels or corruption. In the future, transparent algorithms could also attack corruption by minimizing or removing human participation from the course of the procurement procedure.

Digitalisation also creates possibilities for using blockchain: for example, to manage company records, official statements and documents, which can be made available to all contracting authorities across EU. However, this also creates risks linked to eg EU wide blacklists: a minor infringement in one Member State could lead to the economic operator’s incapability of participating in public tenders throughout the EU.

The implications of the adoption of both algorithmic and blockchain-based tools still requires further thought and analysis, and this is likely to remain a fertile area for practical experimentation and academic debate in the years to come.

Competition

Open public contract registers have become a part of public procurement regime in EU Member States where corruption is high or with a tradition of high levels of public sector transparency. The European Commission is pushing for their creation in all EU jurisdictions as part of its 2017 Procurement Strategy. These contract registers aim to enhance integrity of the procurement system and public official and to allow public scrutiny of public spending by citizens and media.

However, these registers can facilitate collusive agreements. Indeed, easier access to detailed tendering information facilitates monitoring existing cartels by its members: it provides means to make sure ”cartel discipline” is being followed. Moreover, it may facilitate the establishment of new cartels or lead to higher / not market-based pricing without specific collusive agreements.

Instead of creating large PDF-format databases of scanned public contracts, the European Commission indeed encourages Member States to create contract registers with workable datasets (user friendly, open, downloadable and machine-readable information on contracts and especially prices and parties of the contract). This creates huge risks of market failure and tendering with pricing that is not based on the market prices. It thus requires further thought.

Conclusions

Digitalisation has and is transforming public procurement regime and procedures. It is usually considered as a positive change: less bureaucracy, enhanced efficiency, better and faster communication and strengthening integrity of public sector. However, digitalisation keeps challenging the public procurement regime through eg automated processes and production of detailed data - leaving less room for qualitative assessments. One can wonder whether this contributes to the higher-level objectives of increasing SME participation and generating better value for money.

Digitalisation brings new tools for monitoring contracting authorities and to detect competition distortions and integrity failures. However, there is a clear risk in providing “too much” and “too detailed” pricing and contract information to the market operators – hence lowering the threshold of different collusive practices. It is thus necessary to reconsider current regulatory trends and to perhaps develop a more nuanced regulatory framework for the transparency of procurement information in a framework of digitalised governance.

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Guest blogger

Dr Kirsi-Maria Halonen is a Doctor of Laws and Adjunct Professor, Senior Lecturer in Commercial Law at University of Lapland. She is also a current Member of the European Commission’s Stakeholders Expert Group on Public Procurement (SEGPP, E02807), the Research Council at Swedish Competition Authority, the Finnish Ministry of Finance national PP strategy working group (previously also national general contract terms for PP (JYSE) working group), the Finnish Public Procurement Association, of which she is a board member and previous chair, and the European Procurement Law Group (EPLG).

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). Most recently, she has co-edited Transparency in EU Procurements. Disclosure within Public Procurement and during Contract Execution, vol 9 European Procurement Law Series (Edward Elgar, 2019), together with Prof R Caranta and Prof A Sanchez-Graells.

Procurement governance and complex technologies: a promising future?

Thanks to the UK’s Procurement Lawyers’ Association (PLA) and in particular Totis Kotsonis, on Wednesday 6 March 2019, I will have the opportunity to present some of my initial thoughts on the potential impact of complex technologies on procurement governance.

In the presentation, I will aim to critically assess the impacts that complex technologies such as blockchain (or smart contracts), artificial intelligence (including big data) and the internet of things could have for public procurement governance and oversight. Taking the main risks of maladministration of the procurement function (corruption, discrimination and inefficiency) on which procurement law is based as the analytical point of departure, the talk will explore the potential improvements of governance that different complex technologies could bring, as well as any new governance risks that they could also generate.

The slides I will use are at the end of this post. Unfortunately, the hyperlinks do not work, so please email me if you are interested in a fully-accessible presentation format (a.sanchez-graells@bristol.ac.uk).

The event is open to non-PLA members. So if you are in London and fancy joining the conversation, please register following the instructions in the PLA’s event page.

A Duty to ‘Save’ Seemingly Non-Compliant Tenders for Public Contracts? -- New SSRN paper

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I have published a short paper commenting on the transposition of Article 56(3) of Directive 2014/24/EU  through the 2017 reform version of Article 72 of the Portuguese Code of Public Contracts. I think this is an interesting case study on some of the difficulties that the new provision on the contracting authority's power to seek clarifications can pose in practice--and maybe anticipates some of the future challenges in the development of the Slovensko-Manova-Archus and Gama case law. The abstract of the paper is as follows:

This paper provides a critical assessment of the rules regarding the clarification, supplementation and correction of tenders in procedures for the award of public contracts regulated by the EU 2014 Public Procurement Package. It does so through a detailed assessment of the transposition of Article 56(3) of Directive 2014/24/EU by means of the post-2017 reform version of Article 72 of the Portuguese Code of Public Contracts. The paper concentrates on four main issues: the existence of a mere discretionary power or a positive duty to seek clarifications, corrections or supplementations of tenders and their accompanying documentation; the constraints imposed on such power or duty; the desirability of unilateral tender corrections by the contracting authority; and the transparency given to the correction, supplementation or clarification of tenders. The paper assesses each of these issues against the backdrop of the existing case law of the Court of Justice of the European Union, as well as with a functional approach to the operationalisation of the Portuguese rules on correction, supplementation and clarification of tenders for public contracts.

The paper is freely downloadable from SSRN: A Sanchez-Graells, 'A Duty to "Save" Seemingly Non-Compliant Tenders for Public Contracts? - Comments on Art 72 of the 2017 Portuguese Code of Public Contracts' (2018) 2 Revista de Direito Administrativo 59-68.

CJEU greenlights ‘remedying procedural short-comings in return for (proportionate) payment’ (C-523/16 & C-536/16)

In its Judgment of 28 February 2018 in MA.T.I. SUD, C-523/16, EU:C:2018:135, the Court of Justice of the European Union (CJEU) accepted the compatibility with EU public procurement law (2004 version) in principle of domestic rules allowing for the 'remedying of procedural shortcomings in return for payment', whereby a contracting authority can invite any tenderer whose tender is vitiated by serious irregularities to rectify that tender, subject to the payment of a financial penalty--provided that the amount of that penalty is proportionate.

However, given previous case law excluding the possibility to remedy serious shortcomings in submitted tenders, the CJEU has stressed that such 'remedial mechanism in return for payment' is subject to the limitation that, despite the existence of such financial penalty, the contracting authority cannot require a tenderer to remedy the lack of a document which, according to the express provisions in the contract documentation, must result in the exclusion of that tenderer, or to eliminate irregularities such that any corrections or changes would amount to a new tender (para 65).

It is important to note, though, that despite establishing this position in principle, the CJEU also provided extremely clear indications that, in its view, there is a need to subject the assessment of the adequacy of the correction of the tenders to a strict assessment to make sure that they do not imply a new tender or the circumvention of the tender documentation (or, in other words, to make sure that the correction is not really of a serious irregularity, but rather a minor one), and that the penalties threatened in the Italian domestic cases that generated the preliminary reference cannot be considered proportionate (paras 62 & 64).

This anticipated analysis of incompatibility in concreto despite compatibility in abstracto begs the question whether the position in principle taken by the CJEU--ie the acceptaibility of non-serious modifications subject to proportionate financial penalties--is an adequate default rule, or whether a different default rule would be preferable--ie the acceptability of non-serious modifications without penalty.

In my view, and largely for the same reasons given in criticising the Opinion of AG Campos Sanchez-Bordona that the CJEU has now followed (see here, where they are developed in detail), in tolerating the imposition of financial penalties as a condition for the remediation of minor procedural defects, the MA.T.I. SUD Judgment sets the wrong default rule and is undesirable for its potential anti-SME effects, as well as due to the potential blurring of the narrow space that actually exists for the correction of serious irregularities under the Manova-Slovensko-Archus and Gama case law (see here, here and here). In adopting a seemingly more flexible approach in principle, in MA.T.I. SUD the CJEU may be creating more confusion than providing clarity, solely with the aim of maintaining a questionable space for domestic procedural administrative discretion. On balance, I would have thought it preferable for the CJEU to indicate more clearly and simply that serious irregularities cannot be corrected (with or without financial penalty), and that the correction of minor irregularities needs to be always accepted without sanction.

In MA.T.I. SUD, the CJEU assessed the compatibility with Art 51 of Directive 2004/18/EC of an Italian provision that enabled tenderers for public contracts to remedy any irregularities in their tenders, but at the same time imposed on them a financial penalty proportional to the value of the contract--of between 0.1% and 1% of the value of the contract, with a maximum ceiling of €50,000. The amount of the penalty was to be set in advance by the contracting authority and guaranteed by a provisional security (or bid bond), and could not be adjusted according to the gravity of the irregularity that it remedied. The maximum penalty was later reduced to €5,000, and eventually suppressed. This reduces the immediate impact of the MA.T.I. SUD Judgment. However, this CJEU ruling will be relevant beyond the specific context of Italian procurement rules, not only in relation with the now phased out transposition of Art 51 of Directive 2004/18, but also with Art 59 of Directive 2014/24/EU (which was not applicable ratione temporis). Both provisions foresee that contracting authorities can seek clarifications from tenderers under specified conditions.

There are some passages of the Judgment I consider relevant:

... when they implement the possibility provided for in Article 51 of Directive 2004/18 [whereby the contracting authority may invite economic operators to supplement or clarify the certificates and documents submitted to it], the Member States must ensure that they do not jeopardise the attainment of the objectives pursued by that directive or undermine the effectiveness of its provisions and other relevant provisions and principles of EU law, particularly the principles of equal treatment and non-discrimination, transparency and proportionality ...

It must also be borne in mind that Article 51 of Directive 2004/18 cannot be interpreted as allowing the contracting authority to accept any rectification of omissions which, as expressly provided for in the contract documentation, had to lead to the exclusion of the tenderer ...

... a request for clarification cannot make up for the lack of a document or information whose production was required by the contract documents, the contracting authority being required to comply strictly with the criteria which it has itself laid down ...

In addition, such a request may not lead to the submission by a tenderer of what would appear in reality to be a new tender

... the very concept of substantial irregularity ... does not appear to be compatible with Article 51 of Directive 2004/18 or with the requirements to which the clarification of a tender in the context of a public contract falling within the scope of Directive 2004/17 is subject, according to the case-law of the Court ...

It follows that the mechanism of assistance in compiling the documentation [under dispute] ... is not applicable if the tender submitted by a tenderer cannot be rectified or clarified within the meaning of the case-law referred ... above, and that, consequently, no penalty can be imposed on the tenderers in such a case (C-523/16, paras 48-49, 51-52 & 55-56 references omitted and emphasis added).

In my view, this reasoning of the CJEU reflects the state of the law and a desirable normative position. It would have allowed the CJEU to simply declare the Italian system incompatible due to the excess that a correction of serious irregularities would imply in comparison with the boundaries on tender modification derived from Manova-Slovensko-Archus and Gama. And the CJEU could have done that without entering into a discussion of whether proportionate penalties for non-substantial modifications are acceptable. On this point, it should be stressed that contested Italian rule also foresaw that '[i]n the case of non-substantial irregularities, that is, any non-essential absence or incompleteness of declarations, the contracting authority shall not require the remedying thereof or impose any penalty' (AGO, C-523/16, para 5). Therefore, in the case at hand, the narrow regulatory space left by the CJEU for the imposition of sanctions would not be occupied by the Italian rules, as the Italian legislator saw no need to sanction any such minor tender corrections.

On the whole, then, the MA.T.I. SUD Judgment seems to unnecessarily create a default rule that can be problematic in the interpretation and operationalisation of the rules in Arts 56 and 59 of Dir 2014/24. This stems from the fact that the CJEU has endorsed the underlying principle that 'the imposition of a financial penalty is indeed an appropriate means of achieving the legitimate objectives pursued by the Member State related to the need to place responsibility on the tenderers in submitting their tenders and to offset the financial burden that any regularisation represents for the contracting authority' (para 63). In my view, this runs contrary to the pro-competitive and pro-SME orientation of the 2014 Public Procurement Package. It also reflects a general understanding of public procurement law not as a mode of governance aimed at ensuring best value for money in the expenditure of public funds, but rather a set of fully justiciable rules aimed at discharging the cost and risk of the procurement function on the economic operators, which is then of course putting pressure at the other end of the spectrum via claims for damages where (complex) justiciable rules are not complied with absolutely. In my view, this creates an unrealistic framework for the carrying out of procurement efforts, and more scope for collaborative approaches within the boundaries of the requirements for equal treatment and competition would be superior.

Therefore, I can only hope that, in the future and with a right case, the CJEU will be able to further clarify its position--or, rectius, to reverse position and rule out the possibility of intra-tender sanctions for minor modifications. This is a normative point and, as I said before, the same way I argue against charging potentially interested tenderers for access to the tender documentation, I also take the normative position that imposing fines for the remediation of documentation shortcomings is undesirable, which leads me to propose their eradication de lege ferenda (by analogy, see A Sanchez-Graells, Public Procurement and the EU Competition Rules, 2nd edn (Oxford, Hart, 2015) 280-281).

 

 

AG suggests CJEU should declare fines for clarification or supplementation of procurement documents as contrary to EU law only if disproportionate (C-523/16)

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In his Opinion of 15 November 2017 in case MA.T.I. SUD, C-523/16, EU:C:2017:868, Advocate General Campos Sánchez-Bordona has considered whether, in a situation where a tenderer for a public contract has submitted incomplete information, national rules subjecting the possibility of supplementing that documentation to the payment of a fine are compatible with EU public procurement law.

The dispute concerned a 2014 reform of the Italian law transposing 'Article 51 of Directive 2004/18/EC in a manner which enabled tenderers for public contracts to remedy any irregularities in their tenders, but at the same time imposed on them a financial penalty proportional to the value of the contract' (para 1)--of between 0.1% and 1% of the value of the contract, with a maximum ceiling of €50,000 (para 5, by reference to Art 38(2a) of the Italian Legislative Decree No 163 of 2006). Interestingly, the rule also foresaw that '[i]n the case of non-substantial irregularities, that is, any non-essential absence or incompleteness of declarations, the contracting authority shall not require the remedying thereof or impose any penalty' (idem).

AG Campos has submitted that Art 51 Dir 2004/18 did not prohibit the imposition of such fines, 'provided that [the national legislation] ensures compliance with the principles of transparency and equal treatment, that the remedying of those irregularities does not make possible the submission of what, in reality, would be a new tender and that the burden is proportionate to the objectives justifying it' (para 80), but that, under the circumstances of the case, a fine of between 0.1% and 1% with a maximum of €50,000 was not allowable (para 80). The AG Opinion and the future Judgment of the Court of Justice will be relevant for the interpretation of Articles 56 and 59 of Directive 2014/24/EU, but I am not sure that the reasoning can be simply carried forward to a regulatory setting that indicates more clearly the conditions for the request of clarifications. In this post, I pick on a few elements of the analysis of AG Campos Sánchez-Bordona in his MA.T.I. SUD Opinion, and reflect on the applicability of the reasoning to the post-2014 setting.

Some preliminary normative thoughts

As a preliminary point, though, I think it worth stressing that the functioning of a system allowing for ‘remedying procedural shortcomings in return for payment’ is probably better understood as a system allowing 'avoiding exclusion for payment', in the sense that an undertaking that has submitted incomplete or unclear documentation is given a chance to avoid exclusion from the procurement procedure under the double condition that (a) it is able to submit a clarification or supplementary documentation that does not materially alter its tender, and (b) it is able (and willing) to pay the financial sanction. While (a) is relevant to the goals of the procurement 'triage' process because the contracting authority has a structural interest in attracting as many (in open procedures) or the best (in restricted and different variations of negotiated procedures) qualified tenderers, (b) is irrelevant unless and except in the case in which the inability to pay the fine signals financial difficulties or bankruptcy--which should in any case be captured by discretionary exclusion grounds based on that specific circumstance. Therefore, (b) comes to create a functional distortion of the procurement procedure and, in particular, of the aims of the qualitative selection phase. 

While sanctions in this setting may be seen as an incentive for undertakings to submit full and accurate documentation, this can also be the type of provision that creates a disincentive to participate, and one that seeks to displace part of the costs of the administrative procedure from the contracting authority unto the tenderers (for, statistically, there will be errors and this type of cost should thus be seen as part of the ordinary costs of running procurement processes). While the financial impact of the 'fine-based remedial system' will then largely be borne by the tenderers, the benefits will also fall on the contracting authority (at least in those cases where the 'paying, sloppy undertaking' ends up being awarded the contract for having submitted the most advantageous tender). This creates a strange trade-off between private costs and private and public benefits, which can be further complicated where the imposition of the fine has a discretionary element to it (eg the possibility to waive the fine for non-essential defects, where the determination of the threshold of 'essentiality' is far from clear-cut and objective).

At first sight, then, this seems like the type of rule that can create perverse incentives--in particular in terms of SME access to procurement procedures, or their ability to continue in the race when they commit mistakes--which comes to raise the threshold of 'professionalism' needed to participate in procurement processes without risking significant financial consequences. On the whole, then, from a normative perspective, I think that this is the kind of rule that seeks to reduce the administrative cost of procurement at the expense of reduced (potential) competition for public contracts, in particular from SMEs. The same way I argue against charging potentially interested tenderers for access to the tender documentation, I would also take the normative position that imposing fines for the remediation of documentation shortcomings is undesirable, and would propose their eradication de lege ferenda (by analogy, see A Sanchez-Graells, Public Procurement and the EU Competition Rules, 2nd edn (Oxford, Hart, 2015) 280-281).

This should be kept in mind when reading the remainder of this post, as this line of normative argumentation was used by the parties. In particular, in the clear formulation of the European Commission, which stressed that 'the contrast between paying a fine for a minor irregularity and the uncertainty of being awarded a contract may cause tenderers, especially small and medium-sized undertakings, not to participate in tenders or, where applicable, to withdraw their participation after the tenders have been submitted' (para 38, although the Commission goes on to note that the payment would be allowable despite its dissuasive effects, 'provided that it pursues a legitimate objective of general interest. Such objectives may include both the aim of making undertakings behave responsibly (encouraging them to act seriously and promptly when supplying the documentation for their tenders) and that of financially compensating the contracting authority for the work involved in the more complicated and extended procedure of remedying procedural shortcomings', para 39, which is not completely aligned with my normative position).

‘Remedying procedural shortcomings in return for payment’ under the pre-2014 EU public procurement rules

In the pre-Slovensko (C-599/10, EU:C:2012:191), pre-Manova (C-336/12, EU:C:2013:647) setting, where some doubts could be harboured as to the possibility for contracting authorities to seek clarifications of the tender documentation, and its limits, the only guidance the then current EU rules provided was to be found in the sparse Article 51 Dir 2004/18/EC, which foresaw that 'The contracting authority may invite economic operators to supplement or clarify the certificates and documents submitted pursuant to Articles 45 to 50'--that is, clarifications or supplements to the certificates and documents concerning (i) the personal situation of the candidate or tenderer (art 45); (ii) its suitability to pursue the professional activity (art 46); (iii) its economic and financial standing (art 47); (iv) its technical and/or professional ability (art 48); (v) its quality assurance standards (art 49); and (vi) its environmental management standards (art 50).

However, Slovensko and Manova came to clarify the possibility for clarifications to be sought (which in my view can result in a duty to seek clarifications under certain conditions, see here), and this seemed to prompt a legislative reaction in Italy. Given the need to allow for clarifications and modifications of the tender documentation in certain cases, Italian procurement law was modified from a system of strict disqualification for formal shortcomings, to as system allowing for 'remedying procedural shortcomings for payment' [see M Comba, 'Qualification, Selection and Exclusion of Economic Operators (Tenderers and Candidates) in Italy', in M Burgi, M Trybus & S Treumer (eds), Qualification, Selection and Exclusion in EU Procurement (DJØF Publishing, 2016) 85, 97-100]. However, this modification of the rules and the increased procedural flexibility were subjected to the payment of an administrative fine by the undertakings that had presented incomplete or unclear documentation (see above).

AG Campos assesses the compatibility of this approach to financially-conditional clarification or supplementation of documents under the rules in Directive 2004/18/EC (as Directive 2014/24/EU was not applicable ratione temporis, see paras 50-52 of his Opinion). In his view, there is 'nothing in [the case-law of the Court on Directive 2004/18] which might preclude the Member States from providing for contracting authorities to charge a certain amount (in this case, as a penalty) to tenderers who have placed themselves in that situation' (para 56, reference omitted). Further, he considers that there is no objection in principle and that any EU-law derived restriction on this possibility would be a matter for a proportionality assessment. In his words,

... national legislation may ... authorise the remedying of formal shortcomings in the tenders, while imposing on the tenderers a certain economic burden in order to encourage them to submit their tenders correctly and to pass on to them the additional cost (if any) arising from the procedure for remedying shortcomings. However, national legislation of that kind, which, owing to the magnitude of that burden, constitutes a not easily surmountable obstacle to the participation of undertakings (in particular, small and medium-sized ones) in public procurement procedures, would run counter to Directive 2014/18 and to the principles underlying it; moreover, this would also undermine the competition to be desired in respect of those procedures (para 58, references omitted and emphasis added).

This leads him to stress that he does 'not consider ... that objections of principle can be raised to a mechanism which makes the correction of shortcomings in the submission of a tender subject to a payment by the person responsible for those shortcomings and required to remedy them' (para 59, emphasis in the original).

AG Campos then proceeds to assess whether such non-negligible restriction to participation is created by the Italian rule at stake. He also addresses the issue whether the Italian provision may be in breach with the Court of Justice's case law on the limits to the allowable modifications and clarifications to tender documentation (paras 60-65). However, this concerns a literal interpretation of the Italian rule (which foresees the possibility of remedying '[a]ny absence, incompleteness or any other substantial irregularity in the information'). However, even if part of the rule should be quashed for exceeding the relevant case law, the possibility would have remained to require payment for the remediation of a 'Manova-like' situation that concerned the absence of (pre-dating) information. Thus, the analysis of the rule remains interesting even in the case of partial incompatibility.

A tricky proportionality assessment

In AG Campos' view, the relevant point is thus to establish whether the financial burden derived from the 'remedy for payment' rule is not an 'easily surmountable obstacle' to participation in procurement procedures, in particular by SMEs. In the second part of his Opinion, he deals with this point and considers two sets of issues. First, he carries out a strict proportionality assessment. Second, he goes back to points of principle despite his previous position that no objections of principle could be raised against the mechanism, which is slightly puzzling.

On the strict proportionality front, the Opinion submits that

The two criticisms of that instrument ... are, on the one hand, that the amount of the penalty is determined a priori, in the contract notice itself, without attempting to assess the magnitude of the irregularities committed or the infringing tenderer’s economic circumstances, and, on the other hand, that the resulting amounts (up to a maximum of EUR 50 000) do not comply with the principle of proportionality. Moreover, the exorbitant amount of the penalty is such as to deter participation in the tendering process, especially by small and medium-sized undertakings, thereby restricting competition.

... the objectives which might justify the imposition of the penalties are not consistent with the minimum and maximum amounts of those penalties...

Of course, the argument of higher administrative costs does not justify such substantial amounts: it should be borne in mind that even the minimum of 0.1 per cent (and a fortiori 1 per cent), in contracts subject to [Union] directives, is in itself high, given the lower thresholds for the application of those directives. That argument is also not consistent with a single amount which is established a priori and consists in a percentage of the amount of the contract, since it would be logical, following that line of thought, to tailor to each individual case to the resulting higher costs.

The disproportionate nature of the penalties is evident in the present two cases, which merely arise from the practical application of the legal provision: an executive’s forgetting to sign and the failure to provide a sworn statement regarding a criminal record result in fines of EUR 35 000 and EUR 50 000 respectively. I find it difficult to accept that the higher cost to the contracting authorities, merely for detecting those two anomalies and for inviting the tenderers to remedy them, corresponds to those amounts, which seem rather to be designed to increase their revenue (paras 71-74, references omitted and emphasis in the original).

This part of the reasoning seems unobjectionable and comes to challenge the possibility of imposing a fine for the remedying of documentation, rather than imposing a duty to cover any additional administrative costs ensuing from the remedial action--which would have been preferable, even if still normatively undesirable (see above). Importantly, this part of the reasoning would have sufficed to quash the Italian provision at stake. However, the Opinion proceeds to assert that

Nor does the aim of ensuring the seriousness of tenders justify such large fines. In the first place, because such fines are imposed (as stated in the tender specifications) regardless of the number of irregularities, that is, regardless of the type of information or document which is missing or must be supplemented and of its greater or lesser significance. The provision treats the offences in a uniform manner and allows their level of complexity to be disregarded.

In the second place, that aim [of ensuring the seriousness of tenders] must be weighed against that of promoting the widest possible participation of tenderers, resulting in greater competition and, in general, the best service to public interests. An excessive penalty will probably deter undertakings with smaller financial resources from participating in calls for tenders for high-value contracts, given the percentage limits stated above. They might also be deterred from participating in future calls for tenders which include the same penalty provision.

Moreover, such a burden will be even more of a deterrent to ‘tenderers established in other Member States, inasmuch as their level of knowledge of national law and the interpretation thereof and of the practice of the national authorities cannot be compared to that of national tenderers’.

In short, a provision the purpose of which was, precisely, to help to remedy formal errors made by tenderers (by amending the previous national rule) and, thereby, to increase their chances of successfully participating in public procurement procedures ultimately deters such participation by imposing financial burdens which are disproportionate to its objective (paras 75-78, references omitted and emphasis added).

In this second part, AG Campos seems to adopt a half-way approach to the objection in principle to the establishment of dissuasive barriers to participation, but only through disproportionate or excessive penalties. I find this problematic because it is very difficult establish at which level the dissuasive effect will kick-in, regardless of what can be considered excessive or disproportionate for the purposes of finding an infringement of EU internal market law. Thus, as mentioned above, I think that there are good reasons to oppose the creation of these mechanisms out of principle (the principle of maximising competition for public contracts, to be precise) and, from that perspective, I find the Opinion in MA.T.I. SUD unnecessarily shy or insufficiently ambitious. This does not affect the outcome of the specific case, but perpetuates the problem in view of the 2016 reform of the controversial Italian law, as discussed below.

‘Remedying procedural shortcomings in return for payment’ under the post-2014 EU public procurement rules

Interestingly, the case comprises a dynamic element that remains unresolved. It is worth noting that the Italian rule at stake in MA.T.I. SUD has been amended, and a 2016 reform relaxed 'the conditions for requiring the fine (imposing it only if rectification is required) and reduced its maximum ceiling (from EUR 50 000 to EUR 5 000)' (para 8). Additionally, any substantive assessment of the revised rule will now have to take place within the setting of the rules in Directive 2014/24/EU, where it can be argued that contracting authorities are under a duty to seek clarifications [for discussion, see A Sanchez-Graells, Public Procurement and the EU Competition Rules, 2nd edn (Oxford, Hart, 2015) 321-323]. In my view, in this setting, the analysis should not rely on a matter of proportionality, but on a more sophisticated understanding of the functions and balance of interests involved in the qualitative selection phase of each procurement procedure, which very much opposes the levying of financial penalties for clarifications sought by the contracting authority, regardless of their amount.

My view seems to run contrary to that of AG Campos and the European Commission, which both seem to have hinted at the fact that the new maximum amount of €5,000 for necessary rectifications saves the mechanism. This is seen with favour by both the European Commission in its submissions ('a maximum ceiling of EUR 5 000, such as that adopted by the new Public Contracts Code, is more reasonable', para 41) and, in less clear terms, by the AG ('Perhaps that reform, by significantly reducing the absolute maximum ceiling to EUR 5 000, was a response to the national legislature’s belief that that ceiling had been excessive, as the referring court implies', para 72).

If this represented the position the European Commission would defend in a future case involving the revised Italian rule, and/or the position taken in an Advocate General Opinion, I would strongly disagree because I do not consider helpful the view that €5,000 per rectification is 'more reasonable' or 'less excessive' than €50,000 per error (unless waived due to its non-essential character). Going back to the principles behind the creation of this type of mechanisms, important questions remain as to whether the goals it seeks to achieve are either justified in the public interest, or not already sought by other aspects of the procurement rules.

As submitted by the Italian Government and the Commission, the double legitimate goal of the measure would be 'first, to make the tenderer responsible for acting diligently when producing the documentation which will accompany his tender and, second, to compensate the contracting authority for the additional work involved in administering a procurement procedure which allows for the possibility of remedying those irregularities' (para 70).

On the second point, I am not sure that there is a clear public interest in seeking to recover part or all of the administrative costs involved in rectifying qualitative selection decisions in the view of supplemented or clarified information, in particular because this recovery of costs comes at the expense of an immeasurable potential reduction of competition (and, if one is to adopt AG Campos' reasoning, particularly acute in the case of undertakings from other jurisdictions, see para 77--although I am not sure this part of the argument is persuasive). On the first point, the argument that the financial penalty will ensure that undertakings participating in tender procedures will act diligently seems moot. The main incentive for undertakings to act diligently in the preparation of their tenders is the economic incentive derived from being awarded the contract. Thus, creating a negative incentive that works in the same direction that the main economic incentive (ie to prompt undertakings to submit their best possible tender) makes no economic sense because it creates a double-whammy on less diligent tenderers, whereas it adds no incentive for diligent tenderers.

By isolating the qualitative selection phase and thinking that tenderers have an interest in acting in less than diligent terms (within their abilities) seems to me to miss the point. While the frustration at the administrative burden of carrying out several (or at least two) iterations of inspection of documents where there have been mistakes is understandable, that should not lead to the creation of financial penalty mechanism that is bound to both be ineffective in what it tries to achieve and to create a likely high shadow cost in terms of lost potential competition for public contracts. In that regard, I would have preferred for the Italian mechanism to be quashed as a matter of principle on this occasion. But, even if this does not happen and the Court of Justice follows the intermediate approach of AG Campos' Opinion, I would still hope that a fresh consideration of the revised Italian rule under the setting of Directive 2014/24/EU delivered that result.

Postscript [16 Nov 2017, 9am]

After publishing this post, it was brought to my attention that I had missed the additional information in fn 5 of AG Campos' Opinion, where he explains that the Italian fees for remediation of documentation shortcomings has been abolished. Indeed, the fn says:

Although it can have no bearing on the consideration of the questions referred ... a further, more radical amendment of the Code ... occurred in 2017. In fact, Legislative Decree No 56/2017 of 19 April issued a new draft of Article 89(3) which definitively removed the requirement to pay for the remedying of shortcomings upon its entry into force (20 May 2017). Since then, economic operators have been able to rectify the absence of any formal element from their proposals (except those relating to the economic and technical aspects of the tender) without incurring any kind of penalty or other similar charge.

Thus, the issue will remain unresolved, unless similar charges or financial penalties exist in other jurisdictions.

Discretion in public procurement—notes of a very energising workshop

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I have the great privilege and pleasure of participating in a research project on ‘Discretion in public procurement’ funded by the Swedish Competition Authority and led by Profs Groussot, Hettne and Bogojević of the Universities of Lund and Oxford. In the context of the project, a workshop was held at Lady Margaret Hall (Oxford) on 3 November. The discussions brought together leading general EU law, environmental law and public procurement law academics, and this created a very open-minded atmosphere conducive to very productive discussions.

The results of the research project will be published in due course by Hart, as part of the series Studies of the Oxford Institute of European and Comparative Law (IECL). For now, I am happy to share my notes of the seminar. Needless to say, all valuable insights should be attributed to relevant colleagues, and any errors or misunderstandings are my own responsibility. I hope these notes serve to promote further debate.

Public Procurement and Internal Market

Prof Phil Syrpis used his previous discussion of the two constitutional visions on the interaction between primary and secondary EU law (see P Syrpis, ‘The relationship between primary and secondary law in the EU’ (2015) 52(2) Common Market Law Review 461) to assess the extent to which such primary-secondary interaction shapes the spaces for the exercise in the field of public procurement (see P Syrpis, ‘RegioPost—A Constitutional Perspective’, in A Sanchez-Graells (ed), Smart Public Procurement and Labour Standards. Pushing the Discussion after RegioPost (Hart, 2018) ch 2).

In particular, he discussed RegioPost (C-115/14, EU:C:2015:760), and how the interaction of Art 56 TFEU, the Posted Workers Directive and the rules in Directive 2004/18/EC shaped the space for the exercise of discretion concerning the imposition of minimum wage requirements in the execution of public contracts—emphasising that this is an area of non-exhaustive EU harmonisation, thus triggering EU primary law analysis. Phil criticised the conflation of primary law (Art 56 TFEU) and secondary law (Posted Workers Directive), and the ‘horizontal interaction’ between directives in which the RegioPost case resulted (where the interpretation of the procurement rules hinged on the interpretation of the Posted Workers Directive), as muddling the constitutional position on the value of the sources.

The discussion raised issues concerning the blurry lines around exhaustive/non-exhaustive harmonisation areas, and whether there is displacement or rather procedural juxtaposition of primary and secondary law. Whether a hierarchical approach already contains the seeds of heteronormative interpretation of EU primary law was also considered—in particular in view of the open textured and permeable nature of EU Treaty provisions, and the tendency of the CJEU to consider secondary law as a source of inspiration for the interpretation of primary law, sub silentio. The discussion also raised issues of the potential impact of Art 4(2) TEU (respect for national identities) on the scope for discretion at national level.

Prof Stephen Weatherill used the image of public procurement law as ‘internal market law made better’ and discussed the way in which EU internal market law has generally been developed to constrain the exercise of discretion of (public and private) national actors, and compared the situation in the field of procurement with general internal market law—thus reaching the conclusion that procurement law is more developed and perfected (in constraining national discretion more tightly), and in particular in the area of remedies, which creates a significantly different enforcement scenario and possibly more effectiveness of procurement law compared to general internal market rules (which is jeopardised by the procedural obstinacy of the Member States). He also reflected on the contradiction between the existence of that dense legal framework regulating public procurement in the internal market, and the enduring fragmentation of that market along uncompetitive national lines.

The discussion concentrated on issues surrounding the difficulties in bringing together the analysis in the area of free movement of goods and services, in particular services of general economic interest, the wiggle room for the CJEU to shy away or not from addressing specific cases by using jurisdictional criteria (cfr Comune di Ancona (C-388/12, EU:C:2013:734) and Tecnoedi Costruzioni (C-318/15, EU:C:2016:747)), as well as issues concerning the extent to which the 2014 Public Procurement Package, by creating more discretion or flexibility, may have eroded the component of ‘internal market law made better’ and potentially make public procurement move back to the median (effectiveness) of EU internal market law.

Prof Jörgen Hettne discussed public procurement and technical standards, and whether the specific rules constituted mechanisms to limit discretion or rather a democratic threat. He discussed the multi-faceted nature of technical standards as potential technical barriers, or rather trade facilitators or trade promoters—and focussed on the latter under the new approach to EU standards (CE mark) and the presumption of compliance embedded in the rules on technical specifications in the 2014 Public Procurement Package. He also concentrated on the quasi-binding nature that technical standards are acquiring (eg Nordiska Dental (C-288/08, EU:C:2009:718), James Elliot Construction (C-613/14, EU:C:2016:821)—and see also Medipac - Kazantzidis (C-6/05, EU:C:2007:337), and Commission v Greece (C-489/06, EU:C:2009:165)).

He wondered whether the obligation to respect the CE mark in the context of public procurement is problematic due to its requirement of ‘blind trust’ in the harmonisation system, and whether this is a democratic threat—in particular due to the way in which broad participation is (not) working in the context of standard-setting. He also discussed the constraints in an alternative approach based on the flexibility around the use of functional requirements embedded in Art 44(6) of Directive 2014/24/EU.

Public Procurement Discretion: Limits and Opportunities

Prof Chris Bovis reflected on the drivers and boundaries of discretion in the award of public contracts. He discussed the evolution of the regulatory space left to discretion throughout the five generations of EU procurement directives, and raised issues concerning the scale or structural dimension of discretion, in particular due to the different nature of the issues left to the discretion of the Member States (system-level issues) or the contracting authorities (procurement/procedure-level issues). His reflections also prompted discussion on the dynamics and interaction between exposure to competition, accelerating market dynamics (eg regarding innovation) and exercise of (administrative) discretion.

Dr Dieter Klaus explored the lessons that can be learnt from an analysis of the constraints on discretion in the public procurement setting, as a case study of broader issues concerning the regulation of discretion under EU law. He started with conceptual remarks on ‘discretion’ and the general approach to discretion (deplorable exception or rather a valuable instrument?) and the tension between different pulls and levers in EU law (flexibility, subsidiarity, harmonisation, compliance and potential over-regulation risks). He also stressed the risks and difficulties in EU level concept-building around (eponymous) notions that carry specific connotations in the context of national legal systems, which triggers risks of possible misunderstandings—as well as the interaction between spheres of discretion and intensity of judicial review of (discretion-based) executive decisions.

He used examples that compared case law on gambling (eg Politanò (C-225/15, EU:C:2016:645), Unibet International (C-49/16, EU:C:2017:491) or Vereniging Hoekschewaards Landschap (C-281/16, EU:C:2017:774)) and case law on public procurement (TNS Dimarso (C-6/15, EU:C:2016:555), LitSpecMet (C-567/15, EU:C:2017:736) or Borta (C-298/15, EU:C:2017:266)), with a particular emphasis on the intensity of judicial scrutiny for the justifications backing up discretionary decisions by the Member States. In concluding his reflections, he wondered whether there is something that makes procurement law special within the framework of EU internal market rules—which he thought probably not, in particular if one considers the fact that discretion works in different ways in different areas of EU internal market law, and that EU public procurement law displays the whole range of scenarios where discretion is subjected to different constraints.

The discussion raised the issues of whether the discretion under analysis (in the case law) is only that exercised by the contracting authority in executive decisions, or whether macro/systemic issues are subjected to the same issues and constraints. It also raised issues on the interaction between incompleteness of the regulatory system and (unforeseen) sources of discretion. The discussion also raised the point of whether Art 18 Dir 2014/24 is the natural ‘home’ of discretion within the system (as a horizontal issue), or whether the Directives somehow operate on the basis of a more undercover position for discretion.

In my presentation, I discussed the extent to which the general principles in Article 18(1) of Directive 2014/24/EU set out the relevant constraints on the exercise of executive discretion in the context of procurement and, in particular, the role that the prohibition for contracting authorities to artificially narrow down competition can be used to create effective substantive and/or procedural tests to control the exercise of such discretion.

Following up on my previous proposals (mainly, in Public Procurement and the EU Competition Rules, 2nd edn (Hart, 2015) ch 5) I suggested that Article 18(1)II Dir 2014/24/EU provides the basis for a competition-orientated or competition driven adaptation of a general proportionality test. I suggested that the existing case law of the CJEU, in particular concerning anti-circumvention rules, can form the basis for a substantive test oriented towards the consideration of the counterfactual decision adopted by a diligent contracting authority. I acknowledged that such a test may be difficult to craft in a way that does not create risks of ex post facto reassessment of decisions that would have originally not been seen as restrictive of competition.

I also suggested that a procedural test may be preferable, in the sense of creating a presumption of conformity with the requirements of the Directive where the contracting authority can provide an adequate paper trail (ex Art 84(2) Dir 2014/24) demonstrating having given due consideration to competition impacts of the decisions taken along the procurement design and implementation phase. My preliminary idea is that the procedural test would create a rebuttable presumption of conformity and that, in case of indicia to the contrary, the substantive test would then be applied.

The ensuing discussion concerned challenges on my claim about the competition-orientatedness of the regime in Directive 2014/24/EU and the 2014 Public Procurement Package more generally, discussion of the different concepts of competition (either as a mechanism or as a benchmark demanding economic efficiency in absolute terms) and the links that could be drawn before the substantive test I propose and the more general test of abuse of EU internal market law.

Environmental and Social Clauses

Dr Marta Andrecka discussed limits of contracting authority discretion in the pursuit of sustainability, and drew from previous analysis on her recently edited monographic issue of the European Procurement & Public Private Partnership Law Review (2017) 12:3. Her reflections concerned the balance between the flexibility created to support sustainability goals in procurement through the ‘toolbox approach’ in the 2014 Public Procurement Package and ensuing Commission guidance, on the one hand, and the necessary checks and balances, on the other—in particular by reference to the interpretation of Art 18(2) of Directive 2014/24/EU and difficulties to fit different understandings of ‘public interest’ at EU and national level in this context. She gave significant weight to the addition of sustainability as a strategic goal of procurement under the new rules, very much in line with the European Commission’s approach in the October 2017 Communication on ‘Making public procurement work in and for Europe’. She also mapped out emerging obligations to include sustainability considerations in the context of other (horizontal) EU policies with an impact on procurement—such as the current proposal for a European Accessibility Act.

The ensuing discussion concerned the boundaries of the concepts of public interest and public policy within the context of EU internal market law, and the extent to which that is directly applicable and/or transferable to the interpretation and enforcement of the 2014 Public Procurement Package. It also concerned the link between the increasing sophistication and complications derived from sustainability-orientated procurement and emerginginitiatives on professionalization and capacity building as part of the broader procurement strategy.

Dr Sanja Bogojević mapped environmental contestation points in EU procurement law and policy, as a way of bringing attention to problems and opportunities for the pursuit of environmental policies in the context of public procurement. She recreated the discourse on green procurement through the case law of the CJEU after Concordia Bus Finland (C-513/99, EU:C:2002:495) and EVN and Wienstrom (C-448/01, EU:C:2003:651), and compared it to the discourse in broader internal market case law, to finally arrive to the current expressions of green public procurement aims and goals in policy documents, such as the 7th Environmental Action Plan or the Europe 2020 Strategy. Concentrating on Directive 2014/24/EU, her discussion considered the way green procurement is presented in relation to technical standards, labels and life-cycle costing rules.

Once the mapping was complete, she identified 5 points of contestation: (1) role of sustainable development and the risk it creates of squeezing environmental protection act; (2) reviewability of environmental models used in life-cycle costing (eg as exemplified in the litigation leading to R (ClientEarth) [2016] EWHC 2740); (3) what is the nature of the obligation in Art 11 TFEU (‘environmental protection requirements must be integrated into the definition and implementation of the Union policies and activities’ – is this solely a procedural minimum?); (4) discretionary climate change policy and ways in which policy can be used to create obligations (eg along the lines of the Dutch Urgenda case); and (5) the role of EU public procurement law in non-EU countries looking to access the EU (eg Serbia) or on the way out (UK). Ultimately, she made a compelling case for more interdisciplinary work and efforts of legal imagination to try to find workable legal solutions to global challenges.

Dr Jeremias Prassl discussed means, ends and conflicts in attempting to carry out social procurement. He introduced the clash between labour rights and internal market rules and restrictions (ie a clash of the economic vs the social)—which underlies calls for broad exemptions from internal market law from scholars such as Prof Alan Bogg ('Viking and Laval: The International Labour Law Perspective', in M R Freedland & J Prassl (eds), Viking, Laval and Beyond (Hart, 2016) ch 3)—and considered whether public procurement is more sensitive or atuned to labour law considerations than general internal market. He also reflected on whether the relevant clash was not one between economic and social rights, but rather between social rights of different collectives. He then developed each of the different narratives to see how they have shaped law and policy in the context of EU social and procurement law—in particular around the Posted Workers Directive.

His discussion provided insights on how the application of the internal market logic and its broader normativity comes to water down labour law’s protective effects (building on the analysis of L Rodgers, ‘The Operation of Labour Law as the Exception: The Case of Public Procurement’, in A Sanchez-Graells (ed), Smart Public Procurement and Labour Standards. Pushing the Discussion after RegioPost (Hart, 2018) ch 8). He assessed these issues of normativity and exception from Viking (C-438/05, EU:C:2007:772) and Laval (C-341/05, EU:C:2007:809) to the more recent cases of Bundesdruckerei (C-549/13, EU:C:2014:2235) and RegioPost. He also relied on Prof Weatherill’s approach ('Viking and Laval: The EU Internal Market Perspective', in M R Freedland & J Prassl (eds), Viking, Laval and Beyond (Hart, 2016) ch 2; see also S Weatherill, The Internal Market as a Legal Concept (OUP, 2017)) to criticising the insensitivity of internal market case law to legitimate and democratically expressed national priorities—which Jeremias considers is currently softening, as the CJEU approach in RegioPost indicates.

He also critically reflected on whether the seeming growing scope for labour policies in the context of procurement is likely to generate the maximum practical effects that would be desirable. In closing his paper, he wondered whether the heterogeneity of workers and the conflicts between different groups of workers (insiders vs outsiders) would provide a better narrative and analytical perspective to reassess this topic. In doing that, he drew on Prof Catherine Barnard’s contrast between the equal treatment logic of the procurement rules and the differentiation logic of the traditional rules on posting of workers, which is now being tamed in the revision of the Posted Workers Directive (see C Barnard, ‘Fair’s Fair: Public Procurement, Posting and Pay’, in A Sanchez-Graells (ed), Smart Public Procurement and Labour Standards. Pushing the Discussion after RegioPost (Hart, 2018) ch 10).

The ensuing discussion concentrated on how attempts to integrate social and environmental considerations in a public procurement regime that already tried to address other goals—mainly, economic and internal market-orientated—triggers issues around the extent to which social and environmental considerations should be a more intrinsic element of internal market law generally, as a sort of ‘softer market’, rather than an issue to be addressed sectorially.

Prof Xavier Groussot and Ms Angelica Ericsson wrapped up the discussions with a reflection on the tension between discretion and proportionality in the use of social clauses in procurement. They discussed (i) the elements of discretion, (ii) the application of procedural proportionality to control discretion—and in particular from the perspective of transparency—and (iii) whether recent case law seemingly deviating from the principle of proportionality creates a problem, mainly in light of the application of covert proportionality through consistency in RegioPost (contra P Bogdanowicz, ‘Article 56 TFEU and the Principle of Proportionality: Why, When and How Should They be Applied After RegioPost?,’ in A Sanchez-Graells (ed), Smart Public Procurement and Labour Standards. Pushing the Discussion after RegioPost (Hart, 2018) ch 3). In the first part of the discussion, they explored the connections between the application of discretion under EU law and under ECHR law, and how that comparison can be best assessed using a variation of the framework set out by Tridimas (‘Proportionality in Community Law. Searching for the Appropriate Standard of Scrutiny’, in E Ellis (ed), The Principle of Proportionality in the Laws of Europe (Hart, 1999) 65 ff), and the additional issue of harmonisation raised by Thym (‘The Constitutional Dimension of Public Policy Justification’, in P Koutrakos, N Nic Shuibhne, & P Syrpis, Exceptions from EU Free Movement Law: Derogation, Justification and Proportionality (Hart, 2016) ch 9): (1) the interest, (2) the proceeding, and (3) the level of harmonization (cfr Opinion of AG Cruz-Villalon in dos Santos Palhota and Others (C-515/08, EU:C:2010:589)).

In the second part, they discussed discretion and procedural proportionality, and reflected about ‘what would a high level of discretion mean for a proportionality assessment’ both in theory and in practice. They stressed that the level of discretion and the intensity of proportionality review should theoretically be inversely proportionate (much along the lines presented by Dr Kraus earlier in the day, but with inverted causality), and that this is demonstrated in practice in the area of public procurement (such as in Politanò), where the CJEU shows more deference to administrative discretion (ie a lighter-touch proportionality analysis) where a higher level of discretion exists ex ante. Specifically in the context of procedural proportionality (eg Beentjes v State of the Netherlands (C-31/87, EU:C:1988:422)), and in the context of transparency obligations, they suggested that procurement is a good testing ground for the correlation between higher discretion and more limited proportionality scrutiny by the CJEU (eg in RegioPost, where regulatory transparency may have saved the social clause). They concluded that (i) high level policy discretion for Member States must not translate into unfettered discretionary/arbitrary decision-making by contracting authorities, (ii) procedural scrutiny is spreading beyond public procurement (R Caranta, ‘Public Procurement Law: Limitations, Opportunities and Paradoxes’ in U Neergaard, C Jacqueson & GS Ølykke (eds), XXVI FIDE Congress in Copenhagen, vol 3 (DJØF, 2014), where he claims principles of procurement becoming general principles of EU administrative law more generally), (iii) EU law principles (eg transparency) may be fuelled by different justifications than (eponymous) national ones.

Finally, in the third part, and drawing from French administrative law, they explored the possibilities of developing a taxonomy of CJEU case law that would distinguish between a procedural approach (controle minimum), substantive approach (controle normal) and a balancing approach (controle maximum).

The discussion concentrated mostly on the boundaries of the procedural proportionality approach and the categories that could most usefully be used to create a taxonomy of approaches by the CJEU. This was linked to the discussion to the standard of review of decisions in other areas of EU law—eg competition law, where the connection between EU and ECHR standards has been questioned (eg Menarini, as discussed in extenso in A Sanchez-Graells, ‘The EU’s Accession to the ECHR and Due Process Rights in EU Competition Law Matters: Nothing New Under the Sun?’, in Kosta, Skoutaris & Tzevelekos (eds), The Accession of the EU to the ECHR (Hart, 2014) 255-70).

Alternative Procurement Models

Dr Ohad Graber-Soudry presented the procurement rules of European Research Infrastructure Consortia (ERICs) under the specific regulatory framework of Council Regulation 723/2009/EC, which creates significant space for each ERIC to adopt its own procurement rules. His presentation concentrated on the uncertainties derived from the treatment of ERICs as international organisations and the impact these have on ERICs’ discretion to develop their own procurement rules, as well as the treatment of discretion within those (self-developed) rules.

The ensuing discussion mainly concerned the limits and effects of Art 7(3) of Regulation 723/2009, whereby ‘[a]n ERIC is an international organisation within the meaning of Article 15(c) of Directive 2004/18/EC’, which now corresponds to Article 9(1)(b) of Directive 2014/24/EU.

Closing the workshop, Prof Ulf Bernitz discussed the peculiarities of the Swedish system, and stressed the particular use and weight of transparency obligations in that jurisdiction.

CJEU provides some clarification on functional limits to in-house exemption: no two bites of the cherry? (C-567/15)

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In its Judgment of 5 October 2017 in LitSpecMet, C-567/15, EU:C:2017:736, the Court of Justice of the European Union (CJEU) has considered the limits of the in-house exemption from the procurement rules in scenarios where a contracting authority controls an in-house entity and, in turn, the in-house entity engages in activities with third parties--or, in other words, the CJEU has assessed the functional limits of the exemption in relatively complex public house situations.

The CJEU has not really followed the thrust of the Opinion of AG Campos (which was largely based on competition considerations, see here), but rather provided a clarification that focuses the assessment of the applicability of the EU procurement rules to the purchases by the in-house entity from third parties on an independent analysis of whether the in-house entity 'at the end of the public house chain' meets the definition of 'body governed by public law'. This offers some clarification that could be useful in the future, but the way the CJEU applies the tweaked test also creates new areas of uncertainty and opens up the case law to criticisms on the basis of the conflation of activities along the 'public house chain' despite setting out to avoid such conflation.

In LitSpecMet, more specifically, the CJEU considered "whether the second subparagraph of Article 1(9) of Directive 2004/18 must be interpreted as meaning that a company which, firstly, is wholly owned by a contracting authority the activity of which is to meet needs in the general interest and which, secondly, carries out both transactions for that contracting authority and transactions on the competitive market may be classified as a ‘body governed by public law’ within the meaning of that provision and if so, in that regard, what is the effect of the fact that the value of the in-house transactions may in future represent less than 90% or not the main part of the total financial turnover of the company" (C-567/15, para 23).

The case was decided on the basis of Art 1(9) of Directive 2004/18/EC but, given that its terms are largely coincidental with Article 2(1)(4) of Directive 2014/24/EU, it is of broad and future relevance. In the end, both provisions establish three cumulative conditions for the consideration of an entity as a 'body governed by public law': (a) be established for the specific purpose of meeting needs in the general interest, not having an industrial or commercial character; (b) have legal personality; and (c) (i) be financed, for the most part, by the State, regional or local authorities, or by other bodies governed by public law; or (ii) be subject to management supervision by those authorities or bodies; or (iii) have an administrative, managerial or supervisory board, more than half of whose members are appointed by the State, regional or local authorities, or by other bodies governed by public law.

In LitSpecMet, the CJEU started by reiterating its case law on the cumulative conditions that determine the status of 'body governed by public law' (paras 29-30) and on the functional and broad approach to the interpretation of the personal scope of application of EU procurement rules (para 31). Given that in LitSpecMet it was uncontroversial that the relevant entity had separate legal personality and was controlled by a contracting authority (para 32), the analysis rested on whether the entity constituted a "body established for the specific purpose of meeting needs in the general interest, not having an industrial or commercial character" (para 33).

Specific purpose of meeting needs in the public interest

In this analysis, and decoupling the different phases of the relevant test, the CJEU stressed that

34 It is clear ... that the requirement [for the entity to have been 'established for the specific purpose of meeting needs in the general interest, not having an industrial or commercial character'] must be satisfied by the entity whose classification is being examined and not by another entity, even if the latter is the parent company of the former which supplies the latter with goods or services. It is therefore not sufficient that an undertaking was established by a contracting authority or that its activities are financed by funds derived from activities pursued by a contracting authority in order for it to be regarded as a contracting authority itself (judgment of 15 January 1998, Mannesmann Anlagenbau Austria and Others, C‑44/96, EU:C:1998:4, paragraph 39).

35 In addition, it is necessary to take into consideration the fact that the use of the term ‘specific’ shows the EU legislature’s intention to make only entities established for the specific purpose (sic) of meeting needs in the general interest, not having an industrial or commercial character, the activity of which meets such needs, subject to the binding rules on public contracts.

36 Accordingly, it is necessary to determine, first of all, whether [the in-house entity] was established for the specific purpose of meeting needs in the general interest, the activity of which meets such needs before, if necessary, examining whether or not those needs have an industrial or commercial character (see, to that effect, judgment of 22 May 2003, Korhonen and Others, C‑18/01, EU:C:2003:300, paragraph 40) (C-567/15, paras 34-36, emphasis added).

Even if the drafting could have been clearer, particularly that of para 35 (which is tautological and, frankly, impossible for me to crack), the thrust of the test set out by the CJEU in LitSpecMet comes to assess the functional purpose of the in-house entity under consideration, rather than the nature of the activities it carries out. This comes to severe any intended chains of justification based on the activities in the general interest carried out by contracting authorities further up the 'public house chain' and concentrates on the purpose of the in-house entity 'at the end of the public house chain'--which must have been specifically established for general interest purposes.

This seems like the proper approach in abstract terms. However, the difficulty is that such a strict approach to the assessment of the activities of the in-house entity are likely to lead to the conclusion that it does not carry out activities in the general interest, which creates a difficult functional conundrum. This is visible in LitSpecMet where, in my view, the CJEU creates a great deal of confusion in the way it applies the test to the relevant entity in LitSpecMet in two ways.

First, in the way that the CJEU considers the purpose of the entity, which is to supply goods and services to enable its parent company to carry out the latter's activity (para 37), to be in the general interest because its "activity, in particular the manufacture and maintenance of locomotives and rolling stock and the supply of those goods and services to [the parent company], appears necessary for [the parent company] to be able to carry out its activity intended to meet needs in the general interest" (para 38).

To me, this seems wrong because the supply activity is not in the public interest, but in the interest of the parent company, which means that the entity whose classification is being examined does not meet the requirement (ie, in contravention of para 34) and because functionally it conflates the main activity of the parent company (in the general interest) with the ancillary (commercial/industrial) activity of the in-house entity 'at the bottom of the public house chain'. Otherwise, this would be tantamount to saying that a (private) supplier of the public sector carries out activities in the general interest where its supplies are necessary for a public authority to carry them out--quod non. In that regard, the test suggested by AG Campos concerning whether the in-house entity indirectly contributed to the general interest activities would seem preferable.

Second, and more importantly, the CJEU creates additional confusion when it indicates that, in the assessment of whether the in-house entity was specifically established for the purpose of meeting needs in the general interest, 

40 ... it is irrelevant that, in addition to the activities intended to meet needs in the general interest, the entity in question also carries out other activities for profit on the competitive market (see, to that effect, judgments of 15 January 1998, Mannesmann Anlagenbau Austria and Others, C‑44/96, EU:C:1998:4, paragraph 25, and of 10 April 2008, Ing. Aigner, C‑393/06, EU:C:2008:213, paragraph 46 and the case-law cited).

41      Thus, the fact that [the in-house entity] does not carry out only activities intended to meet needs in the general interest through internal transactions with [its parent company], so that [the parent company] may carry out its transport activities, but also other profit-making activities is irrelevant in that regard (C-567/15, paras 40-41, emphasis added).

Once more, with the ultimate goal of preventing an 'escape' from the procurement rules by in-house entities carrying out activities outside of the public house, this seems to me to wrongly ignore the focus previously put on the assessment of the activity of the entity whose classification is being examined. Functionally, where an entity carries out activities in the public interest and activities of a commercial or industrial nature, it makes no sense to treat all activities the same.

This is not the approach followed in the context of utilities procurement under Directive 2014/25/EU. Furthermore, in EU competition law, where entities carry out activities that represent the exercise of public powers and economic activities, their assessment is based on the severability of the activities. In my view, the same approach would be appropriate here and, even more, in keeping with the functional logic of the in-house and public-public cooperation exemptions from compliance with EU public procurement rules, it would seem that the opposite approach should be preferred--to the effect that, where an entity carries out a significant volume of its activities for the benefit of entities outside the public house, it should not be considered a 'body governed by public law' for the purposes of subjecting it to the procurement rules but at the same time, the exemption from compliance with public procurement rules in the award of public contracts by other entities in the public house should disappear. 

In other words, functionally, I do not think it makes sense to take such a strict approach to the assessment of the existence of activities in the general interest for the purpose of assessing the classification of the in-house entity as a 'body governed by public law', but rather to take a more holistic approach to the assessment of the position of the entity within the public house--ie, the entity must be either in or out of the public house.

Thus, in my opinion, the formulation of the test (and its sequencing) seems appropriate, but its application and the conflation of activities--both (i) the conflation of the activities of the controlling and the controlled entity, and (ii) the conflation of the activities in the general interest and the commercial or industrial activities of the latter inter se--is erroneous and comes to create significant confusion that muddies the waters of the intended clarification.

Needs not having an industrial or commercial character

Moreover, given that the CJEU considered the in-house entity 'at the bottom of the public house chain' to have been established specifically to meet needs in the general interest, the Court continued setting out the detailed test, and established that

43 ... in the assessment of [needs in the general interest, not having an industrial or commercial] character account must be taken of relevant legal and factual circumstances, such as those prevailing when the body concerned was formed and the conditions in which it carries on its activity, including, inter alia, lack of competition on the market, the fact that its primary aim is not the making of profits, the fact that it does not bear the risks associated with the activity, and any public financing of the activity in question.

44 ... if, with regard to the activities intended to meet needs in the general interest, the body operates in normal market conditions, aims to make a profit and bears the losses associated with the exercise of its activity, it is unlikely that the needs it seeks to meet are not of an industrial or commercial nature (judgment of 16 October 2003, Commission v Spain, C‑283/00, EU:C:2003:544, paragraphs 81 and 82 and the case-law cited).

45 That being the case, the existence of significant competition does not, of itself, allow the conclusion to be drawn that there is no need in the general interest, which is not of an industrial or commercial character.

46      In those circumstances, it is for the referring court to ascertain ... whether... the activities carried out by [the in-house entity], seeking to meet needs in the general interest, were exercised in competitive conditions and in particular whether [the in-house entity] was able ... to be guided by non-economic considerations (C-567/15, paras 43-46, emphasis added). 

I also find the formulation of this part of the test confusing, not least due to the unclear position that the existence of competitive markets assumes. As I mentioned when discussing the Opinion of AG Campos, the sole fact that the controlling entities within the public house are directly awarding contracts to the in-house entity without having to comply with the procurement rules suffices to exclude a consideration that those entities are actually exposed to the vagaries of the market because they have a captive demand from the controlling entities--which significantly insulates them from market risk where such demand is enough to absorb 80% of the entities' turnover. Ultimately, then, either there is an exemption at the level of the relationship between the contracting authority and the in-house entity, or there is an obligation to tender at that level (which then frees the otherwise in-house entity from public procurement duties). But, either way, the logic of exposition to competition in the market does not allow for both exclusions. In addition to that consideration, I think that the position of the CJEU in LitSpecMet creates additional issues.

First, it is not clear to me whether the analysis in this second step needs to be constrained to the activities "intended to meet needs in the general interest" (para 44, particularly in relation to para 40) or to all the activities of the in-house entity (as suggested in para 46?), particularly where the in-house entity carries out for-profit activities with third parties, but also carries out not-for-profit (or not fully commercial) activities with the controlling entity and/or other entities within the public house. Would profit-seeking activities with third parties (even if of a relatively small volume, say 10% or 20% of the turnover of the in-house entity) suffice to make it fall foul of the definition of 'body governed by public law'? Second, it is not clear to me how to assess whether an entity is "able to be guided by non-economic considerations". Third, it is also unclear to me whether transactions are carried out in competitive conditions where the mere existence of the in-house entity may suppress any relevant comparator. 

Ultimately, I guess that what is relevant is to try to understand the functional rationale and implications of the second part of the test. The situation here is one where an in-house entity carries out procurement activities ancillary to the activity in the general interest of its parent company (first step of the test) and, at this point, the assessment of whether its activities are competitive or not, and whether it can be guided by non-economic factors, determine the applicability of procurement rules to its purchases from third parties (second step of the test).

In my reading, that means that (a) if the in-house entity carries out its relevant activities in competitive conditions, it falls foul of the definition of 'body governed by public law' and does not need to comply with the procurement rules in its acquisitions from third parties; and (b) if the in-house entity does not carry out its relevant activities in competitive conditions and/or can be guided by non-economic considerations, then it will be classed as a 'body governed by public law' and thus obliged to comply with the procurement rules. At least (a) can be problematic in some scenarios--although (b) can also be problematic where the analysis is constrained to solely part of the activities of the in-house entity.

Regarding (a)-type situations, where the in-house entity that receives the direct award of contracts from other entities in the public house without subjection to public procurement rules carries out competitive activities, the test seems to allow it to benefit from its in-house position to compete in the market without having to comply with procurement rules in its purchases--which is functionally opposite to the restrictions on market activities of the in-house entity under Art 12 Dir 2014/24/EU (as mentioned above).

Overall consideration

I think that my uneasiness with the Judgment in LitSpecMet primarily derives from the fact that, where assessing the activities of in-house entities 'at the bottom of the in-house chain', the first part of the test ignores whether, in addition to (indirect) activities in the general interest, the entities carry out additional for-profit activities with third parties. And, subsequently, the second part of the test (potentially) concentrates on the existence of such activities (and the existence of profit goals and business risk) to exclude the non-commercial and non-industrial nature of those activities. Even if I cannot say exactly why, I sense a disconnection between both parts of the test. I will have to give this case some additional thought but, for now, I think that the CJEU would have been better off by adopting a functional approach to the in-house exemption and its limits, rather than a functional approach to the concept of 'body governed by public law', which implementation creates confusion.