New interesting paper on green public procurement -- re Halonen (2021)

Dr Kirsi-Maria Halonen has just published in advanced open access her new paper ‘Is public procurement fit for reaching sustainability goals? A law and economics approach to green public procurement’ (2021) Maastricht Journal of European and Comparative Law.

This is a very interesting paper that takes a law and economics approach to assess recent proposals to make some aspects of green public procurement mandatory, in particular in the context of the EU Green Deal and its expected implementing measures. The discussion relies on European examples and data, but the insights offered by the paper are relevant to all jurisdictions considering using public procurement to tackle the climate emergency.

The paper is well worth reading in full and, to my mind, makes two main original contributions that should be stressed, as they should carefully be taken into account by anyone seeking to leverage public procurement for environmental goals (or sustainability, more generally) by means of a ‘hardening’ of current soft law approaches—that is, via the imposition of procurement-specific mandatory (green) legal requirements. The following is my understanding of those two main points, which Kirsi presents slightly differently in her paper.

First, the paper warns against blanket approaches that would apply across all areas of public expenditure or, relatedly, across types of procurement specified by reference to relatively random administration-based criteria (eg tenders of a value above a certain amount). The paper evidences how the effectiveness of mandatory requirements will vary by industry and, consequently, how the design of mandatory requirements should not be based on demand-side considerations, but rather on supply-side analysis.

More than ever, the need for sophisticated market intelligence to underpin the design of green procurement requirements comes to the fore. Relatedly, the paper shows that, for some industries (or more generally), it is possible (or likely) that regulatory measures other than mandatory public procurement requirements are more effective in promoting the desired green transition. Consequently, an analysis of alternative policy interventions should be carried out ahead of the imposition of such mandatory requirements.

Second, and more originally, the paper shows that one of the key considerations in assessing the effectiveness of mandatory green public procurement requirements has to be their knock-on effect on private consumption patterns. Relying on substitution policy analysis, the paper makes it plainly clear that changes in public demand for green (or sustainable) products will create a mix of incentives that can well result in the increased consumption of dirty (or unsustainable) goods and services by private consumers (both corporate and individual) as a result of rigidities in the supply side of the relevant markets—which, at best, can be resolved as the green transition advances and, at worse, could be structurally resistant.

This shows how, despite public procurement representing anything between 10% and 20% of most economies, policy interventions that are procurement centric can generate net negative environmental (or social) effects if the remainder of the economy (or rather, part of the rest of the economy) is displaced towards goods and services that do not meet the required standards. This once again brings home the message that procurement-specific interventions may not be the preferable (or even desirable) way to try to tackle the climate emergency and that a broader, supply (or industry)- based assessment of alternative regulatory interventions is necessary.

Taken all insights together, I would read Kirsi’s paper as making a very strong argument that green (or sustainable) public procurement must not be seen as a goal in itself, or as intrinsically desirable, and that a broader embedding of procurement within larger legislative initiatives (eg economy-wide minimum requirements, or the imposition of consumption taxes regardless of the public or private nature of the buyer) is likely to be a better way forward.

I also read the paper as offering a persuasive argument against claims that ‘mandating green procurement is better than doing nothing’, or that ‘green procurement is a low-hanging fruit that should be collected before reaching for more difficult targets like individual consumer behaviour’. Without proper analysis of the substitution effects that mandatory green public procurement requirements can generate, none of that should be taken at face value. Which is interesting because it is exactly the same way broader market dynamics operate in public procurement, and precisely the reason why the desirability of the exercise of public buying power needs to be assessed with caution, regardless of the policy goal it seeks to achieve.

Anticompetitive behaviour in NHS #publicprocurement: Regulating distortions of competition?

The recently adopted National Health Service (Procurement, Patient Choice and Competition) (No. 2) Regulations 2013 include an interesting (highly unsettling) provision authorising the carrying out of anti-competitive behaviour in the commissioning of NHS services, as long as that is in the interest of health care users. 

The oddity of such 'authorisation' for public buyers to engage in anti-competitive procurement deserves some careful analysis. According to the Regulations:

10.—(1) When commissioning health care services for the purposes of the NHS, a relevant body must not engage in anti-competitive behaviour [i.e. behaviour which would (or would be likely to) prevent, restrict or distort competition], unless to do so is in the interests of people who use health care services for the purposes of the NHS which may include—

(a) by the services being provided in an integrated way (including with other health care services, health-related services, or social care services); or

(b) by co-operation between the persons who provide the services in order to improve the quality of the services.

(2) An arrangement for the provision of health care services for the purposes of the NHS must not include any term or condition restricting competition which is not necessary for the attainment of—

(a) intended outcomes which are beneficial for people who use such services; or

(b) the objective referred to in regulation 2.

The only explanation provided in the Explanatory Memoradum is that

The Regulations place further requirements on commissioners to ensure accountability and transparency in their expenditure. In particular: [...] not to engage in anti-competitive behaviour unless to do so is in the interest of patients. Regulation 10 makes clear that behaviour in the interests of patients may include services being provided in an integrated way or co-operation between providers in order to improve the quality of services. This reflects the Government’s firm view that competition is a means to improving services and not an end in itself.

Generally, then, it seems that under the new NHS public procurement rules, whatever is considered in the 'interest of patients' can trump pro-competitive requirements and allow the commissioning entity to engage in distortions of competition. Even if Regulation 10(2) sets a clear proportionality requirement, my general impression is that this is at odds with the general requirements of EU public procurement law and, more specifically, with the principle of competition embedded in the public procurement Directives--so that the application of Regulation 10(1) for contracts covered by EU law (ie when there is cross-border interest) may result in a breach of those Directives.

In that regard, the substantive guidance published by the UK's healthcare sector regulator Monitor for public consultation is particularly relevant. According to such draft substantive guidance, Monitor will assess the appropriateness of engaging in anti-competitive behaviour on the basis of a cost/benefit analysis. Indeed, it is explained that:

When will behaviour be anti-competitive and not in the interests of users of health care services?

Where a commissioner’s conduct is in the interests of patients its behaviour will not be inconsistent with the prohibition on anti-competitive behaviour in Regulation 10.

In assessing whether or not anti-competitive behaviour is in the interests of health care service users, Monitor will carry out a cost/benefit analysis. Monitor will consider whether by preventing, restricting or distorting competition behaviour gives rise to material adverse effects (costs) for health care service users.

If we find that behaviour gives rise to material costs, we will consider whether it also gives rise to benefits that could not be achieved without the restriction on competition.

Monitor will then weigh the benefits and costs against each other.

The methodology for the carrying out of that cost/benefit (both clinical and non-clinical) analysis is explained and, at the bottom line, when weighing their relevance, Monitor will take into consideration that

This is not a mathematical exercise, but rather a qualitative assessment. Relevant benefits might outweigh costs when, for example, as a result of a commissioner’s actions there is a reduction of competition between a small number of providers, but a significant number of other providers of the relevant services remain and the clinical benefits of the initiative are significant and well evidenced. 

Given the very open-ended methodology described in the document and this final consideration, my impression is that the analysis to be carried out by Monitor may err on the side of allowing for an excessive amount of anti-competitive behaviour--particularly in view of the potential relevance given to qualitative (and, hence, difficult to measure, benefits). 

However, such lenient approach is not exactly matched when Monitor indicates the type of factors it will take into consideration when assessing whether a commissioner has engaged in disproportionate or unjustified anti-competitive behaviour, which include examples such as whether the commissioner:

·               has limited the extent to which providers are able to compete to attract patients to their services, for example, by limiting the total number of patients a provider can treat or the income a provider can earn, or by restricting the providers to whom a provider can refer patients for further treatment, without objective justification;

·               has restricted the ability of providers to differentiate themselves to attract patients, such as, for example, by imposing minimum waiting times that providers must adhere to or restricting opening hours without objective justification; and

·               has reduced the incentives on providers to compete, such as, for example, by disclosing commercially sensitive information belonging to one provider to a different provider without objective justification.

Therefore, it seems that the substantive guidance is strict in terms of promoting (or not reducing) competition of providers in their interface with patients, unless the cost benefit/analysis indicates a (qualitative) advantage for patients that derives from any restriction of competition--such as vertical or horizontal integration of services, joint provision, or standardisation of conditions [as indicated by Regulation 10(1)].

After reading the substantive guidance, it is not clear to me whether the structurally strict approach of Regulation 10(2) will restrict the 'anti-competitive authorisation' of Regulation 10(1) or, on the contrary, if Regulation 10(2) will also be affected by the 'qualitative' approach of Regulation 10(1). In that regard, it would be desirable for Monitor to make it clearer if it intends to use Regulation 10(1) only exceptionally and in cases where the cost/benefit analysis is clearly positive, or if it envisages a more lenient approach. 

I would personally favour the first option, since the authorisation of anti-competitive behaviour in public procurement is prone to generate clear social losses derived from the direct and knock-on effects that non-competitive public procurement generates (see here and here), whereas the (qualitative) benefits sought are hard to measure and to realise. In any case, it will be interesting to see how the final guidance may be affected by the current consultation period, which will be open until the 15th of July 2013.