New lengthy reference by Lithuanian Supreme Court raises a range of difficult questions (C-927/19, Klaipėdos regiono atliekų tvarkymo centras) [guest post by Dr Deividas Soloveičik*]

This guest post by Dr Deividas Soloveičik provides interesting background and critical remarks on a recent Lithuanian reference to the Court of Justice for a preliminary ruling on issues concerning several aspects of the 2014 rules, in particular interesting boundary issues between qualitative selection and technical specifications, as well as exclusion of consortium partners. It will be interesting to keep an eye on the case, as it brings an opportunity for the CJEU to expand its case law.

Some difficult questions

The very end of the 2019 was highlighted by a new lengthy preliminary reference to the CJEU by the Supreme Court of Lithuania (the Supreme Court), in a case that raises a broad range of issues concerning economic and financial standing requirements, the boundary between qualitative selection and technical specification criteria, confidentiality of procurement documents in the context of ensuing litigation and the consequences of the provision of false information. This case and the initial findings of the Supreme Court will be  assessed in this “executive summary” of the references sent to the CJEU—which, at the time of writing (17 January 2020) are yet to be admitted (although the referral has been assigned case number C-927/19, Klaipėdos regiono atliekų tvarkymo centras).

Before proceeding to the analysis, it is worth recalling that, in relation specifically to the point on submission of false information and its impact on the potential exclusion of the tenderer concerned the Supreme Court was perfectly aware of the recent Judgments in Meca (C-41/18, EU:C:2019:507, not available in English) and Delta (C-267/18, EU:C:2019:826) case-law at the time of the reference to the CJEU. However, the Court extends its query and mainly is seeking to find out whether (i) the act of provision of false information by one of the consortium partners “infects” the rest of the team and (ii) what the role of the national court hearing this kind of legal case in the light of the above-mentioned Meca and Delta case-law is, when the CJEU previously specifically emphasized the importance of the discretion of the contracting authority while handling these kind of legal (procurement) situations.

Background

The Lithuanian contracting authority started an open tender for the services of municipal waste gathering and removal to landfill treatment facilities. The procurement procedure was regulated by national and Directive 2014/24/EU. The procurement documents inter alia included the following requirements:

• Technical specification: the service provider uses vehicles for waste management services that are in line with the requirements of EURO 5 standard; all vehicles must have installed constantly functioning GPS transmitters that would allow the contracting authority monitoring the exact location and movement route of the vehicle. The supplier must allow the contracting authority and the administration of the Neringa municipality to use its installed GPS as much as it is necessary to monitor the location and movement routes of the vehicles used in providing the services of waste management and transporting waste to landfill. If sub-suppliers are involved, this requirement is also applicable for their vehicles.

• Technical and professional capacity: the supplier must own or lease (or possess otherwise) the necessary quantity of vehicles needed to execute the public contract and these must comply with the requirements listed in the technical specifications. The requirements for qualification and technical specification were almost identical.

• Financial and economic capacity: tenderers’ average annual operating income from carrying out the activities related to the management of mixed municipal waste during the past 3 financial years (or the period since the supplier’s registration date if the supplier carried out the activities for a period less than 3 financial years) had to be not less than EUR 20,000 EUR excluding VAT.

There were three tenderers in a procedure: the plaintiff, another company and an awardee of the public contract, which was a consortium comprised by three individual companies. The plaintiff took second place. The plaintiff submitted the claim against the contracting authority claiming that the winner had not complied with the: (i) technical specifications – the vehicle indicated by the supplier is not for the mixed waste transportation and considering the years of manufacture – it does not comply with the requirements of the EURO 5 standard; (ii) financial and economic requirements - the average annual operating income of the supplier while carrying out the activities related to the management of mixed municipal waste during the past 3 financial years must be not less than EUR 20 000 EUR excluding VAT, but one of the joint venture partners of the supplier does not carry out waste management activities overall. The crux of the dispute was thus the following: one of the consortium partners made a statement that it had experience in management of mixed municipal waste. The claimant contended that this might not have been the truth because this partner of the consortium had never rendered any services of this type. So the claimant maintained that (a) this consortium partner did not have the needed qualification and (b) that this consortium partner made a false statement. This must have led, in the opinion of the claimant, to rejection of the consortium’s tender.

The court of first instance dismissed the claim but the appeal was successful, and the court obliged the contracting authority to re-execute the evaluation of the tenders. The Court of Appeals considered that the winner of the tender did not prove that it had the technical capacity, because the original tender did not include the information on the required vehicles, which were provided by the tenderer only after the submission of the bid to the contracting authority.

The initial awardee of the contract did not agree with the findings of the Court of Appeals and filed a cassation complaint which was accepted by the Supreme Court.

Regarding the financial and economic capacity as a qualification criterion

By raising the question on the scope of the qualification requirement to hold a relevant financial and economic capacity, the Supreme Court addressed the above-mentioned statements of the procurement documentation which required each tenderer to have an annual operating income from carrying out the activities related to the management of mixed municipal waste during the past 3 financial years or the period since the supplier’s registration date (if the supplier carried out the activities for a period less than 3 financial years) of not less than EUR 20,000 EUR excluding VAT. There were three legal aspects which triggered the Court’s doubts.

First, by reading Art. 58(3) of Directive 2014/24/EU the Supreme Court was prone to conclude that the latter limited the discretion of the contracting authority to require the suppliers to have a turnover from a very specific (niche) economic (business) activity as a sole and main financial criterion. The Court reasoned that the main goal of Art. 58(3) of the Directive was to help contracting authorities finding a financially trustworthy and economically stable contract partner. Therefore, the Court believed that, on the one hand, it allowed the contracting authorities to request from the tenderers having a general financial turnover (as specified in the procurement documentation) and, on the other hand, it left leeway to request the proof of the financial (monetary) capacity gained from a more specific business activity, because the wording of Art. 58(3) of the Directive 2014/24 contains a statement “... including a certain minimum turnover in the area covered by the contract”. However, the Court considered that any requirement for the suppliers’ qualification which is based on Art. 58(3) of Directive 2014/24 (and respectively the national procurement law) should (or even must) a priori address the general financial turnover and must not use a turnover from a niche commercial activity autonomously (i.e. as a sole requirement for financial and economic qualification). In the given case, it seems that the Supreme Court doubted if the contracting authority had a right to require an annual operating income to be received from carrying out the activities related to the management of mixed municipal waste as a single selection ground. The wording of the ruling suggests that the Supreme Court deemed that the contracting authority had a right to require a general turnover (e.g. 200,000 EUR annually) and an income from a specific activity (e.g. 20,000 EUR from management of mixed municipal waste), but not only the latter.

Second, by reading a text of the ruling it seems that the Supreme Court reasoned that if the interpretation of the Art. 58(3) of the Directive 2014/24 was otherwise, i.e. as allowing the contracting authority to require financial and economic standing on the basis of a narrow experience (like in a given case from management of mixed municipal waste), then, in the Supreme Courts’ view, there would be a blurred line between the qualification related to financial and economic standing and the one connected to technical and professional ability. There would hardly be a difference between Art. 58(3) and Art. 58(4) of Directive 2014/24. In other words, the Supreme Court considered that even if legally the requirement for qualification was named as a financial and economical one, it in fact would be the requirement for technical and professional ability when it required financial flows to be gained from a very specific practice. Therefore, it might be said that the Court’s question to the CJEU has an indirect perspective, namely the Court wants the CJEU to clarify the lines between Arts. 58(3) and 58(4) of the Directive 2014/24/EU.

Third, the Court went on to examine the CJEU case-law in Esaprojekt (C-387/14, EU:C:2017:338) and its possible application to the case at hand. It must be recalled that the awardee of the public contract was a consortium of three companies. One of these companies (say company A) constantly held that it had the required financial qualification, because it maintained that this requirement was not personal and could be relied upon as a capacity gained from the execution of a previous public contract which was executed by the consortium to which company A was a member. However, company A did not itself render the services related to the management of mixed waste and therefore it had not received any income from that.  Therefore, the claimant contended that the company A could not hold that it had received any income from the management of mixed municipal waste and, therefore, it did not have a required qualification. The Court recalled that in Esaprojekt the CJEU stated that an economic operator cannot refer to the qualification gained by the whole consortium and may only be deemed to be qualified to the extent it itself executed the relevant (part of) public contract. Therefore, the Supreme Court wonders if this ratio decidendi, delivered in Esaprojekt in respect of technical and professional ability as a qualification requirement, should be applied on the same grounds while dealing with financial and economic standing of the suppliers.

In the light of these considerations, the Court asked the CJEU to answer:

(i) if the requirement to prove the annual income of the relevant size, received from a specific commercial activity (the management of mixed municipal waste), should be subsumed under Art. 58(3) or Art. 58(4) of the Directive 2014/24;

(ii) if the answer to the previous question had any effect on the application of the rules, provided in Esaprojekt, namely, whether it is allowed under the EU public procurement law to disregard the financial and economical capacity, gained during the joint bidding and execution of the previous public contract, if this capacity in corpore is relied upon by a single member of consortium in a later procurement procedure. In other words, the Supreme Court seeks to find out if a consortium member (company A) in a present tender can rely on a qualification, gained by another consortium, to which this company A was also a member, although company A did not actually and directly execute the part of the contract to which it seeks to rely in the later (present) tender (in this case – the management of mixed waste).

Regarding the separation between professional and technical capacity and technical specifications

It is a consistent and already an old national case-law which makes a very clear and precise dividing line between the requirements of the suppliers’ qualification (selection criteria) and technical specification. The Supreme Court maintains a principle that this separation has a substantial practical implication because under the settled case-law of the Lithuanian courts each discrepancy of the tender that is related to qualification (missing document, insufficient provision of required information on qualification, etc.), may be easily rectified. This means that it is forbidden to reject the a tender without at least requesting for a decent explanation from the supplier. The Supreme Court holds that such approach is in line with the view of the CJEU, expressed in such cases as SAG ELV Slovensko (C-599/10, EU:C:2012:191) or Manova (C-336/12, EU:C:2013:647). Meanwhile, any part of the tender that is connected to the requirements of technical specification cannot be amended, rectified or explained by an economic operator at a later stage of procurement in such a way as to turn the non-compliant original tender into a compliant one.

It must be recalled that in this case the requirements for the technical and professional capacity (the supplier must own or lease (or possess otherwise) the necessary quantity of technical measures needed to execute the public contract) were copy-pasted to the technical specification. Therefore, the situation itself became confusing: if those conditions were deemed as criterion for qualification, then there must have been a possibility to provide the additional information upon the request of the contracting authority (what was one of the arguments by the respondent in a case). Meanwhile, in case of an opposite legal approach, i.e. that such requirements are a part of technical specification, any amendment to the original tender after the submission deadline would undergo a much stricter test.

Therefore, the Supreme Court cast doubts on the legal possibility of the mentioned technical and professional qualification requirement. Although the Court referred to Commission v. Netherlands case (C-368/10, EU:C:2012:284) as the one allowing “relevant similar simultaneous requirements both as a condition of technical specification and criteria for entering into a public contract or its execution”, the Supreme Court was not sure if the qualification criterion can be so detailed and exhaustive as it was in the disputed procurement. The Court went on with its reasoning that the more detailed the requirement on qualification was, the more likely it was already a condition of the technical specification and not a selection criterion. In other words, it seems that the Supreme Court was prone to consider that the requirement on qualification cannot be so detailed as it should be in case of technical specification.

Thus, the Court asked the CJEU if the requirement of the procurement documentation that the economic operator used the vehicles needed for waste management services, that were in line with the requirements of EURO 5 standard; all vehicles must have had installed constantly functioning GPS transmitters, that would have allowed the contracting authority monitoring the exact location and movement route of the vehicle fell within the scope of regulation of Directive 2014/24 a) Art. 58(4), b) Art. 42 together with the Annex VII or c) Art. 70.

Regarding the scope of obligation of confidentiality in the light of effective remedies in public procurement

Although since Varec (C-450/06, EU:C:2008:91) there has not been a major development of the concept of confidentiality in public procurement law, on the contrary, in Lithuania it is one of the hottest legal topics during the recent five years. It has been circulated in all possible layers of the legal world, starting from the legislation and ending with the widely elaborated case-law [more on this might be read here: D Soloveičik, ‘Rethinking the confidentiality in public procurement: does public mean naked public?’ (2018) 1 UrT 11-26; for comparative perspectives, see the contributions to K-M Halonen, R Caranta & A Sanchez-Graells (eds), Transparency in EU Procurements. Disclosure Within Public Procurement and During Contract Execution (Elgar 2019)). In a nutshell the current national legal ecosystem in respect of confidentiality could be described as promoting extreme transparency in public procurement and thus limiting the disclosure of competitors’ information in very rare cases, mostly related to top commercial secrets of private parties. The Supreme Court considers that the mentioned “pro disclosure” case-lawis in line not only with the requirements of the principle of effectiveness of remedies in public procurement, but also with the regulation of Directive 2016/943/EU on the protection of trade secrets.

Despite the legal ecosystem, where the transparency should prosper, paradoxically the administrative practice during the procurement procedure is usually different. The contracting authorities, albeit being precisely aware of the mentioned juridical requirements to grant access to the relevant documentation, still are very disclosure averse. In a majority of procurement cases the contracting authorities deny the tenderers their right to gain the access to the competitors’ commercial proposal by arguing that this might lead to an illicit leak of a commercial secret. Moreover, while rejecting the claims of the tenderers, contracting authorities tend to give very abstract and uncomprehensive answers.

This leads to a situation where tenderers launch their legal challenges in from of the courts without having seeing the full picture of the procurement process and, therefore, being refused  an effective protection of their rights as required by the EU public procurement remedies directives. Usually in such cases the situation is rectified by the courts, which tend to disclose the information if it is not a commercial secret. As there is a two-layer procurement dispute system in Lithuania, where access to the court is guaranteed only after the prior submission of the claim to the contracting authority itself, the Supreme Court raised the issue of consistency and rationality of such practice when contracting authorities try to hide the information (usually the winners’) and then such information is only gained at the stage of litigation in court. This makes the procurement dispute at the stage of contracting authority useless. Therefore, the Court referred to Art. 1(1)(3) of Directive 89/665/EEC, Art. 21 of Directive 2014/24/EU and Directive 2016/943/EU and asked the CJEU if:

(i) if the contracting authority must deliver to the requesting tenderer the information comprising the competitors’ tender if such request is related to a legal challenge of such tender and is needed to verify its compliance with the requirements of the procurement documentation, subject to the fact that the claiming tenderer previously asked for this information. It is interesting to note that actually the main point of that question is whether the contracting authorities should be obliged to disclose the required information in order to avoid the mentioned practice that the information is locked during an early stage of the dispute, meanwhile it will still most likely be unlocked when it reaches the court. The hidden idea of the inquiry is that if it appears that the answer to the question is positive and the contracting authorities would be obliged to be almost fully open, then less disputes might reach the courts as the tenderers, after seeing the competitors’ tender, may find out that their claim would be unfounded.

(ii) In case the contracting authority rejects the suppliers’ claim, if its answer must be comprehensive, clear and informative, even though such an answer and its wording may disclose the confidential information. In other words, the Supreme Court wants to know to what extent the contracting authorities may be reserved while replying to the disclosure requests from tenderers, on the grounds that providing a detailed justification for the rejection could in itself constitute a breach of confidential treatment.

(iii) The mentioned provisions of the EU law must be understood as allowing the tenderer to separately challenge before the court the decision of the contracting authority each time it decides to reject the suppliers’ request for access to the competitors’ bid. It has to be mentioned that it is a long-standing national case-law which allows this kind of legal action in Lithuania. So, it seems that the Supreme Court knows the answer because it gave it to all the practitioners itself a long time ago. However, the inquiry sent to the Luxembourg is more an implicit request for verification if such case-law is in line with the EU legal regulation. An additional aspect to this inquiry is that the Supreme Court wanted to know if in the above-mentioned legal situations the tenderer may claim only the denial of the access to information, leaving the rest of possible legal claims, related to the competitors bid, aside. It seems that the Court is prone to think that if the answer to this question was positive, it would most likely mean that such tenderer would not lose its right to challenge these additional irregularities of the competitors’ tender after it receives the relevant information from the contracting authority, even if it is done with the assistance of the court. In other words, this part of the question is related to possible (non)application of limitation of actions.

(iv) Another two questions were related to a procedural law. The Court asked if the national court, hearing the public procurement dispute, in all cases must require the information on the challenged competitors’ tender from the contracting authority, despite its previous actions during the public procurement procedure. And a related question: if Art. 9(2)(3) of Directive 2016/943/EU must be understood as requiring the court, which declined the disclosure of the competitors’ tender to the claimant (but having this information in a file), to take this information into consideration while deciding on a merits of the case. In other words, the Supreme Court is asking whether the courts hearing the public procurement cases and having the information on one of the tenderers’ tender and which they decided to leave locked (meaning that the claimant would not see this data), are under an obligation to examine such information ex officio and take it into consideration while deciding the case. This means that in case of a positive answer to that question, the claimant might still have a chance to win the case, even without seeing the whole materials of a case-file, if there were actual irregularities of the competitors’ tender and the court spotted them.

Regarding the legal consequences of submitting false information and the courts’ discretion to decide upon this

Under the national provisions of the Law on Public Procurement, economic operators can be “blacklisted” if they provide false information to the contracting authority during the procurement procedure. In case of a joint bidding, all of the consortium members are included into this list.

In the case before the Court, one of the members of the consortium that was awarded the public contract was presenting to the contracting authority an inconsistent information regarding its previous financial income. The Supreme Court mentioned that according to the Esaprojekt ruling (above), there is no need to identify the intentional misbehavior of the tenderer in order to reject its bid. The Court reminded that purely negligent actions are sufficient to disqualify the tenderer if such actions could seriously mislead the contracting authority and negatively affect the result of the procurement. Therefore, taking into consideration the facts of a case, the Supreme Court stated that the actions of the mentioned consortium member, in Court’s view, might be considered as negligent.

After the Court came to such a conclusion, on the one hand it most likely must have decided that the tender of the consortium was invalid and that all the members were blacklisted. On the other hand, the Court was stopped from moving towards this legal direction because of two reasons. Firstly, the contracting authority was of the opposite opinion. It did not hold the tenderer negligent and neither it considered the consortiums’ given information as false. Therefore, the Court had a doubt if it can decide on its’ own initiative completely opposite to the direct will of the contracting authority. Secondly, these doubts were amplified by the recent findings of the CJEU in the above-mentioned Delta and Meca cases, where the Court of Luxembourg emphasized that it is a contracting authority, and only it, which is empowered to decide regarding the reliability of the economic operator. In the light of these conclusions, the Supreme Court decided to stay proceedings and request for explanation from the CJEU on the scope and limits of the discretion of national courts in such legal situations.

Besides, the Supreme Court raised a question on whether in case of submission of false information to the contracting authority the consequences of blacklisting must be applied to all members of the consortium. The Court noted that it is natural to expect the possibility of legal risks, related to the participation in a tender (e.g. the need to replace the partner due to its default, etc.). However, the Supreme Court considered that any such risk should be limited to the particular procurement and not be implemented in a way of a total ban on participation for a specified period of time and for all the consortium members. Although the Court did not use this wording, but it implied that this might be disproportionate.

Therefore, the Court asked the CJEU two following questions:

(i) If, in the light of the Art. 57(4)(h) of Directive 2014/24/EU and the Delta case, the national court is allowed, despite the will of the contracting authority, to ex officio decide that the economic operator intentionally or by negligence provided the contracting authority with false information and must have been excluded from the public tender.

(ii) If, in the light of the Art. 57(4)(h) of Directive 2014/24/EU and the principle of proportionality, the disqualification of a tenderer from a procurement procedure with the possible consequences of being “blacklisted” for the specified period of time is applicable against all the members of a joint bidding consortium or just against the economic operator responsible for such misbehavior.

Conclusion

There is no doubt that the Lithuanian Supreme Court triggered important issues related to public procurement practice. The answers from the CJEU are much awaited because procurement professionals face similar situations daily. Some of the areas, such as confidentiality, are extremely different across many EU jurisdictions, albeit all procurers operate under the same EU law on public procurement. Therefore, the interpretation suggested by the CJEU will be used to further unify practice across the internal market.

Dr. Deividas Soloveičik, LL.M

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

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

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

Have a good end of the year and see you in 2020

Dear How to Crack a Nut friends,

As the year (and decade) draws to a close, I hope you will all have the time to unwind and enjoy some quality time with friends, family and (why not?) yourselves. That is my plan, as I wrap up study leave and get ready to go back to ‘normal’ after more than 16 months away from teaching and other duties.

I hope to continue blogging in the new year, but perhaps not as soon or as frequently as I would like to.

For now, I just wanted to thank you all for reading and engaging, and for keeping an eye on the blog despite starts and stops, and its more ‘techy’ reorientation. Seeing that the community has grown despite the more reduced and narrower content offering is most encouraging to me, and definitely a highlight of this year. Thank you for being on the other side of the screen.

Wishing you all the best for the weeks ahead and the festive season,

Albert

Some thoughts on the SMART project's reform proposals for transition to sustainability

The Sustainable Market Actors for Responsible Trade (SMART) project, led by Prof Beate Sjåfjell (University of Oslo) and with the participation of many dear friends and colleagues from the University of Bristol and beyond, has published a first report presenting its reform proposals aimed to support the transition to sustainability and is encouraging feedback.

Following that invitation to engage with their proposals, in this post, I reflect on the SMART projects’ transition to sustainability reform proposals (the ‘SMART proposals’), in particular those concerned with public procurement. Everyone is invited to contribute further thoughts and to engage in the debate with the SMART project, which you can do through this online form or by e-mail to smart-admin@jus.uio.no. Engagement at this stage can influence the more detailed proposals that SMART will publish in the first quarter of 2020, on which they announce a further round of public consultation.

General framework

It should be stressed that the SMART proposals, as the project more generally, 'employ the broadly recognised definition of sustainability as securing the social foundation for humanity now and in the future within planetary boundaries – encapsulated in the goal of a safe and just space for humanity' (at 6). This is broader than alternative approaches to sustainability that conceptualise it as the ability of satisfying current needs without jeopardising the ability of future generations to satisfy their own, and the concept is explored in detail in another SMART document (see here).

The SMART proposals have the ‘aim to make it possible and easy for business and finance to create value in a sustainable manner, and for products to be produced and consumed in a way that contributes to securing a safe and just space for humanity within planetary boundaries. As such, [their] reform proposals concern the EU as a global actor, and the EU as a legislator and policymaker’ (at 5, emphases in the original). Moreover, it is stressed that the SMART ‘reform proposals are interconnected. The proposals concerning business are prerequisites for the proposals concerning finance and products, forming the basis also for more sustainable investments and lending, and more sustainable private and public consumption. In turn, the proposals concerning finance and products may act as enforcers and drivers for the timely and successful implementation of the changes we suggest in the way business operates’ (at 8).

The set of recommendations is thus mainly oriented at changing, but not substituting or significantly re-regulating, existing markets through a shift in incentives for economic and socio-political actors. The proposals are indeed conceived as a set of interlinked alternative incentives to what is seen as the main cause of unsustainable business practices: shareholder primacy, and the fact that ‘this norm results in pressure on decision-makers in those companies to maximise returns for investors, especially shareholders’ (at 7).

This evidences the strong influence of corporate governance scholarship and approaches on the project as a whole, with the relative exception of the international trade-related aspects, which follow a different logic of inter-governmental and multilateral negotiations. It also clearly signals that the SMART proposals cannot be seen as radical or disruptive, but rather incremental and sometimes rather modestly incremental. While this has a clear rationale in trying to facilitate adoption by policy-makers, and in particular the European Commission, the general approach could also limit the potential upside of the much needed transition to sustainability by not including more radical proposals—eg such as enacting new legislation prohibiting specific types of products or activities, or introducing heavy environmental corporate and consumer taxes, as well as sanctions for specific unsustanaible behaviour—which perhaps fall outwith the remit of the project, with the exception of the chapter on finance, which discusses ‘brown’ penalising charges against specific non-sustainable investments (at 17).

Somehow, despite framing the proposals in terms of incentives, it seems like most of the proposals concentrate on non-economic incentives, with the relative exception of trying to boost market demand for sustainable products, in particular in the context of procurement (see below). To my mind, this is a significant limitation of the ensemble of proposals, as they still largely hinge on soft incentives and do not seem to put the necessary focus on much more intense public intervention in a manner that can create effective short-term changes in consumption and production patterns. For a project that is normatively premised on market failure—in particular, in the context of the market for corporate control—such an approach is perhaps surprising. Given the repeated indications that some of the existing problems derive from limited or non-enforcement of current rules, there is surprisingly little in the SMART proposals by way of institutional development and capacity building for national enforcement agencies.

The other main shortcoming of the project is perhaps the absence of proposals in terms of public education. Most of the proposals are addressed to regulating the behaviour of corporate entities. However, and this does not make things any easier, the behaviour of those entities (particularly large ones) will only really change if their stakeholders, either in their role as (sustainable) consumers or civil society, have a strong transition to sustainability drive. More thought seems necessary around how to inform, educate and mobilise stakeholders. The SMART project seems to presume that such knowledge and activism not only exist, but are the majoritarian position. Daily events show that, quite the contrary, this is not the case and that there continue to be many a disconnect between expressed opinions and actual (private) unsustainable behaviour. This is a major challenge. Until we are not sustainability-minded consumers and citizens, we will not be able to act as sustainability-minded stakeholders able to maximise the effect of the type of soft incentives on which the proposals rely.

Public procurement related SMART proposals

The proposals concerning public procurement are mainly focused on the ‘products’ element of their triad of priorities. They are premised on the starting point that ‘products sold in the EU must be produced in manner that supports sustainable circular production and consumption. Products are the objects of the linear business models based on overconsumption, and sold to private consumers and public procurers. [Their] proposals aim firstly to broaden and strengthen the EU’s Circular Economy initiative, secondly to make it easier to be a sustainability- oriented consumer, and thirdly to reinforce sustainable public procurement’ (at 5). Therefore, there seems to be a dual lever for the transition to sustainability in procurement. First, a more general promotion of circular economy. Second, a more specific boost of sustainable procurement (on which the SMART project is working more generally).

Accelerated transition to circular economy

This first subset of proposals has the ‘aim to increase efficiencies in production systems, extends the lifetime of products, and promote sustainable consumption. To this end, regulation should enable access to repair, promote the right to repair, and ensure the internalization of the social and environmental risks prevalent in global value chains’ (at 19). The specific instruments that would be deployed to this effect are listed, although in not much detail. One that bears some attention is the proposal to extend ‘eco-design and labelling requirements to include durability, reparability, reusability and recoverability, and also to cover more product types (e.g. textiles)’ (ibid).

Along the same lines already discussed above, this proposal seems to also go down the voluntary/soft incentive road. Labelling and eco-design will only generate a significant impact if there is a significant shift in demand. And although the proposals seek to bolster that demand, both from private consumers (at 20) and public buyers (see below), the question is left unaddressed as to why would those requirements not be made mandatory? Having the opportunity of formulating ambitious proposals to significantly shift the policy-making approach would surely support a bolder take and a recommendation to ban products that do not meet specific requirements of durability, reparability, reusability and recoverability. I would have very much preferred for the SMART proposals to take that more ambitious stance.

Sustainable public procurement

The thrust of the procurement aspects of the SMART proposals has a strong environmental component, in particular in relation to (non)circular consumption, and thus closely corresponds to the formulation of the UN Sustainable Development Goal (SDG) more closely related to public procurement, which establishes as part of the goal to ensure sustainable consumption and production patterns (SDG 12), the aim to ‘promote public procurement practices that are sustainable, in accordance with national policies and priorities’ (SDG 12.7).

The SMART proposals related to public procurement concern three main areas: (1) professionalisation and facilitation of knowledge exchange; (2) supply chain monitoring; and (3) making the legislative environment more 'SPP friendly'. Both (2) and (3) would, in the SMART project’s view, ‘require amendments to Directives 2014/23/EU, 2014/24/EU and 2014/25/EU. Ad hoc regulations need to be adopted to enact further sectoral mandatory legislation’ (at 22). It is worth looking at each of the three proposals in turn.

(1) Professionalisation and facilitation of knowledge exchange

The SMART proposal is for ‘the EU [to] invest significantly in the capacity of contracting officials, procurement strategists and financial auditors by (a) encouraging the institution of Sustainable Public Procurement (SPP) knowledge centres at EU, national and regional levels following the model already provided by virtuous Central Purchasing Bodies; (b) creating a network of knowledge centres working closely together in developing and disseminating best practices on SPP, including through training materials, and in collecting information and data on the uptake of SPP and the difficulties encountered in applying the relevant EU rules, and (c) providing financial and technical assistance targeted to specific SPP formation for ground-level contracting officials' (at 21).

The thrust of this recommendation can but be shared. There is a clear need for environmental sustainability in particular to become a core focus of public sector consumption, and that requires an investment in skills and the development of a more effective knowledge-management system. However, whether this is something that the European Commission is primarily in a good place to do remains dubious. The clear fiasco (whether temporary or permanent) of the Commission’s initiative on large infrastructure procurement evidences that such a centralised but devolved approach to the collection and dissemination of best practices can hardly work. The important barrier of language needs to be addressed in a different manner. Moreover, the initiative on procurement professionalisation also makes it clear that the Commission can only develop a relatively marginal facilitative role, but that the main changes need to be developed and implemented at national level. From that perspective, it would perhaps be preferable to address the recommendations to Member States.

There is, for example, a clear need to promote the domestic adoption and use of the already developed European Green Procurement criteria, as well as a need to educate the domestic procurement workforce and review bodies on the very significant flexibility of the current EU rules (see (3) below). Once more, then, the focus should in my view be on more specific and differently targeted education and continuous professional development proposals, rather than on proposals addressed to the Commission, which may not have the budget or be in the best position to implement them.

(2) Supply chain monitoring

The SMART proposal is that ‘the EU make it mandatory for contracting authorities to map and monitor their supply chains for risks of breaches of environmental and social rules, including those protecting human rights. That the EU takes those breaches seriously, mandating the exclusion from award procedures of those found in violation and the taking of appropriate remedial actions in case of violations during contract performance. That the EU makes it easier for contracting authorities to know about the economic operators having breached environmental and social rules, including those protecting human rights' (at 21-22).

This proposal seems to reflect frustration with the way in which compliance with environmental, social and labour (and human rights) standards is regulated in the current EU rules and, perhaps, in particular in Arts 18(2), 56(1) in fine, 57(4)(a), 69(2)(d) and 69(3), and 71(1) and 71(6) of Directive 2014/24/EU. However, the proposal is, in my view, targeting the wrong governance level.

Reading such rules and taking them into account as a whole—in particular Art 69(3)—makes it plain that the EU rules create an enabling framework for contracting authorities to engage in oversight of their supply chains for risks of breaches of environmental and social rules, including those protecting human rights. Therefore, shortcomings in this area are not a result of regulatory constraints at EU level, but rather of either a lack of political will at domestic level or, more probably, the complexity of such endeavour and the limited resources contracting authorities can dedicate to it. This seems implicit in the final part of the recommendation, which calls for the EU to make ‘it easier for contracting authorities to know about the economic operators having breached environmental and social rules, including those protecting human rights’.

I will be very interested to see how the proposal is further developed at the next stage. I think that this is setting the EU up to fail because the issue of ensuring global compliance within supply chains poses fiendish challenges and, as I have argued elsewhere, both assumes too much capability in the public procurement function and is bound to diminish its effectiveness [see A Sanchez-Graells, ‘Regulatory Substitution Between Labour and Public Procurement Law: The EU’s Shifting Approach to Enforcing Labour Standards in Public Contracts’ (2018) 24(2) European Public Law 229–254].

Related to earlier comments, I think that the extent to which procurement can be used to monitor supply chains will in part hinge on expanded skills and capabilities (as already addressed at (1) above) and, in a much larger part, depend on the development or reinforcement of other mechanisms of public intervention of horizontal application. Just like private consumption, public consumption needs to rely on a broader regulatory framework fostering sustainability and preventing illegal behaviour, rather than be tasked with those goals itself.

(3) Making the legislative environment more 'SPP friendly'

The SMART proposal is that ‘the EU makes the legislative environment more 'SPP friendly'. Contracting authorities must be allowed to require suppliers to have effective sustainability policies in place. A shift is needed from enabling the Member States to pursue SPP to requiring them to buy sustainably by increasing the number of mandatory sectoral legislation and by requiring contracting authorit[ies] to take into account the life-cycle costs associated with their purchases.’

Again, this reflects a double frustration with the regulation of sustainability-enabling mechanisms in the current EU rules and, in my view, in particular with the requirement of the ‘link to the subject matter’ in Arts 42(1) and 67(3), and in relation to the limited uptake of the possibility to rely on life-cycle costing under Art 68 of Directive 2014/24/EU; as well as in the voluntary nature of most sustainability-oriented rules, eg on technical specifications (Art 42), eco-labels (Art 43), or environmental management standards (Art 62).

Once again, this seems to me unfocused. First, because it reflects an obsession with getting rid of the link to the subject matter of the contract that risks throwing the baby out with the bath water. It seems to me indisputable that the 2014 EU public procurement rules have significantly expanded the discretionary scope for the inclusion of sustainability-oriented requirements, in particular concerning environmental sustainability through green procurement. This may not unlock maximum or unlimited room for sustainability considerations (which is debatable), but this does not constitute a main regulatory barrier to a large uptake of more sustainable procurement practices. It could be argued that it is perceived as a major barrier but, in that case, what is necessary is an effort in debunking that myth and in fostering a better understanding of the current rules, which once again goes back to (1) above.

Second, and by the same token, making those provisions mandatory at EU level would not necessarily generate practical changes. Where current structures have not moved despite increased flexibility and discretion, imposing the behaviour as mandatory without addressing the root causes of the immobility would simply result in extended non-compliance or, worse, window-dressing. Thus, in order to generate a practical effect, focusing on enabling further exercises of discretion seems to me preferable to imposing compliance.

Relatedly, advocating for more sectoral legislation imposing sustainability requirements for public purchases only (which is what I understand by the reference to ‘increasing the number of mandatory sectoral legislation’) is undesirable. First, because it generates a ‘feel good’ factor for the public sector without addressing the broader social distortions of allowing for private consumption of the unsustainable goods or services. However large procurement expenditure, sectoral legislation will only cover the smaller part of the economy. If procurement represented 20% of GDP, imposing sectoral product or service-related sustainability requirements would still leave 80% of the economy free from such constraint. Second, and also very important, the creation of such sectoral requirements will fracture (or perpetuate the fracture) between ‘public and private’ markets for equivalent goods and services. This would only result in a reduction of competition for public contracts, a shrinking of the supplier base and worse conditions (in terms of value for money) for the public buyer. Therefore, where sustainability considerations need to reduce or exclude the availability of specific types of goods or services, this needs to be addressed at an economy-wide level, as suggested above re acceleration of the transition to the circular economy.

All in all, any limitations in the uptake of more sustainable procurement seem to me mainly related to issues of procurement workforce skills, public sector dimensioning and knowledge-management. There is significant space for a much larger uptake of sustainable considerations in procurement if recommendations along the lines of (1) above are seriously implemented. In my view, this should be the focus of action in the short to medium term. Advocating for legislative change in a context where there are significant difficulties in consolidating the changes of the 2014 revision and where digitalisation is already driving regulatory and practice changes over the next three years seems to me self-defeating. As does advocating for ‘procurement-only’ interventions.

(4) Excursus: the need to include digital technologies in the scope of the recommendations

One of the aspects I have found missing in the chapter on procurement in the SMART recommendations concerns digital technologies and their potential contribution to more sustainable procurement. As things stand, improving the generation and collection of procurement data, including of the outcomes of earlier procurement exercises, in order to create an evidence base that can then enable the deployment of machine learning and other artificial intelligence techniques to promote more sustainable procurement should be a priority. These are issues I discuss in detail in a recent working paper: A Sanchez-Graells, ‘Digital Technologies, Public Procurement and Sustainability: Some Exploratory Thoughts’ (November 7, 2019). I would be happy to engage with the SMART team if the inclusion of this dimension in their final report was of interest.

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

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.

Golden nugget or poison pill? 'Clearly minor' breach of EU law in the Whistleblower Protection Directive

The recently-adopted Directive 2019/1937 of 23 October 2019 on the protection of persons who report breaches of Union law (aka the ‘Whistleblower Protection Directive’ or WPD) explicitly covers reports of breaches of public procurement law (Art 2(1)(a)(i) WPD)—with a limited exception for defence and security procurement not covered by the relevant EU rules (Art 3(2) WPD and Annex, Part I(A) WPD).

The Whistleblower Protection Directive needs to be transposed towards the end of 2021 (with a further delay to 2023 for covered SMEs). The decisions made by Member States in the transposition of the Whistleblower Protection Directive may generate significant impacts on public procurement practice in the medium term. However, the likely future effectiveness of the Directive hinges on a problematic discretionary provision on ‘clearly minor’ breaches of EU law, on which this blog post will focus.

Background

Implicitly, the coverage of public procurement by the Whistleblower Protection Directive is a recognition of the limitations of the public enforcement of (EU) public procurement law, as well as their private enforcement through the procurement remedies system (despite the Commission’s recent decision not to reform the Remedies Directives…).

Indeed, the recitals of the Whistleblower Protection Directive stress that procurement coverage is necessary

… to enhance the enforcement of Union law on public procurement. It is necessary, not only to prevent and detect procurement-related fraud and corruption in the context of the implementation of the Union budget, but also to tackle insufficient enforcement of rules on public procurement by national contracting authorities and contracting entities in relation to the execution of works, the supply of products or the provision of services. Breaches of such rules create distortions of competition, increase costs for doing business, undermine the interests of investors and shareholders and, in general, lower attractiveness for investment and create an uneven playing field for all businesses across the Union, thus affecting the proper functioning of the internal market (rec 6 WPD, emphasis added).

Therefore, creating (or boosting) national mechanisms to enable whistleblowers to shine a light on potential infringements of EU public procurement law is expected to generate gains on procurement compliance and probity. This is largely aimed at reporting by ‘insiders’, to the extent that there are already other strategies to seek to increase the visibility of procurement information and trigger engagement by civil society and external stakeholders, eg through the new rules on eForms, due to be transposed by end of 2022.

Broadly, the Whistleblower Protection Directive seeks to enhance compliance with EU law, and in particular public procurement rules, by requiring Member States to mandate private and public entities to create new internal and external reporting mechanisms, as well as to afford specific protective measures to (good faith) whistleblowers that report internally or externally, or publicly disclose, breaches of EU law on the basis of information gained in a work-related context. The Directive creates rather granular requirements depending on the size of the private or public sector entity allegedly involved in the EU law breach.

‘Clearly minor’ breaches

In the context of external reporting of suspected breaches of EU (public procurement) law, Art 11(3) of the Whistleblower Protection Directive establishes that

Member States may provide that competent authorities, after having duly assessed the matter, can decide that a reported breach is clearly minor and does not require further follow-up pursuant to this Directive, other than closure of the procedure (emphasis added).

Different to other fields covered by the Directive (eg securities regulation or competition law), I think that this will be the crux of the whistleblowing system in the context of procurement, in particular if Member States opt to designate procurement review bodies as those competent to receive and/or process reports on potential infringements of EU public procurement law—which seems like a rather natural option. However, this would largely amount to a mere broadening of the active standing to launch procurement review procedures.

I would expect most Member States to avail themselves of the discretionary nature of this provision. Thus, I think that the effectiveness of the system will hinge on the provisions of Art 11(3) WPD because external reporting of non-obvious breaches is the most likely focus of (potential) whistleblower activity.

First, because internal reporting mechanisms are unlikely to gain much traction in either private entities (I find it difficult to see how a company that has taken a specific position in the context of a tender would be willing to reverse it due to an internal report, unless it had a very decentralised system to approve the offers) or public entities (again, as the mechanisms of control and decision-making should have already addressed any concerns and, failing that, would have galvanised the public buyers’ position).

It is hard for me to envisage a significant number of inadvertent breaches of procurement law that go undetected and can easily be fixed upon realisation, as is also hard to imagine the possibility of creating a multi-track system whereby concerns harboured by those ‘in the know’ within an organisation can be reported in a manner that results in a significant revision of the situation (barring, perhaps, in the context of very large organisations, or shared mechanisms for intermediate ones).

Second, because very major shortcomings in the probity of the procurement process (ie straight out corruption) or major deviations from procurement law (eg illegal direct awards or ‘cooking’ of the technical specifications or award criteria) should already be covered by other mechanisms, including criminal law. In that context, the main issue is not the administrative responsibility or liability of those involved in the illegality (criminality?), and probably also not (primarily) an issue of work-related retaliation against the whistleblower (which is the core coverage of the protective measures of Art 19 WPD, as far as I can see).

So, unless there is a fear that criminal behaviour is widespread and largely under-reported and under-detected in the field of EU public procurement practice due specifically to limited protections for whistleblowers (which I find a relatively implausible claim), in my opinion, the area of EU procurement law compliance that can probably be practically targeted is somewhat intermediate—ie that of relatively unclear rules of EU public procurement law, of the (mis)implementation of rules in non-observable manner (eg the ‘doctoring’ of evaluation reports), as well as deviations that fall within the area of discretion afforded to contracting authorities.

In those cases, and for the reasons indicated above, the most likely materialisation of any whistleblowing is an external report to the competent authority, which will then have to assess the extent to which the reported breach is (or not) ‘clearly minor and does not require further follow-up’ pursuant to the Whistleblower Protection Directive—ie, presumably, whether the issue of (strict) compliance can be left to the ordinary (if faulty?) enforcement mechanisms for EU (public procurement) law.

Why is public procurement different?

Against that practical backdrop, in my view, the importance of Art 11(3) WPD in the context of procurement stems from the long-lasting discussion of the types of infringements of EU law—ie ‘any breach’, a ‘sufficiently serios breach’, etc—that should trigger relevant consequences; eg the termination of the contract under Art 73 of Directive 2014/24/EU, the ineffectiveness of an awarded contract under Art 2d of the Remedies Directive, or more recently State liability in damages, in the context of the Fosen-Linjen saga (see here).

What constitutes a ‘clearly minor’ breach will need to be somewhat reconciled with the existing rules on procurement remedies. It would seem not only undesirable, but also counter-intuitive, for the Whistleblower Protection Directive to be interpreted in a more stringent way than other rules on procurement remedies. If a public entity could legally follow a course of action under regular administrative and liability rules, why would it be subjected to a more stringent threshold of compliance solely due to the origin of the information/report that prompts the review of its actions and decisions?

Moreover, the application of a common standard would seem a natural consequence of the accumulation of competences for the review of procurement complaints by the same authorities, where this happens. Therefore, as indicated above, it seems to me that the effect of the implementation of the Whistleblower Protection Directive is largely constrained to expanding the active standing to launch procurement review procedures. Whether this can make a significant difference remains an empirical unknown.

Other effects would only be generated if the choices leading to the domestic implementation resulted eg in the attribution of the competence to investigate procurement whistleblowing reports to authorities other than procurement review bodies—but this would create all sorts of practical complications in terms of expertise availability and two-track review procedures, eg in the case of a whistleblowing report concerning a tender in relation to which disappointed tenderers also launch ‘standard’ review procedures.

All in all, then, I think that the likely future effectiveness of the application of the Whistleblower Protection Directive in the field of procurement will hinge on the concept of ‘clearly minor’ breach and its relationship to the current standards triggering ineffectiveness of procurement procedures, awarded contract and/or liability in damages at the domestic level. This is thus perhaps an area where the European Commission could issue interpretive guidance ahead of the transposition deadline of 17 December 2021.

More than meets the eye: La Chimia & Trepte (eds), Public Procurement and Aid Effectiveness (2019) [book review]

I have just finished reading Annamaria La Chimia & Peter Trepte (eds), Public Procurement and Aid Effectiveness. A Roadmap under Construction (Oxford, Hart/Bloomsbury, 2019). 416 pages, £86.40, reading time: 20 hours aprox.

Heart in hand, I must admit that I may not have been tempted to pick up the book if it was not edited by two scholars for whom I have great intellectual admiration and with whom I have long-lasting friendships—and if I was not on research leave and thus, having some more reading time than usual... the snazzy book cover certainly also helped. I would have made a big mistake if I had left the book accumulate virtual dust in my (only growing) to read list, though.

So this unofficial book review (remember, I am friends with the editors) seeks to save you from making that mistake yourself. If you are interested in procurement governance, or even on the broader field of international political economy, you should read this book.

I have found the book to be truly excellent and very thought-provoking, not least because it covers much more than procurement as a conduit for the economic effectiveness of foreign/development aid. For sure, this core preoccupation of the aid community (and a fringe of procurement community) is addressed centrally, thoroughly and authoritatively in the book, including interdisciplinary perspectives from political scientists, economists, lawyers and leading practitioners at international institutions. The book is thus a very valuable source of information and analysis for anyone researching the field. However, the book goes well beyond this.

The book is fascinating because it engages with a wicked problem: how to reconcile multiple regulatory layers driven by a multitude of conflicting normative values, how to find a balance between regulatory complexity and effectiveness of practical interventions, and how to do so in a manner that does not perpetuate inequality or result in regulatory imperialism. In other words, the book ultimately engages with the (impossible) challenge of designing a (perfect) procurement system of worldwide application and capable of delivering a multitude of policy goals on top of the ever present value for money.

Not that the book seeks that goal. However, in assessing legal reforms promoted by the international donor community that implicitly sought ways to achieve that nirvana (through harmonisation, alignment and other, sometimes mutually-contradictory, regulatory strategies) or that were understood as prescribing a ‘magic solution’ for such upgrade of country systems (such as the OECD Methodology for Assessing Procurement Systems, MAPS) , the book is a very effective mirror of the ugly side of procurement reform efforts.

As such, and covering such a polyhedric subject-matter, the book can be read at very different levels or from many different angles, and rewards the reader with a large number of insights that are easily transferable to other (ie non-aid) areas of procurement research and, more generally, public governance. The following are my main take aways. When you read it, please feel free to add yours in the comments section.

I found the book tells a fascinating story about hidden drivers for procurement reform and the pernicious effects they can have. Indeed, the book demonstrates how the goal of improving domestic procurement systems (in developing countries) was not set independently or with a strict concern for regulatory quality, but rather as a demand of international institutions seeking to ‘be able to rely’ on domestic systems in order to foster procurement simplification and to achieve goals of country ownership of the relevant projects.

It also demonstrates how the blueprint of what was considered ‘good procurement’ derived either from the own procurement rules of the international institutions (mostly, multilateral development banks, MDBs) or from half-baked (and misunderstood?) attempts at capturing what defines good procurement regulation (notably, the OECD MAPS, now revised). The book shines a light on the failures of such approaches and queries the wisdom of any similar future attempts. This is something that should not go unnoticed (and I am here thinking, in particular, of the World Bank’s renewed Benchmarking Public Procurement, criticised here). The book offers an unequivocal cautionary tale of the negative spillover effects of badly construed and improperly understood and/or applied regulatory benchmarks. To me, this is one of its big contributions.

From a close perspective, the book demonstrates how ‘increasing aid effectiveness’ was used as an excuse or lever to push for much broader regulatory reforms and how, in turn, this affected international discussions beyond the context of aid and of great relevance to ‘ordinary’ procurement. However, it is very difficult to establish or observe a linear influence between ‘general’ and ‘aid-related’ procurement reforms, and both seem to be part of a melting pot that resulted in significant changes of transnational procurement regulation over the first half of this decade (notably, the new WTO GPA, UNCITRAL Model Law, EU Procurement Package and World Bank Procurement Framework). All these changes evidence different speeds of pendular movements, ranging between constraints on discretion and flexibilisation of procurement regulation, as well as between purely economic and broader policy goals.

From a regulatory perspective, finally, the book also shows how an excessive focus (rectius, obsession) with fighting procurement corruption has resulted in both exceedingly rigid approaches and insufficient regulatory responses. The book documents excesses in the way that draconian anti-corruption measures can freeze frontline decision-makers and prevent them from exercising commercial discretion or risk-taking in the public interest, while leaving the real beneficiaries of corruption unaffected. This is framed in terms of an excessive reliance on agency theory for procurement regulation design. Following from that, the book shows how procurement and its tools (eg debarment) cannot be seen as the one and only regulatory tool, but rather need to be coordinated with the broader institutions of a criminal law and public law system. Failures to do so can, in large part, result from the original blueprint adopted for procurement reform (as mentioned above), as eg the MDBs do not have such a broader regulatory context.

Moving to broader themes of global governance, the book also shows the double standards applied to the assessment of country systems, depending on whether a country is a donor or a partner (ie beneficiary of aid). While developed and international organisations’ procurement systems are largely assessed on the basis of their regulation of procurement, the assessment of developing countries’ has focused more clearly on institutional capacity and on issues of professionalisation. Some of the experiences collected in the book, in particular regarding methods for the assessment of procurement systems’ maturity and for the training of a procurement workforce, could be very useful in the context of eg the European Commission’s current procurement strategy and its initiatives on procurement professionalisation. The analysis in the book also stresses the need to focus system evaluation and institutional development on the basis of procurement outcomes (not processes, or inputs), which in my view is a pending task for all procurement systems, not just those of countries receiving development aid.

Talking about double standards, the book also reports on the resurgence of tied aid and aid conditionality as one more incarnation of the surge in procurement protectionism. The discussion offers some interesting parallels with the analysis of offsets in defence procurement markets and, more generally, with the use of procurement as an industrial policy tool. These are not issues left behind, but rather a constant fight for those advocating free trade, including through procurement, to be consistent when they engage in foreign/development aid or in defence-related procurement, as well as more generally. Given the emerging use of procurement as an ‘Industry 4.0 policy tool’, these issues can only gain even further prominence in years to come.

A final thought the book spurred in me is that perhaps we should, within reason, start making ourselves comfortable with a relatively high level of regulatory complexity, in particular because outcomes-oriented procurement that seeks to achieve the sustainable development goals is a difficult endeavour. What international institutions and countries may need to do is stop trying to find easy fixes through nirvana-like regulatory simplification approaches and rather invest (heavily) in the creation of the required level of competence and capacity in their procurement workforce. This may not seem like a very likely prospect, but perhaps its chances increase if policy-makers and practitioners read this book, and if academics continue to push for practically-implementable procurement reform. So get your copy and enjoy the read.

The Danish Supreme Court’s ruling in the “Road Marking Case”: the end of a joint bidding era [guest post by Heidi Sander Løjmand, MSc]

In this insightful and thoughtful blog post, Heidi Sander Løjmand discusses the hot-off-the-press Judgment of the Danish Supreme Court in longstanding litigation concerned with joint bidding in procurement procedures. As she stresses, this is a ‘must-know’ case for all competition and procurement practitioners, much as the earlier Norwegian SKI Taxi and the related EFTA Court Judgment, because it fleshes out the difficulties and implications of a strict application of competition law in this setting.

The Danish Judgment is likely to mark the end of an era in Danish practice, as Heidi points out, but it will certainly only add fuel to the fire of academic and policy-making discussions about the interpretation and application of Article 101 TFEU in the context of public procurement. I for one, am very grateful to Heidi for making this interesting line of Scandinavian case law accessible in English, as well as for sharp questioning of the legal arguments. 

The Danish Supreme Court’s ruling in the “Road Marking Case”: the end of a joint bidding era

Yesterday, the 27th of November 2019, the Danish Supreme Court delivered its long-awaited judgment in the so-called “Road Marking Case”. The full judgment is available here (in Danish). The Danish Supreme Court found that joint bidding by companies that could have submitted independent bids for several lots of the same tender constituted an anticompetitive agreement between competitors and, as it included an agreement on the price of the tender as well as on the division of the services (share by lots) to be carried out by each of the teaming companies, it constituted a by object violation of Art 101(1) TFEU and the domestic equivalent, Section 6 of the Danish Competition Act. In doing so, the Danish Supreme Court upheld the initial decision by the Danish Competition Council and overturned an intermediate decision by the Danish Maritime and Commercial High Court that had deemed the joint tendering lawful.

1. Background

In 2010, the consultancy firm McKinsey & Company provided the Danish Government with a report on how to increase economic growth through competition. Amongst the suggestions were to consolidate public tenders within the construction and services industries in order to (i) take advantage of potential economies of scale, (ii) to attract foreign companies, and (iii) to apply procurement procedures and tender requirements that encourage efficient operation. Such initiatives would, according to the report, lead to fewer yet bigger and more efficient companies, and thus to a better utilization of economies of scale.

Tender I (2012): In that light, the Danish Road Directorate changed its tender format and published – in 2012 for the first time – an invitation to bid for a consolidated tender comprised of 337 contracts covering 19 different subject areas. One subject area was road marking. The demanded road marking services were divided into five lots/contracts covering different geographical areas. It was possible to submit bids for one or more lots; companies submitting bids for multiple lots could offer rebates not exceeding 20%, compared to the aggregation of their offers for individual lots. The award criterion was the lowest price.

The two road marking companies, Eurostar Danmark A/S and GVCO A/S (formerly LKF Vejmarkering A/S) (hereinafter referred to as Eurostar and GVCO or the parties) decided to team up and submitted a joint bid with a rebate for all 5 contracts via their agreement-based Danish Road-marking Consortium. The consortium was unsuccessful. All 5 contracts were awarded to the competitor, Guide-Lines, who had offered a 20% rebate (it bears mentioning that Guide-Lines would have won all the contracts without the rebate).

Tender II (2013): One year later, Guide-Lines won a similarly structured tender by the Road Directorate regarding road maintenance. As in 2012, Eurostar and GVCO submitted an unsuccessful joint bid via their Danish Road-marking Consortium.

Tender III (2014): Guide-Lines defaulted on two of their road marking contracts (i.e. from the 2012 tender) as they were unable to perform according to the set time and work schedules. As a consequence, the Danish Road Directorate decided to publish an invitation to bid for 3 of the initial geographical lots. The procurement format was similar to the two previous tenders, except this time there was no limit to the size of the rebate. For the third time, Eurostar and GVCO submitted a joint bid through their Danish Road-marking Consortium for all three contracts. If the consortium was awarded one contract, no rebate would be granted. If it won two or three contracts a rebate of 5% or 20% would be granted, respectively. The consortium won all three contracts. It turned out that no other company had submitted a total bid for all three lots, and on one of the lots the consortium’s bid was the only one. Guide-Lines had submitted a bid for two lots with no rebate, and Lemminkäinen for one lot. Guide-Lines filed a complaint with the Danish Competition Council alleging that the joint bid from Eurostar and GVCO constituted an infringement of Section 6 of the Danish Competition Act and art. 101(1) TFEU. 

It is worth noting that Eurostar and GVCO concluded a new consortium agreement for each of the three above-mentioned tender procedures. The civil charges in the present case concerned only the consortium agreement between Eurostar and GVCO in relation to the 2014-tender. The criminal charges that were brought against the parties in 2016 following the Competition Appeals Tribunal’s decision (discussed below), however – remarkably – accuse the parties of having entered into a cartel agreement in the period from primo 2012 to ultimo 2014, thus including the collaboration between the parties in all three tenders. It shall be interesting to see the outcome of the criminal proceedings, not least because individuals engaged in cartel behavior (which is defined very broadly in the Danish Competition Act) face the risk of prison sentences of up to 6 years. Fortunately, the Danish Appeals Tribunal noted in its decision that the joint bidding in question did not amount to a classic cartel.

2. Procedural history

A) Decision of the Danish Competition Council (24 June 2015) [available in full here (in Danish)].

The Competition Council found that Eurostar and GVCO had infringed the prohibition on anticompetitive agreements. Decisive for this finding was that the two companies could have submitted separate bids on at least one lot with their current individual capacity. In addition – though it was not essential for the conclusion – the companies could have expanded their individual capacities so as to bid separately for all three lots. They were therefore to be regarded as competitors in the tender procedure at issue, despite their argument that they were not competitors because they were incapable of submitting individual bids for all three lots, and that this, the total tender, was the relevant benchmark due to the way the procurement procedure was structured.

The Competition Council found that the joint bidding constituted an infringement by object because the consortium agreement was concluded between competitors (debatably the two largest in the industry, that were also subsidiaries of two large corporate groups: SAFEROAD and Geveko AB), and it contained the fixing of a joint price as well as an agreement to share the different geographical lots between the two companies with (allegedly) no pooling of resources etc. Not surprisingly, the Competition Council also found that the agreement did not meet the conditions for exemption under art. 101(3) TFEU.

The parties appealed the decision to the Danish Competition Appeals Tribunal.

B) Decision of the Danish Competition Appeals Tribunal (11 April 2016) [available in full here (in Danish)].

The Danish Competition Appeals Tribunal upheld the Competition Council’s decision but refrained from assessing whether Eurostar and GVCO had – or could achieve – sufficient capacity to submit separate bids on the entire tender. The parties indisputably had the capacity to bid individually for some of the lots and were therefore to be regarded as competitors. In light of this, the Tribunal found that their agreement to submit joint bids eliminated competition between them, and that it infringed art. 101(1) TFEU by object. Like the Competition Council, the Tribunal found that the criteria for exemption under art. 101(3) TFEU were not met.

Once again, the parties appealed the decision to the Danish Maritime and Commercial Court. 

C) Judgment of the Maritime and Commercial High Court (27 August 2018) [available in full here (in Danish)].

Contrary to the decisions of the competition authorities, the Maritime and Commercial High Court found that the agreement between Eurostar and GVCO to submit joint bids did not infringe art. 101(1) TFEU. The Court noted that the tender was structured in a way that favored bids on all three lots, and that the companies’ ability to submit separate bids on some lots could not prevent them from teaming up for the purpose of submitting a joint bid for the entire contract. In the Court’s view, such a restriction on companies’ freedom to carry out their business would not necessarily promote competition.

Since the Competition Council had not provided sufficient proof that Eurostar’s and GVCO’s capacity calculations were inaccurate, the Court found that the parties were unable to independently bid for the entire contract. As a consequence – though it is not explicitly stated – they were not classified as being competitors, and therefore the agreement fell entirely outside of the scope of art. 101(1) TFEU. The competition authorities’ decisions were thus set aside.

Besides the different benchmark for assessing when two companies are competitors in connection to a tender procedure, the Court also stated its view on the Competition Council’s way of assessing companies’ ability to bid independently. The Council did not allow the companies to subtract resources allocated to the servicing of existing key customers, unless written agreements were in place. The Court dismissed this, stating that companies are entitled to take account of such capacity if the expectation of recurring orders is backed by previous experience. It would be commercially irresponsible not to.

This time, the Danish Competition Authorities appealed the judgment. 

3. Ruling of the Danish Supreme Court (27 November 2019)

As already noted, the Supreme Court set aside the judgment of the Maritime and Commercial High Court. It is worth mentioning that during the proceedings, the Supreme Court refused to refer questions to the CJEU for a preliminary ruling as it found the law to be clear. The questions submitted by the parties have not been published, and thus it is not possible to elaborate on the justification of the Court’s refusal.

In general, the Supreme Court gave support to the interpretation applied by the Competition Appeals Tribunal. Initially, the Court confirmed that Eurostar and GVCO would not be treated as competitors if they were incapable of undertaking the services demanded by the Road Directorate independently, and that the basis for evaluating this ability was the requirements of the tender documents. Remarkably, the Supreme Court then stated that all the conditions, which according to the two consortium parties encouraged the submission of total bids—i.e. the terms of the tender (consolidation of previous smaller tenders + option to provide collective rebate) and the history of previous tenders (in which the winner submitted a total bid)—were irrelevant. Because the tender documents objectively allowed companies to bid for one, two or all three lots, the Supreme Court found no basis for the view that the “real contest” was for the total tender, i.e. all three lots. The Supreme Court instead observed that the other tenderers submitted bids for only one or two lots, respectively.

Since it was undisputed that Eurostar and GVCO could have submitted separate bids on individual lots, the Supreme Court found that Eurostar and GVCO were competitors in relation to the tender procedure at issue. On the issue of object/effect, the Supreme Court acknowledged that the agreement between the two companies was entered into with the purpose of submitting a joint bid on the Road Directorate’s tender and to perform the tasks accordingly if the consortium was successful. The Court then went on to state that the agreement did not possess the characteristics of a production agreement, and that it did not foster collaboration between the parties as to the actual performance of the offered road marking services, since the parties had decided ex ante which one of them should operate in the respective geographical areas in each possible outcome (i.e. whether the consortium won one lot, two or three). On this note, the Supreme Court concluded that the consortium agreement was in fact a means to distribute two individual companies’ services – and highlighted the price fixing as well as the market division element – and that the Appeals Tribunal was right in finding that it amounted to a restriction of competition by object. Not surprisingly, the Court also found that the conditions for individual exemption under art. 101(3) TFEU had not been proved to be met.

4. Comment

The Danish Road Marking Case is the second case in Scandinavia to make it all the way to the Supreme Court. In 2017, the Norwegian Supreme Court decided on the much-debated Ski Taxi case, in which two taxi companies had submitted joint bids via a jointly-owned administrative company for a number of years (for comments on the case, see e.g. A Sanchez-Graells, “Ski Taxi: Joint Bidding in Procurement as Price-Fixing?” (2017) 8(7) Journal of European Competition Law & Practice 451–453, and I Herrera Anchustegui, “Joint bidding and object restrictions of competition: The EFTA Court’s take in the ‘Taxi case’” (2017) 1(2) European Competition and Regulatory Law Review (CoRe) 174-179).

One would like to believe that, with these cases, the boundary between legal and illegal joint bidding should be just about clear-cut; providing legal certainty for the companies thereby allowing them to plan effectively their bidding strategy and behaviour. The reality is, however, that even with the clarity stemming from the mentioned cases, many (essential) issues still remain unsettled and/or ambiguous (as recently pointed put in a joint letter of 1 November 2019 to the European Commission by the Confederation of Danish Industry (DI), the Confederation of Norwegian Enterprise (NHO), the Confederation of Swedish Enterprise (Svensk Näringsliv), the Confederation of Finnish Industries (EK) and the Federation of Icelandic Industries (SI); on file with author)

First. When are two companies to be regarded as (of particular interest potential) competitors in relation to a certain tender procedure? The Supreme Court cases clearly indicate that it suffices to classify two companies as competitors if they are capable of submitting bids on some (the same?) lots, and that it is irrelevant whether they have the ability to submit bids for the entire tender/contract for which they have actually teamed up to bid.

The Danish Supreme Court does not seem to give importance to the distinction between the individual lots, but it follows from the Competition Council’s decision that GVCO had the capacity to submit an individual bid on lot A or B and Eurostar on lot A and B (given the information about the lot sizes, Eurostar could presumably also have bid for lot C instead of lot A and B). Without specifically mentioning that the two companies are competitors because of their ability to submit individual bids on (some of) the same lots, the Danish Supreme Court leaves the impression that if company 1 is able to submit an individual bid for lot A, and company 2 for lot B, the two companies will be competitors in relation to a tender consisting of the two lots A and B. Unless the two lots are very similar in size – and needless to say concern the same product – this logic does not appear very convincing or pro-competitive.

Providing the lots A and B are similar, what is clear from the Danish Supreme Court’s approach is that the possibility of receiving two bids on lot A or lot B is favoured over the possibility of receiving one (joint) bid on lot A and B. For the contracting authority (and society in general), this may not be the most desired (economically efficient) approach, as lot B will have to be re-tendered if company 1 and 2 happen to submit individual bids on the same lot (provided of course that there are no other bidders than company 1 and 2).

Both the Norwegian and Danish Supreme Court cases concerned contracts/lots of the same product. It is not clear-cut how the analysis is to be applied to tenders of e.g. framework agreements or public contracts with various products. Two companies could have subject-specific overlaps but different key operations – a consultancy firm specialized in construction could have in-house architects employed (or have architecture companies as subsidiaries) but want to team up with a specialized, independent architecture company. If a tender is divided into lots, one of which concerns architectural services, would such an overlap in competencies lead to the conclusion that the consultancy firm and the architect are competitors, because of their ability to bid for the “architecture lot”? Or should they be viewed as non-competitors in relation to the entire tender/or to the demanded consultancy services of which architecture services may just be a part?

Second. The Danish Supreme Court did not consider the capacity assessments put forward by the parties or the Competition Council in order to prove the companies’ (in)ability to submit individual bids. It is therefore uncertain whether the parties’ calculations had been sufficient to prove their lack of individual abilities, if the benchmark had been the entire tender as in the Maritime and Commercial High Court’s view. It is going to be very interesting to see how far the assessment of a company’s “real and concrete possibilities” to expand its capacity in order to submit a bid (on a single lot!) will be stretched. Indeed, if the standard follows that of the Competition Council in the Road Marking Case (which however concerned the ability to expand in order to bid for the entire tender, not single lots) it seems many companies are likely to be viewed as potential competitors for future procurement tenders.

Third. It remains undecided how the use of sub-contractors affects the competition assessment. If it is common to use sub-contractors, should two companies be classified as competitors if they could submit individual bids with the use of (non-competitors) as sub-contractors? In a case for the Norwegian Competition Authority (Vedtak V2009-17 – Gran & Ekran AS og Grunnarbeid AS [available here (in Norwegian)], the company Gran & Ekran could perform only 8% of the tasks required in the tender. The fact that the company had contacted a sub-contractor with a view to submit a bid for the entire tender, however, indicated to the competition authority that it was a potential competitor to the company Grunnarbeid. Though the case is not a straight-forward joint bidding case as it concerned a reciprocal sub-contracting arrangement between Gran & Ekran and Grunnarbeid (and was assessed ex post with the knowledge that both parties in fact submitted separate bids on the entire tender with each other as sub-contractors, and thus were de facto actual competitors), it raises the question whether – in a “more traditional” joint bidding case – a company with such a limited ex ante competence to bid risks being considered a potential competitor for a tender (lot!?) to which 92% of the tasks must be performed by sub-contractors?

Fourth. The relevance of whether the companies submitting a joint bid are competitors in the market “outside of” the particular tender appears ambiguous. The Danish Supreme Court observed in its commented Judgment that Eurostar and GVCO were amongst the biggest Danish undertakings in the road marking industry at the time the Road Marking Consortium was established and the joint bid submitted, and that they were active in the same market and at the same level of the value chain. Thus, it is apparent that they were competitors in the traditional relevant market; but (why) does this matter?

In a recent case for the Danish District Court [Retten i Glostrup, case 15-10950/2017 Bjerregaard Sikkerhed, available here (in Danish)] two companies’ (lack of) competitive relation outside of the tender procedure was determinative for the conclusion. The company Bacher Logistics (formerly Four Danes) submitted a bid for an entire tender (i.e. 5 lots of various work wear and logistics) with the company Bjerregaard Sikkerhed as a sub-contractor. Bjerregaard Sikkerhed, however, also submitted an independent bid for one of the lots, and thus the two companies were de facto competitors for that lot. The two independent bids from the companies on that specific lot were identical. Nevertheless, the Court found that – with the evidence presented – this behavior did not amount to a restriction of competition. The conclusion rested on mainly three arguments:

i)               since the companies were specialized in different products/services (specialist wholesaler within safety footwear vs logistics), they were not normally competitors;

ii)              there was nothing unusual about the commercial practice of submitting bids based on prices/product information from sub-contractors; and

iii)            it was unlikely that the sub-contractor would have been able to submit a better bid.

 As with the Norwegian case mentioned above, this case is not a “straight-forward” joint bidding case, yet it opens for a discussion of the impact that the competitive relation outside of a specific tender may have for the assessment of the companies bidding behavior.

Fifth. As regards the size and number of the teaming companies, one could in the light of the Maritime and Commercial High Court’s approach wonder: if two consortium parties are amongst the biggest companies (no. 1 and 2, or 2 and 3) in a highly-concentrated industry, and none of them could bid individually for a contract, what is the likelihood of other market participants being able to? Presumably, less likely. Would the acceptance of a joint bid between these two companies then not lead to the conclusion that all of the industry’s companies could have teamed up to submit one joint bid without conflicting with the competition rule, because none of them could be regarded as competitors in relation to the tendered contract? No. Though it does not appear from any the mentioned cases, a joint bidding arrangement may restrict competition if it involves more companies than it is objectively necessary to submit a bid, even if the companies are not competitors in relation to the specific tender.

The requirement of a joint bid being “objectively necessary” also raises – in light of the Road Marking Case – the question of whether account should be taken of the size/market share/market power of the teaming companies. Would it have been objectively necessary that the allegedly two largest companies teamed up, even if they were incapable of submitting individual bids? What if the two companies could have submitted bids in competition with each other by teaming up with any of the industry’s smaller enterprises; should they be regarded as competitors because of that possibility? Can and should competition law impose such a “less restrictive means” approach to determine the legality of joint bidding, and if so should it be applied to determine whether two companies are competitors or whether the restriction is by object or by effect for the purposes of art. 101(1) TFEU, or perhaps reserved for whether exemption is possible under art. 101(3) TFEU?

Sixth. An issue that has not been given much attention in the mentioned cases is the risk of achieving static efficiency as opposed to dynamic, when assessing the legality of a joint bid with a sole focus on the particular tender procedure at issue. Such an approach risks neglecting the possible spill-over effects that may affect the broader market on which the companies operate, including for example higher (joint) concentration. Of course, one may argue that if there is an expectation that consortium members will bid jointly for future contracts, the industry’s other companies will (need to) team up in order to effectively compete against that consortium. This may promote economic efficiency, if the (likely) fewer bids are more competitive than any individual bids would have been; thus, such promotion of a more concentrated industry structure (in the bidding market) may not sit as awkwardly together with competition policy as would appear at first sight. One could, however, wonder whether this type of structural assessments belong to the enforcement of the prohibition of anticompetitive practices rather than e.g. merger control, as joint tendering in one occasion does not necessarily imply joint tendering for future contracts.

More generally, this line of argumentation raised one of the main questions in the Road Marking Case: Do fewer bids necessarily equal a restriction of competition when such could provide the public authority with a higher (or equivalent) value-for-money than individual bids? Having in mind that the goal of competition law is to promote economic welfare (for the consumers), and that the mean to achieve this goal is effective competition, it would be useful to obtain further clarity on how exactly “effective competition” is to be understood in a public procurement context, and how the static welfare of a contracting authority stemming from one tender procedure is to be weighed against the dynamic welfare of other contracting authorities and consumers in its broader sense.

Seventh. A different but somewhat related topic, which the cases do not provide clarity on, is whether and/or when joint bidding constitutes an infringement of competition law by object or by effect; and how much detail and effort is needed to establish an object infringement. In the Road Marking Case both the competition authorities and the companies used AG Bobek’s fish metaphor (Opinon of 5 September 2019 in Budapest Bank and Others, C-228/18, EU:C:2019:678, para 51) to support their respective views.

The companies claimed that, although the consortium agreement perhaps looked like a fish and smelled like a fish, it possessed so many characteristics different from a fish that in order to qualify it as such, a detailed examination (of its effects) should be carried out. Of course, they also argued the obvious; since joint bidding can have pro- as well as anticompetitive effects on competition, such behavior does not categorically fall into “the object box”. In fact, because of its ambivalent effects, joint bidding should always require a detailed analysis as to the effects on competition.

Not surprisingly, the competition authority argued to the contrary. In their view, the consortium agreement looked like a fish, smelled like a fish, and behaved like a fish; and no circumstances in the market could convincingly question the (likely) anticompetitive effects of such a fish. It was a price fixing and market sharing agreement between competitors, and because such have long been classified as object restrictions, no detailed analysis was needed to establish that it was in fact a fish. The only plausible object of the agreement was to restrict competition. As revealed, the Danish Supreme Court supported the authority’s interpretation.

Clearly, the parties and the competition authority viewed the agreement very differently. Some may argue that at first glance their different approaches seem to fit nicely into “the more economic” vs “the orthodox” approach to competition law enforcement. The authority seemed to follow the rather stringent approach adopted by the Norwegian Supreme Court and the EFTA Court in the Ski Taxi case, where a joint bidding arrangement was deemed a restriction of competition by object mainly due to its price-fixing element. From an enforcement perspective, this simple yet inflexible approach is not hard to understand; merely observing a price-fixing element between competitors renders a joint bidding arrangement anticompetitive by object, regardless of any legitimate purposes or (likely) pro-competitive effects. The benefits of this approach are that it provides a high degree of legal certainty; it reduces the procedural burden of the competition authorities under art. 101(1) TFEU; and it effectively reverses the burden of illegality to the parties, who must provide sufficient evidence to prove fulfilment of the cumulative conditions in art. 101(3) TFEU to find their joint bidding agreement exempt. This approach, however, also creates risk of type I enforcement errors, i.e. condemnation of conducts that are not anticompetitive, and may lead businesses to refrain from entering into joint bidding arrangements that are not harmful to competition—to the potential detriment of contracting authorities and, ultimately, taxpayers.

The parties in the Road Marking Case did not give “stand-alone” importance to the price fixing element as this is an inevitable element of joint bidding. To correctly assess the restrictive effects of joint bidding one should therefore see the price-fixing element in its rightful context. This led to another principal disagreement in the case; namely, determining which facts and circumstances should be included in the “legal and economic context”, and which should be reserved for the analysis of efficiencies under art. 101(3) TFEU. The companies argued that past experience from comparable tenders revealed that the winning bidder was likely to be found amongst those who submitted bids for the entire tender, and the companies’ legitimately anticipated participation by foreign tenderers to submit such “total bids” because of the Road Directorate’s active marketing efforts in the Nordic countries. These circumstances determined the parties’ bidding strategy and should, according to the parties, be taken into account under the legal and economic context (art. 101(1) TFEU). The authority noticed that the companies’ ability to provide a “more competitive bid” (i.e. a “more likely to win” bid) could only be assessed under art. 101(3), as the ability to bid is the determinative factor under 101(1) TFEU, not the ability to win, and objectively it was not a requirement that tenderers submitted “total bids”. Again, as already declared, the Danish Supreme Court upheld the authority’s approach, leaving much to be desired from a commercial bidding strategy perspective.

It is correct that it was objectively possible to submit bids for one or several lots, and that the consortium parties could in fact have done so independently. The problem is that in reality no company (except in certain cover price cases) submits bids merely to participate in public tenders because of the costs involved; they bid to win. If they assess that there is no (or a low) chance of winning, they will refrain from bidding. The Maritime and Commercial High Court acknowledged this commercial reality of the companies, and though the Court repealed the case primarily because the parties were not competitors (in relation to the entire tender), it also noted that the Competition Appeals Tribunal had failed to carry out the necessary, concrete assessment of the agreements’ purpose and character so as to conclude with sufficient clarity that it had the object of restricting competition. Whether the Maritime and Commercial High Court would have repealed the case if the companies had been found to have the ability to individually submit bids for the entire tender, is questionable.

The Supreme Court found that, in the given market settings, the consortium agreement by its very nature had the potential to restrict competition, and thus it was unnecessary to demonstrate any actual anti-competitive effects on the market. Neither the parties’ subjective purpose of submitting a more competitive bid, nor the fact that the collaboration happened openly, could change this.

The questions and issues highlighted above are by no means exhaustive, but already demonstrate the complexity of the enforcement of competition law in the context of public procurement. Further topics within the joint bidding sphere are equally interesting (and unclear), for example; the possibility of joint bidding arrangements fulfilling the conditions for exemption under art. 101(3) TFEU; the burden of proof and usage of the proof proximity principle in regards to the assessment of companies’ (lack of) capacity to bid individually; the substance of the profitability test when assessing whether it constitutes a sustainable business strategy to expand company capacity; the relevance and significance of ex ante vs ex post facts; the limits on information exchange between the companies during the different stages of the tender process; the relevance and application of auction theory; the relevant market and competitor-analysis when applying the de minimis, the qualification of illegal joint bidding as cartel behavior that may be faced with criminal charges; etc.

Needless to say, the Road Marking Case limits the possibility for companies to bid strategically with each other; or at least it makes clear that such collaboration must involve some integration of resources/competencies. A prospective need to (maybe) pool resources if needed during the contract period does not suffice, if the market (in this case geographical lots) has been divided between the parties ex ante. The case, however, not only offers a cautionary tale to companies but also to contracting authorities when it comes to procurement design (as did the SKI Taxi case, as discussed by Sanchez-Graells in this blog). Clearly, the contracting authorities have very limited scope to utilize the benefits of potential bidders’ economies of scale, if at the same time, they decide to divide the tender into lots.

Looking at the future, it is worth stressing that the detailed Danish Guidelines on joint tendering [available here (in English)]: were amended – in a less than convincing way – to reflect the judgment of the Maritime and Commercial High Court. In light of yesterdays’ Supreme Court judgment, the Danish Competition and Consumer Authority may simply pick out the few comments reflecting the High Court’s stance and change the guidelines back to how they used to be.

Heidi Sander Løjmand, MSc

Heidi Sander Løjmand is a PhD Researcher at the University of Southern Denmark (Law Department). In her PhD she explores the approach to joint bidding under art. 101(1) TFEU, in particular in the Nordic Countries. She holds a master’s degree in Business Administration and Commercial Law (law and economics) from Copenhagen Business School, and has previously worked in legal practice. You can connect with Heidi via LinkedIn: https://www.linkedin.com/in/heidi-sander-l%C3%B8jmand-ba41513b/.

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

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).

10 years on, the CJEU creates more uncertainty about the (in)divisibility of public powers and economic activities in public procurement (C-687/17 P)

© F. Antolín Hernández/Flickr.

In its Judgment of 7 November 2019 in Aanbestedingskalender and Others v Commission, C-687/17 P, EU:C:2019:932 (the ‘TenderNed’ case), the Court of Justice of the European Union (CJEU) rejected the appeal against the earlier Judgment of the General Court (GC) of 28 September 2017 (T-138/15, EU:T:2017:675) and thus left intact the GC’s upholding of the European Commission’s finding that ‘e-procurement was a service of general interest, and not an inherent economic activity, which could be commercially exploited so long as the State did not offer that service itself’ (T-138/15, para 108, for discussion see the earlier comment in this blog).

However, in TenderNed, the CJEU did not rely on the consideration of e-procurement as a service of general interest as such (which is a less than persuasive argument), but rather on the basis of its persistently confusing case law on the separability of economic activities and those connected with the exercise of public powers [for discussion, see A Sanchez-Graells & I Herrera Anchustegui, 'Revisiting the concept of undertaking from a public procurement law perspective – A discussion on EasyPay and Finance Engineering' (2016) 37(3) European Competition Law Review 93-98; and, more in depth, A Sanchez-Graells, Public Procurement and the EU Competition Rules (2nd edn, Hart 2015) ch 4].

The reasoning followed by the CJEU deserves close analysis, as it once again relies on the artificial indivisibility or interconnection between the economic and non-economic activities carried out by an entity tasked with a public procurement role; as it already did, initially in 2006, in FENIN v Commission, C-205/03 P, EU:C:2006:453; and 10 years ago in Selex Sistemi Integrati v Commission, C-113/07 P, EU:C:2009:191. Remarkably, this is another CJEU Judgment without Advocate General Opinion, despite the complexity of the issue and the far-fetched potential implications of the case.

Indeed, the way the TenderNed Judgment recasts the applicable (in)divisibility test is less than clear cut and can thus create renewed difficulties for the analysis of predominantly economic activities carried out by entities with some public powers—or tasked with an SGEI involving them—which is increasingly the case of central purchasing bodies [such as eg the English NHS supply chain management entity; as briefly discussed in A Sanchez-Graells, 'State Aid and EU Public Procurement: More Interactions, Fuzzier Boundaries' in L Hancher & JJ Piernas López (eds), Research Handbook on European State Aid Law (2nd edn, Edward Elgar 2020) forthcoming, section 8].

Background to the TenderNed case

In simple terms, the case concerned the controversial decision by the Dutch government to intervene in the market for the provision of electronic procurement platform services through the creation of TenderNed—an in-house e-procurement platform run by PIANOo, the tendering expertise centre for the Dutch government.

Prior to the creation of TenderNed, private providers of e-procurement services had been offering their services to Dutch contracting authorities. The creation of TenderNed and the offering of services free of charge to contracting authorities by this in-house entity logically killed the e-procurement services industry (or a part of it), which triggered the litigation.

As explained in more detail by the CJEU,

TenderNed offers a number of functionalities, made available to contracting authorities and special sector entities … free of charge. It provides the following functionalities:

– a publication module, which can be used for the publication of tender notices as well as associated tender documents (“the publication module”);

– a tendering (submission) module, offering functionalities such as the exchange of questions and answers, and the uploading and downloading of tenders and bids. That module also includes a “virtual company” section in which economic operators can introduce and manage their data (“the submission module”);

– an e-guide, which supports interested parties in using TenderNed (“the e-guide”) (C-687/17 P, para 3).

However, in providing the relevant background, the CJEU glosses over one aspect that is particularly damaging to private providers of e-procurement services, as not only is the availability of TenderNed free of charge, but contracting authorities are also obliged to use some of TenderNed’s functionalities (what the CJEU calls the “publication module” and the GC had earlier described as the “notice board”). Indeed, as explicitly stated in the TenderNed website itself: ‘All Dutch authorities are obliged to publish their national and European tenders on Tenderned’s announcement platform’. It is also clear that contracting authorities can then decide whether ‘businesses must submit their offer digitally in TenderNed’.

This stems from the fact that, as explicitly established under Dutch law, ‘while the Netherlands legislature expressly considered the publication module to be a service of general economic interest, it did not concern itself in any way with the question of whether the submission module, as an economic activity, was of general economic interest or not. Indeed, it considered that part of TenderNed’s activities to be a “simple” economic activity’ (as argued by the appellants; see C-687/17 P, para 25).

In functional terms, the unavoidable use of TenderNed for the publication of the mandatory tender notices works as an anchor for contracting authorities, which will have a strong incentive to rely on the rest of TenderNed’s free functionalities rather than pay for separate e-procurement services (even if, at least theoretically, they were of a higher quality). This creates an important issue that would be assessed as bundling under competition law, were these rules applicable. Any such argument, however, as well as the main argument on State aid in the TenderNed case, rely on the analysis of whether the entity providing the services (TenderNed) is an undertaking or not.

Succinctly, the relevant test to determine whether an entity is or not an undertaking relies on the analysis of whether it is engaged in an economic activity or not; as competition and State aid rules apply to economic activities, but not to the exercise of public powers. And this is the crux of the TenderNed case: the CJEU’s recast and application of its case law on the (in)divisibility of public powers and economic activities carried out by the same entity.

As the CJEU summarises in relation to the appellant’s claim, the issue requires determining whether:

a simple ‘connection’, even if it is a connection by their nature, by their aim and by the rules to which the activities are subject, is not sufficient to classify those activities as activities falling within the exercise of public powers, if the criterion stemming from the judgment of 12 July 2012, Compass-Datenbank (C‑138/11, EU:C:2012:449), is not to be deprived of its full meaning. The Court of Justice held … that, when an entity exercises an activity which can be separated from the exercise of its public powers, that entity, in relation to that activity, acts as an undertaking, while, if that economic activity cannot be separated from the exercise of those public powers, the activities exercised by that entity as a whole remain activities connected with the exercise of those public powers. According to the appellants, compliance with that criterion is much more difficult than with a mere criterion of ‘connection’ (C-687/17 P, para 13).

It is thus a matter of establishing an appropriate test to assess the intensity and severability of the connection between the public powers and the economic activities carried out by the relevant entity.

The (in)divisibility test in TenderNed

The CJEU recast its earlier case law on this issue as follows:

… in so far as a public entity carries on an economic activity, since that activity is not connected to the exercise of its public powers, that entity, in relation to that activity, acts as an undertaking, while, if that same economic activity cannot, however, be separated from other activities connected with the exercise of public powers, the activities exercised by that entity as a whole remain activities connected with the exercise of those public powers.

The ‘separation’ criterion ... is in fact referred to by the Court ... only in the particular situation where certain activities of a public entity do not, as such, form part of the exercise of public powers and must be considered, in isolation, to be economic activities (C-687/17 P, paras 18-19).

This is another puzzling ‘clarification’ from the CJEU (see also the recent Irgita case, discussed by Janssen & Olsson in this blog), which raises a number of potential interpretive quagmires. The verbose test in para 18 is relatively straightforward: if the different activities carried out by a single entity cannot be separated, they are exempted from competition/State aid law as a whole (as the entity cannot be classed as an undertaking); whereas if the activities are separable (or ‘not connected’, and here lies the catch?) then only the activities that do not involve the exercise of a public power are subjected to competition/State aid law (as the entity is classed as an undertaking in relation to those activities only).

The more concise clarification in para 19 is much more confusing, though. In my opinion, the CJEU’s statement is circular. It makes no sense to state that the test of ‘separation’ is only applicable to activities that ‘do not, as such, form part of the exercise of public powers’ because the whole and only point of assessing whether two sets of activities are separate or not lies in the fact of determining whether some of them are to be considered economic activities. The CJEU seems to indicate that the ‘separation’ criterion is to be applied in a second-tier of analysis, once it is clear that some activities are, in isolation, to be considered economic activities because they ‘do not, as such, form part of the exercise of public powers’. This begs the question what is the first-tier criterion for the relevant analysis.

A very convoluted systematic interpretation of both paragraphs could indicate that the first-tier criterion is that of ‘connection’, whereas the second-tier criterion is that of ‘separation’. This could make some sense as the first-tier would seek to establish whether there is an approximation between two connected sets of activities, whereas the second-tier would assess the intensity (or severability) of such connection. However, a literal interpretation of paragraph 18 dispels the illusion of such possibility, as the CJEU contraposes economic activities ‘connected to’ the exercise of public powers to economic activities that can be ‘separated from’ such exercise of public powers; thus indicating that ‘connection’ and ‘separation’ are used interchangeably for the purposes of the main test.

Therefore, in my view, the recast or clarification of the test in paragraphs 18 and 19 of the TenderNed Judgment brings nothing new (except some scope for linguistic contortion) and the issue continues to revolve around the need to assess the intensity and severability of the connection between the public powers and the economic activities carried out by the relevant entity. Such assessment has been carried out in a notoriously vague manner by the CJEU in earlier cases, and this is no different in TenderNed.

The application of the test in TenderNed

Indeed, in TenderNed, the ‘connection’/’separation’ test is applied in a rather convoluted and three-step process, in a way that overlaps across different steps and creates confusion as to the relevant scope of the analysis. In any case, the most relevant part comes at paragraphs 43 to 45, which state that

43 As regards the submission module, in order to find that there is a connection between that functionality and the exercise of public powers, the General Court held … that … separating the submission module from the publication module and the e-guide, or even removing it entirely from the overall TenderNed framework, would interfere with TenderNed’s activities and undermine the objectives pursued by [the 2014 Public Procurement rules].

44 In that respect, it should be pointed out, on the one hand, that it is apparent from the case-law of the Court of Justice that two activities can be considered not able to be separated when one of them would be rendered largely useless in the absence of the other (see, to that effect, … Compass-Datenbank, … paragraph 41) or where those two activities are closely linked (see, to that effect, … Selex Sistemi Integrati v Commission, … paragraphs 76 and 77). On the other hand, as noted in paragraph 18 of the present judgment, if an economic activity carried out by a public entity nevertheless cannot be separated from other activities connected with the exercise of public powers, the activities of that entity as a whole must be regarded as being connected with the exercise of public powers.

45 It follows that the General Court was fully entitled to deduce from the factual assessments set out in paragraph 43 of the present judgment,… that the submission module cannot be separated from the publication module, so that those two activities must be regarded as being connected to the exercise of public powers (C-687/17 P, paras 43-45, emphasis added).

If we synthesise the CJEU’s reasoning, the TenderNed case comes to say that “when the separation of activities would interfere with the functioning of the entity and undermine the objectives it pursues [at least, as long as they are mandated by EU law], those activities cannot be separated and those activities must be regarded as being connected to the exercise of public powers”.

This test of ‘interference’ or ‘goal undermining’ is most bizarre and difficult to understand. It also seems to introduce an even more light-touch approach than the original ‘separation’ test, which the CJEU explicitly restated in TenderNed as still representing good law (at paragraph 18)—subject to the circular ‘clarification’ (in paragraph 19).

It may be worth revisiting the original factual assessment carried out by the GC at paragraph 51 of its Judgment (to which the CJEU refers in para 43), according to which:

It must be noted that considering TenderNed’s various functionalities in isolation, or reducing TenderNed to one of those functionalities, by regarding them as independent of each other, when they are all indispensable for e-procurement and constitute different facets of one and the same activity, would interfere with that activity and disregard the objective pursued by [the 2014 Public Procurement rules] (T-138/15, paragraph 51).

But, alas, this is another of the largely unsubstantiated analyses that pepper this line of case law. The reasoning of the GC was structured as follows: (1) one of the objectives of the 2014 EU Public Procurement rules ‘is that procurement procedures should be carried out via electronic means throughout the European Union’ and, to that effect, ‘when implementing e-procurement, Member States were obliged to provide guidance and support to contracting authorities and economic operators’ (para 44). (2) ‘TenderNed was created and implemented by the Kingdom of the Netherlands precisely in order to comply with those obligations’, even if it did so ahead of the adoption of the 2014 EU Public Procurement rules and on the basis of draft texts (para 45). It follows that (3) ‘considering TenderNed’s various functionalities in isolation, or reducing TenderNed to one of those functionalities, by regarding them as independent of each other, when they are all indispensable for e-procurement and constitute different facets of one and the same activity, would interfere with that activity and disregard the objective pursued by [the 2014 Public Procurement rules]’ (para 51).

The key issue here is that the GC does not explain, in any meaningful way, why TenderNed’s functionalities ‘are all indispensable for e-procurement and constitute different facets of one and the same activity’. As a matter of fact, the different functionalities are easily separable from a technical perspective and the existence of decentralised e-procurement systems coordinated through a central database (such as in the case of Ukraine’s Prozorro) is definitive evidence of this. The separability of the activities was raised by the appellants and the CJEU summarised their arguments at paragraphs 26 and 27 of the TenderNed Judgment, as follows:

… the Netherlands legislature itself regarded the submission module as distinct from the publication module. Moreover, in the appellants’ view, the day-to-day practical operation of TenderNed confirms that the publication module, on the one hand, can be separated from the submission module, on the other.

In addition, the General Court wrongly held … that it is as a whole that TenderNed assists in achieving the objective of harmonisation and technical integration in the field of public procurement and that TenderNed’s activities as a whole constitute facets of the same activity. The mere fact that two activities contribute to the same objective is not sufficient for them to be considered to be facets of the same activity. The appellants point out, in that respect, that that same activity is carried out in a large number of Member States by private companies (C-687/17 P, paras 26 & 27).

However, confusingly, the CJEU did not take this into account when upholding the GC’s factual assessment (at paras 43-45), which was the third step of its analysis of the ‘connection’/’separation’ of the activities, but rather dismissed it earlier (paras 30-32).

Therefore, the strange salami slicing of the relevant issues by the CJEU leads it to confirm a disputed factual assessment by the GC without engaging with the arguments provided by the appellants to support their views. This could not be more puzzling.

Final thoughts

Not to mince words, I find TenderNed to be another highly-criticisable CJEU Judgment, due to its poor technical foundations and the additional uncertainty it creates for the assessment of the economic and non-economic activities carried out by entities with public procurement functions. The CJEU has further obscured the relevant tests and, in the end, continued to expand the procurement activities beyond the reach of competition and State aid law on the basis of flimsy assessments of separability of activities. To my mind, the litmus test to this approach will come with challenges against the activities of central purchasing bodies. I am not optimistic of the chances of a correction of this defective line of case even then. We will have to wait and see if the right case emerges from national practice and litigation, though.

The public cooperation-saga continues in Irgita [guest post by Dr Willem A Janssen & Erik Olsson, LLM]

Last month, the Court of Justice issued a confusing and potentially revolutionary Judgment in the Irgita case, which concerned the award of a contract to an in-house entity. In this blog post, Dr Willem A Janssen and Erik Olsson, LLM give us a sketch of the deep implications that the case could have and the interpretive complications it is already generating. Their ideas provide plenty food for thought and will probably be expanded in a forthcoming (even) more detailed academic article.

Janssen & Olsson make a very timely reference to another confusing and complicated recent Judgment, that in the TenderNed case, where the position that eProcurement can be classified as an SGEI withstood appeal before the CJEU. Keep an eye on the blog for a comment of that case soon.

The public cooperation-saga continues in Irgita: harmonization, competition & free movement

Many contracting authorities across the European Union (EU) sighed with relief when article 12 of Directive 2014/24/EU was adopted in 2014. After years of lingering uncertainties not solved by the case-law of the Court of Justice of the EU (CJEU), the new rules in article 12 provided more legal leeway and clarity for institutionalized and non-institutionalized cooperation between public authorities. Some perhaps even hoped it would also put an end to legal discussions about in-house and public-public cooperation in the public procurement context. With new laws, however, come new uncertainties. It did not take too long for the CJEU to show that the public procurement law community will still continue to discuss these exemptions in the future—for when a door closes, a window opens. Indeed, the CJEU has once again shaken the foundations of the ‘public house’ exemptions to the EU public procurement rules with its Judgment of 3 October 2019 in the Lithuanian case Irigita (C-285/18, EU:C:2019:829).

After providing a short overview of the Irgita case (Section 1), we scrutinize some of the CJEU’s conclusions and provide an initial mapping exercise to gage their potential implications for future discussions in this post. More specifically, we discuss the third preliminary question about the legality of national rules that limit the scope of the institutionalised exemption of article 12 Dir 2014/24/EU through adjusted or additional criteria (Section 2). We expect, however, that most future discussions will delve into the Court’s answer to the fourth preliminary question, whereby the CJEU’s reasoning seemingly created two new requirements, including that the ‘conclusion of an in-house transaction which satisfies the conditions laid down in Article 12(1)(a) to (c) of Directive 2014/24 is not as such compatible with EU law’, for such provision ‘cannot relieve the Member States or the contracting authorities of the obligation to have due regard to, inter alia, the principles of equal treatment, non-discrimination, mutual recognition, proportionality and transparency’. This position is far from clear and potentially raises far-reaching consequences for the general functioning of article 12 (Section 3). Hence, we discuss – at least - two interpretative issues, namely what the legal relevance of the impact on competition caused by a cooperation is (Section 3.1), and if the fulfillment of article 12’s criteria provides a general exception from EU law (Section 3.2). We also offer some concluding remarks.

1. A short introduction to the Irgita case

The legal context and circumstances of the Irgita case can be summarized as follows. The Lithuanian legislature implemented article 12 Dir 2014/24/EU through Article 10 of the Law on Public Procurement (as applicable on 1 July 2017). This was not a copy-paste implementation. The legislature clearly limited the application of article 12 through additional criteria in both the Law on Public Procurement and the Competition Act (Irgita, par. 8-10). For instance, the scope of article 12 Dir 2014/24/EU was limited by article 10(2) Law on Public Procurement, which required that:

‘an in-house transaction may be concluded only in an exceptional case, when the conditions set out in paragraph 1 of this article are satisfied and the continuity, good quality and availability of services cannot be ensured if they are purchased through public procurement procedures.’

Article 4 Competition Act also contains an additional criterion:

‘when carrying out the assigned tasks relating to the regulation of economic activities within the Republic of Lithuania, entities of public administration must ensure freedom of fair competition’.

The Lithuanian legislature also banned private capital participation in an institutionalised cooperation entirely (Irgita, par. 9). This is an example of an altered implementation of article 12(1)(c), which contrarily does allow some categories of private participation (‘non-controlling and non-blocking forms of private capital participation required by national legislative provisions, in conformity with the Treaties, which do not exert a decisive influence on the controlled legal person’).

The Irgita case takes place within this legal framework. Shortly said, there are two relevant awards of public contracts in this case. Firstly, the municipality of Kaunus awarded a contract for the maintenance and management of plantations, forests and forest parks following a public procurement procedure to Irgita (a private operator) in February of 2014. Secondly, the municipality decided to directly award a contract for similar services to another entity, the publicly-controlled Kauno švare, in March 2016. This latter contractual relationship fulfilled the control-, activities- and private participation-criteria of the institutionalised exemption (i.e. 100% shares, more than 90% of activities for the municipality, etc.). Irgita challenged the validity of the second award in light of the Lithuanian competition provision, whilst acknowledging that the criteria of the institutionalised exemption were indeed fulfilled.

Following a legal battle trough the national courts, the Lithuanian Supreme Court posed questions to the CJEU [as discussed at the time by Dr Deividas Soloveičik in this same blog]. As mentioned above, we consider the third and fourth preliminary questions particularly relevant. 

2. Harmonization of self-organisation

The third preliminary question (part a) considered the discretionary power of the Lithuanian legislature to implement the additional or altered criteria mentioned above in light of article 12 Dir 2014/24/EU. This is also relevant for other Member States, such as Finland, Italy and Poland, which have in their own way also limited the scope of this provision.

We argue that this question requires scrutiny of the harmonisation method of article 12. Milestone cases, such as Rätti (C-148/78, EU:C:1979:110) and Gallaher (C-11/92, EU:C:1993:262), had clarified that the 1) objective, 2) structure and 3) wording of a legal provision are relevant to determine if it concerns total or minimum harmonisation. The latter would leave discretion for national legislatures to introduce additional and adjusted criteria, whereas the former would not.

Amongst other arguments, we argue that it would, for instance, be relevant to consider that a limited implementation of article 12 in fact aids the coming about of the internal market, thereby implying that this provision concerns minimum harmonisation. This is also the approach taken by Advocate-General Hogan in his opinion of 7 May 2019 in Irgita (C-285/18, EU:C:2019:369) [for such a full analysis based on the Lithuanian and Finnish context, see also W A Janssen, ‘Swimming against the Tide: The Harmonisation of Self-organisation trough Article 12 Directive 2014/24/EU’ (2019) 14(3)  European Procurement & Public Private Partnership Law Review 145-155).

Contrary to the Advocate-General, however, the Court does not mention the relevance of the type of harmonisation in article 12 Dir 2014/24/EU, but instead emphasises the following (Irgita, par. 45-46):

‘The freedom of the Member States as to the choice of means of providing services whereby the contracting authorities meet their own needs follows moreover from recital 5 of Directive 2014/24, which states that ‘nothing in this Directive obliges Member States to contract out or externalise the provision of services that they wish to provide themselves or to organise by means other than public contracts within the meaning of this Directive’, thereby reflecting the case-law of the Court prior to that directive.

Thus, just as Directive 2014/24 does not require the Member States to have recourse to a public procurement procedure, it cannot compel them to have recourse to an in-house transaction where the conditions laid down in Article 12(1) are satisfied.’

Despite the granted clarity on the relevant discretion to legislate, it is unclear why this reasoning would provide a conclusive and final argument for the national legislatures to legislate additional or adjusted criteria. Whereas an analysis of harmonisation would provide it, the CJEU’s arguments seem to only be the first step in a more extensive analysis. It supports the long-standing idea that the EU legislature cannot impinge on the discretion of the Member States to organise themselves as they see fit [in accordance with their chosen socio-economic model, as discussed in detail in A Sanchez-Graells, ‘Against the Grain? Member State Interests and EU Procurement Law’, in M Varju (ed), Between Compliance and Particularism: Member State Interests and European Union Law (Springer 2019) 171-189; see chapter 3, W A Janssen, EU Public Procurement Law & Self-organisation: A Nexus of Tensions & Reconciliations (Eleven Publishers 2018) on the development of a right to self-organisation in article 4(2) TEU]. The subsequent argument to be made would be to consider the discretion of national legislatures to legislate. 

The second paragraph above perhaps attempts to make this explicit, but could also be a response to the Advocate-General’s conclusion. Whilst arguing in favour of minimum harmonisation, the Advocate-General surprisingly stated that article 12 could not concern total harmonisation, because it would mean that contracting authorities would be obliged to apply the institutionalised exemption if the criteria were met (A-G’s opinion in Irgita, par. 46). The Court seems to explicitly take the contrary position. More practically, however, the outcome of the Court’s approach or an argumentation based on harmonisation is still the same: the Member States can in principle limit the scope of article 12.

Finally, the CJEU does rightly emphasise two aspects. Firstly, the Court concludes that additional or adjusted criteria cannot result in a limitation of the internal market, namely a violation of the fundamental freedoms and the derived principles (Irgita, par. 48). Secondly, it concludes that the principle of transparency must be interpreted as meaning that the conditions to which the Member States subject the conclusion of in-house transactions must be made known by means of precise and clear rules of the substantive law governing public procurement, which must be sufficiently accessible, precise and predictable in their application to avoid any risk of arbitrariness (see preliminary question 3b in Irgita, par. 57).

3. Issues of cooperation, competition & free movement

In a rather lengthy fourth preliminary question, the Lithuanian Supreme Court aimed to further inquire if the fulfillment of the criteria of article 12(1)(a-c) Dir 2014/24/EU (i.e. control, activities, and private participation) would deem the entire transaction in the Irgita case compatible with the entire body of EU law. The Supreme Court referred in its question to a variety of legal obligations, including to article 2 of Directive 2004/18/EC and 2014/24/EU, articles 18, 49, 56, 106 TFEU, and the case law of the CJEU on institutionalized cooperation (ANAV, Teckal, Sea, Undis Servizi and others). The general gist of the CJEU’s dictum was not surprising (Irgita, par. 64):

‘The answer therefore to the fourth question is that the conclusion of an in-house transaction which satisfies the conditions laid down in Article 12(1)(a) to (c) of Directive 2014/24 is not as such compatible with EU law.’

This conclusion appears correct, because the institutionalized exemption vested in article 12 only exempts the application of Directive 2014/24/EU in which it is included. However, the Court’s reasoning raises various difficult interpretative issues. We have attempted to categorize them into issues relating to (1) competition and (2) free movement. Furthermore, we aim to shed some light on possible interpretations.

3.1. Competition & cooperation

After the CJEU repeated the relevance of the control-, activities- and private participation criteria as stipulated by article 12(1) Dir 2014/24/EU in its answer to the fourth question (Irgita, par. 59), a seemingly new notion appears on the stage in paragraph 62:

‘It must moreover be observed that recital 31 of that directive states, in relation to cooperation between entities belonging to the public sector, that it should be ensured that any cooperation of that kind, which is excluded from the scope of that directive, does not result in a distortion of competition in relation to private economic operators.’

The question can be raised what the significance of this inclusion is. Two potential interpretations seem to be relevant. One more limited, the other rather open-ended. A third interpretation strikes some sort of balance between the two, but is also linked to the free movement rules, and is thus discussed in Section 3.2 below.

1st interpretation: an existing obligation

Paragraph 62 could be a general reference to the already existing private participation criterion of the institutionalised exemption. A similar consideration was included in light of the non-institutionalised exemption, when the CJEU introduced this criterion in the milestone case of Commission/Germany (C-480/06, EU:C:2009:357, par. 47):

‘the principal objective of the Community rules on public procurement, that is, the free movement of services and the opening-up of undistorted competition in all the Member States’

and the Court continued by stating in the same paragraph:

‘that no private undertaking is placed in a position of advantage vis-à-vis competitors’.

In Stadt Halle (C-26/03, EU:C:2005:5), the CJEU referred to such a consideration in relation to the institutionalised exemption (par. 59):

‘Second, the award of a public contract to a semi-public company without calling for tenders would interfere with the objective of free and undistorted competition and the principle of equal treatment of the persons concerned, referred to in Directive 92/50, in particular in that such a procedure would offer a private undertaking with a capital presence in that undertaking an advantage over its competitors.’

This was also interpreted in an expansive manner in Centro Hospitalar de Setúbal and SUCH (C-574/12, EU:C:2014:2004; as discussed by Sanchez-Graells in this same blog). Article 12 sub 1(c) Dir 2014/24/EU is a codification of this ban on private participation, and could thus be a mere reference to the ratio of this article. If such an interpretation is correct, paragraph 59 merely re-emphasises a current obligation and, thus, provides nothing new under the sun. This is further confirmed again in paragraph 61, which would imply that the private participation criterion is indeed relevant, because the Court refers to these principles prior to its reference to competition:

‘As follows, in essence, from paragraph 48 of the present judgment, the fact that an in-house transaction, within the meaning of Article 12(1) of Directive 2014/24, does not fall within the scope of that directive cannot relieve the Member States or the contracting authorities of the obligation to have due regard to, inter alia, the principles of equal treatment, non-discrimination, mutual recognition, proportionality and transparency.’

This interpretation would also fit in well with the last part of recital 31 Dir 2014/24/EU, which the Court did not include in paragraph 62 of its Irgita ruling, and which states that:

‘It should be ensured that any exempted public-public cooperation does not result in a distortion of competition in relation to private economic operators in so far as it places a private provider of services in a position of advantage vis-à-vis its competitors.’ (emphasis added)

If the above were correct, paragraph 62 would contain a simple repetition of an existing obligation. Contrarily, it could be argued that the references in Commission/Germany and Stadt Halle are in fact distinct from the notion that is introduced in Irgita. Whereas these cases refer to an economic operator that can benefit from an exempted contract, the Irgita case concerns a scenario in which the exempted contract could affect competition in a different manner. This is supported by the facts of the Irgita case, which do not refer to a scenario in which private participation was included, because the municipality was a 100% shareholder in the in-house entity. Consequently, it questions why the Court would have included this paragraph in the first place and does not explain why the Court would consider competitive concerns in a scenario between a public-public cooperation and an private operator (public-private) in addition to a competitive scenario between economic operators (private-private). 

2nd interpretation: a new general criterion for the institutionalised exemption

Alternatively, paragraph 62 could generate much more significant consequences if it introduces a new criterion for the institutionalised exemption. It could require cooperating public authorities to consider the impact of their cooperation on the market. This introduction of a ‘distortion of competition’ test could require cooperation authorities to analyse if their presence on the market, should they use the discretion granted by article 12 to engage in market activities up to 20% of turnover, would create a distortion of competition. Questionably, however, this test is already covered by the state aid rules (Arts 106 to 108 TFEU), which aim to prevent such distortions—and a straightforward application of the competition rules (Arts 101 and 102 TFEU) to the in-house entity would also serve the same purpose. Furthermore, it could also mean that the use of exemptions like article 12 decreases the potential volume available on the market, thereby also distorting competition.

This interpretation might in fact make the application of the institutionalised exemption entirely impossible, because such distortion would always exist. It seemingly also undermines the standpoint that the Member States are free to organise their public tasks on the national level through cooperation as they see fit, which finds its roots in, amongst other things, article 345 TFEU, art 14 TFEU, article 4(2) TEU and CJEU cases, such as Remondis (C-51/15, EU:C:2016:985) and Stadt Halle  (see reference above in Sanchez-Graells 2019; Janssen 2018). If anything, it definitely feeds into discussion about the existence of a principle of competition and its effects within EU public procurement law (A. Sanchez-Graells, Public Procurement and the EU Competition Rules (2nd ed, Bloomsbury-Hart 2015).

3.2. Free movement & cooperation

In addition to the competition issues, the most pertinent issue is the relationship between article 12 Dir 2014/24/EU and, amongst other things, the free movement rules. In its answer to preliminary question 4, the CJEU considers in paragraph 63:

‘In this case, it is particularly the task of the referring court to assess whether, by concluding the in-house transaction at issue in the main proceedings, the subject matter of which overlaps with that of a public contract still in force and performed by Irgita, as the party to whom that contract was awarded, the contracting authority has not acted in breach of its contractual obligations, arising from that public contract, and of the principle of transparency; whether it had to be established that the contracting authority failed to define its requirements sufficiently clearly, in particular by not guaranteeing the provision of a minimum volume of services to the party to whom that contract was awarded, or, further, whether that transaction constitutes a substantial amendment of the general structure of the contract concluded with Irgita.’

Prior to this paragraph, the CJEU states that article 12 provides an exemption from Directive 2014/24, and that contracting authorities must ‘have due regard to, inter alia, the principles of equal treatment, non-discrimination, mutual recognition, proportionality and transparency’ (Irgita, par. 61). Again, this paragraph brings about interpretative difficulties for which - at least - two interpretations could be relevant.

1st interpretation: an onerous double test of public-public cooperation

The least favorable interpretation would have a significant legal impact, because it would introduce an onerous double test for public-public cooperation. It would mean that, even though the criteria of article 12 are met, that the first contract awarded to Irgita and the second contract awarded to the in-house entity are still under an obligation to fulfill the requirements of the free movement rules (Irgita, par. 63). One effect of this interpretation would be that an exempted in-house contract would still need to comply with the transparency principle.

This interpretation would go against the idea that the EU Public Procurement Directives, which legal basis is found in the internal market, are in fact a specification of the free movement rules. It is, therefore, often assumed that an exemption of these Directives would automatically also cover the free movement rules. Furthermore, the CJEU clarified already in Parking Brixen (C-458/03, EU:C:2005:605), a case about service concessions, that the criteria of the institutionalized exemption could also be applied under the free movement rules (Parking Brixen, par. 62), thereby implying that this exemption is relevant within and outside Directive 2014/24/EU. Needless to say, this interpretation would defeat the added value of the exemption altogether, because an in-house entity might still not be awarded an in-house contract should a double test indeed exist.

One softer - yet unlikely - interpretation of a double test could be that the principle of transparency would require contracting authorities to announce the fact that they are relying on the institutionalized exemption, and that these entities consider the relevant criteria fulfilled. This would fill a crevice that currently exists, which is the absence of knowledge about exempted contracts, thereby allowing these parties to challenge their legality. It is, needless to say, unknown if this is what the Court intended to refer to as the Irigita case is silent on this issue.

2nd interpretation: a double test only applies where a procurement has been made

A second – and seemingly most favorable - interpretation in which two scenarios are relevant for the free movement principles, would be as follows.

The first scenario in which the free movement principles apply concerns national legislatures that have chosen to limit the scope of the institutionalized exemption at the national level. This has been discussed in Section 2 in relation to preliminary question 3a and b.  Member States can, thus, clearly limit this exemption through national legislation, and will, if they choose to implement such limitations, be subjected to the principles of equal treatment, non-discrimination, mutual recognition, proportionality and transparency. This appears to be a classic application of the principles underlying the free movement rules to national legislation.

The second scenario relates to the relationship between the two contract awards in the Irgita case, which would integrate free movement and competitive issues discussed in this post. It would first require, however, to establish that the CJEU erroneously introduced the concept of ‘in-house transaction’ (Irgita, par. 58) as a separate concept under EU law. The Court appears to grant individual weight to this concept, because its repeatedly refers to it as a independent concept that includes both awards of contract (1. to Irgita and 2. to the in-house entity). The Court then implicitly poses the question if the fulfillment of the criteria of article 12 would exempt both awards from the scope of EU law. Other than phrasing it under the new umbrella of ‘in-house transaction’, this is not a new conclusion if one agrees that both awards of contract require separate scrutiny of EU law. In this light, it is not surprising that the Court states that, despite the fulfillment of article 12, the other award to economic operator Irgita still needs to uphold the principle of transparency, amongst other things in relation to contract amendments. Hence, this individual analysis per contract is then extended by the Court to the relationship between the two contracts.

Accordingly, the principle of transparency requires that it is made clear to a reasonably informed tenderer what is to be expected if they are awarded a contract.  If the second award of contract to the in-house entity undermines this transparency requirement, it would constitute a sort of “after the fact” breach of this requirement with regards to the first award of contract. Such a breach would be contrary to what can be reasonably expected from an economic operator in the first proceeding and, thus, undermine the effectiveness of Directive 2014/24/EU. Consequently, it could be argued that the national court should interpret and apply national contract law to the first contract that was awarded to Irgita based on the reasonable expectation of transparency based on this Directive.

In a national legal order in which reasonable expectations of the contracting parties are an important tool to interpret a contract, a national court could find that the principle of transparency would require a contracting authority to clearly spell out any right for the contracting authority to choose to purchase the services covered by the contract from a different supplier during the duration of the contract. In fact, Swedish courts have on a few occasions found that there is arguably an obligation for a contracting authority to be clearer and more precise in a contract that has been awarded following a public procurement procedure than what would be the case with a ‘normal’ contract (see Hovrätten för Nedre Norrland, case nr. T-678-14 and Hovrätten över Skåne och Blekinge, case nr. 2798-16).

This interpretation of Irgita’s free movement issue fits in the CJEU’s reasoning, when it focusses on the fact that the scope of the second contract “overlaps with that of a public contract still in force” and on whether the contracting authority has “acted in breach of its contractual obligations” (Irgita, par. 63). As a consequence, this interpretation means that the free movement rules would only apply to a scenario that is similar to the Irgita case in which two overlapping contract awards were made. The double test would in such situations basically be limited to the question of whether the contracting authority was transparent enough when it concluded the first contract about their intent to award a second contract for similar services during the term of the first contract. In other words, this obligation would not preclude the contracting authority from using the institutionalized exemption in the future (see comparatively, and perhaps even contrarily, the General Court’s and the CJEU’s ruling relating to the Dutch TenderNED case (C-687/17, EU:C:2019:932) in which e-procurement was deemed a Service of General Interest, and thus that EU law left room for national organization of procurement functions.)

Finally, it is also possible to construe the same scenario for the competition issues discussed in Section 3.1. Despite the general terminology of the CJEU in its reasoning, it could be that the reference to distortion of competition is solely related to the relationship between the two awards of contract in the Irgita case, making its impact significantly less than discussed in light of potential other interpretative scenarios. No conclusive answers can, however, be given at this point in time.

4. Concluding remarks

The above discussion has shown that the cooperation saga in the procurement context continues. It is clear that the Irgita case provides an interesting stomping ground for discussions about public-public cooperation, harmonization, competition and free movement. We have aimed to provide some initial thoughts on this case. More often than not, it has required us to read between the lines and fill interpretative gaps in an attempt to understand the CJEU’s reasoning.

Overseeing this case and its potential major consequences, we are still uncertain if the Court consciously aimed to change the playing field of cooperation or if the different interpretations have simply arisen due to the Lithuanian case-specific circumstances. Time - and perhaps future CJEU cases - will tell, but for now we are nonetheless left to wonder: is there still room for contractual cooperation between public authorities within EU law?

Dr Willem Janssen

Dr Willem A. Janssen is an Assistant Professor of European and Dutch Public Procurement Law at the PPRC and RENFORCE of Utrecht University’s Law School. He published his monograph on 'EU public procurement law & Self-organisation: a Nexus of Tensions and Reconciliations' in 2018 and has published in various international and national journals about public procurement law. He hosts the first Dutch procurement podcast 'Bestek - de Aanbestedingspodcast', is a monthly columnist at Gemeente.nu and is actively involved in improving public procurement law and practices.

Erik Olsson, LLM

Erik Olsson is an attorney and partner at Advokatfirman Kahn Pedersen in Sweden. He specializes in public procurement law. He regularly gives lectures on public procurement and is also a columnist in the Swedish European Law Review. Erik Olsson is one of the authors of Sweden’s leading book on procedural public procurement law, Judicial Review of Procurement – and other remedies under the LOU and LUF (Sw: Överprövning av upphandling – och andra rättsmedel enligt LOU och LUF).

3 priorities for policy-makers thinking of AI and machine learning for procurement governance

I find that carrying out research in the digital technologies and governance field can be overwhelming. And that is for an academic currently having the luxury of full-time research leave… so I can only imagine how much more overwhelming it must be for policy-makers thinking about the adoption of artificial intelligence (AI) and machine learning for procurement governance, to identify potential use cases and to establish viable deployment strategies.

Prioritisation seems particularly complicated, as managing such a significant change requires careful planning and paying attention to a wide variety of potential issues. However, getting prioritisation right is probably the best way of increasing the chances of success for the deployment of digital technologies for procurement governance — as well as in other areas of Regtech, such as financial supervision.

This interesting speech by James Proudman (Executive Director of UK Deposit Takers Supervision, Bank of England) on 'Managing Machines: the governance of artificial intelligence', precisely focuses on such issues. And I find the conclusions particularly enlightening:

First, the observation that the introduction of AI/ML poses significant challenges around the proper use of data, suggests that boards should attach priority to the governance of data – what data should be used; how should it be modelled and tested; and whether the outcomes derived from the data are correct.

Second, the observation that the introduction of AI/ML does not eliminate the role of human incentives in delivering good or bad outcomes, but transforms them, implies that boards should continue to focus on the oversight of human incentives and accountabilities within AI/ML-centric systems.

And third, the acceleration in the rate of introduction of AI/ML will create increased execution risks during the transition that need to be overseen. Boards should reflect on the range of skill sets and controls that are required to mitigate these risks both at senior level and throughout the organisation.

These seem to me directly transferable to the context of procurement governance and the design of strategies for the deployment of AI and machine learning, as well as other digital technologies.

First, it is necessary to create an enabling data architecture and to put significant thought into how to extract value from the increasingly available data. In that regard, there are two opportunities that should not be missed. One concerns the treatment of procurement datasets as high-value datasets for the purposes of the special regime of the Open Data Directive (for more details, see section 6 here), which will require careful consideration of the content and level of openness of procurement data in the context of the domestic transpositions that need to be in place by 17 July 2021. The other, related opportunity concerns the implementation of the new rules on eForms for procurement data publications, which Member States need to adopt by 14 November 2022. Building on the data architecture that will result from both sets of changes—which should be coordinated—will allow for the deployment of data analytics and machine learning techniques. The purposes and goals of such deployments also need to be considered carefully, as well as their potential implications.

Second, it seems clear that the changes in the management of procurement data and the quick development of analytics that can support procurement decision-making pile some additional training and upskilling needs on the already existing (and partially unaddressed?) current challenges of full consolidation of eProcurement across the EU. Moreover, it should be clear that there is no such thing as an objective and value neutral implementation of technological governance solutions and that all levels of accountability need to be provided with adequate data skills and digital literacy upgrades in order to check what is being done at the technical level (for crystal-clear discussion, see van der Voort et al, 'Rationality and politics of algorithms. Will the promise of big data survive the dynamics of public decision making?' (2019) 36(1) Government Information Quarterly 27-38). Otherwise, governance mechanism would be at risk of failure due to techno-capture and/or techno-blindness, whether intended or accidental.

Third, there is an increasing need to manage change and the risks that come with it. In a notoriously risk averse policy field such as procurement, this is no minor challenge. This should also prompt some rethinking of the way the procurement function is organised and its risk-management mechanisms.

Addressing these priorities will not be easy or cheap, but these are the fundamental building blocks required to enable the public procurement sector to benefit from the benefits of digital technologies as they mature. In consultancy jargon, these are the priorities to ‘future-proof’ procurement strategies. Will they be adopted?

Postscript

It is worth adding that, in particular the first and second issues, lend themselves to strong collaborations between policy-makers and academics. As rightly pointed out by Pencheva et al, 'Big Data and AI – A transformational shift for government: So, what next for research?' (2018) Public Policy and Administration, advanced access at 16:

... governments should also support the efforts for knowledge creation and analysis by opening up their data further, collaborating with – and actively seeking inputs from – researchers to understand how Big Data can be utilised in the public sector. Ultimately, the supporting field of academic thought will only be as strong as the public administration practice allows it to be.

Digital technologies, public procurement and sustainability: some exploratory thoughts

** This post is based on the seminar given at the Law Department of Pompeu Fabra University in Barcelona, on 7 November 2019. The slides for the seminar are available here. Please note that some of the issues have been rearranged. I am thankful to participants for the interesting discussion, and to Dr Lela Mélon and Prof Carlos Gómez Ligüerre for the kind invitation to participate in this activitity of their research group on patrimonial law. I am also grateful to Karolis Granickas for comments on an earlier draft. The standard disclaimer applies.**

Digital technologies, public procurement and sustainability: some exploratory thoughts

1. Introductory detour

The use of public procurement as a tool to further sustainability goals is not a new topic, but rather the object of a long-running discussion embedded in the broader setting of the use of procurement for the pursuit of horizontal or secondary goals—currently labelled smart or strategic procurement. The instrumentalisation of procurement for (quasi)regulatory purposes gives rise to a number of issues, such as: regulatory transfer; the distortion of the very market mechanisms on which procurement rules rely as a result of added regulatory layers and constraints; legitimacy and accountability issues; complex regulatory impact assessments; professionalisation issues; etc.

Discussions in this field are heavily influenced by normative and policy positions, which are not always clearly spelled out but still drive most of the existing disagreement. My own view is that the use of procurement for horizontal policies is not per se desirable. The simple fact that public expenditure can act as a lever/incentive to affect private (market) behaviour does not mean that it should be used for that purpose at every opportunity and/or in an unconstrained manner. Procurement should not be used in lieu of legislation or administrative regulation where it is a second-best regulatory tool. Embedding regulatory elements that can also achieve horizontal goals in the procurement process should only take place where it has clear synergies with the main goal of procurement: the efficient satisfaction of public sector needs and/or needs in the public interest. This generates a spectrum of potential uses of procurement of a different degree of desirability.

At one end, and at its least desirable, procurement can and is used as a trade barrier for economic protectionism. In my view, this should not happen. At the other end of the spectrum, at its most desirable, procurement can and is (sometimes) used in a manner that supports environmental sustainability and technical innovation. In my view, this should happen, and more than it currently does. In between these two ends, there are uses of procurement for the promotion of labour and social standards, as well as for the promotion of human rights. Controversial as this position is, in my view, the use of procurement for the pursuit of those goals should be subjected to strict proportionality analysis in order to make sure that the secondary goal does not prevent the main purpose of the efficient satisfaction of public sector needs and/or needs in the public interest.

From a normative perspective, thus, I think that there is a wide space of synergy between procurement and environmental sustainability—which goes beyond green procurement and extends to the use of procurement to support a more circular economy—and that this can be used more effectively than is currently the case, due to emerging innovative uses of digital technologies for procurement governance.

This is the topic in which I would like to concentrate, to formulate some exploratory thoughts. The following reflections are focused on the EU context, but hopefully they are of a broader relevance. I first zoom in on the strategic priorities of fostering sustainability through procurement (2) and the digitalisation of procurement (3), as well as critically assess the current state of development of digital technologies for procurement governance (4). I then look at the interaction between both strategic goals, in terms of the potential for sustainable digital procurement (5), which leads to specific discussion of the need for an enabling data architecture (6), the potential for AI and sustainable procurement (7), the potential for the implementation of blockchains for sustainable procurement (8) and the need to refocus the emerging guidelines on the procurement of digital technologies to stress their sustainability dimension (9). Some final thoughts conclude (10).

2. Public procurement and sustainability

As mentioned above, the use of public procurement to promote sustainability is not a new topic. However, it has been receiving increasing attention in recent policy-making and legislative efforts (see eg this recent update)—though they are yet to translate in the level of practical change required to make a relevant contribution to pressing challenges, such as the climate emergency (for a good critique, see this recent post by Lela Mélon).

Facilitating the inclusion of sustainability-related criteria in procurement was one of the drivers for the new rules in the 2014 EU Public Procurement Package, which create a fairly flexible regulatory framework. Most remaining problems are linked to the implementation of such a framework, not its regulatory design. Cost, complexity and institutional inertia are the main obstacles to a broader uptake of sustainable procurement.

The European Commission is alive to these challenges. In its procurement strategy ‘Making Procurement work in and for Europe’ [COM(2017) 572 final; for a critical assessment, see here], the Commission stressed the need to facilitate and to promote the further uptake of strategic procurement, including sustainable procurement.

However, most of its proposals are geared towards the publication of guidance (such as the Buying Green! Handbook), standardised solutions (such as the library of EU green public procurement criteria) and the sharing of good practices (such as in this library of use cases) and training materials (eg this training toolkit). While these are potentially useful interventions, the main difficulty remains in their adoption and implementation at Member State level.

While it is difficult to have a good view of the current situation (see eg the older studies available here, and the terrible methodology used for this 2015 PWC study for the Commission), it seems indisputable that there are massive differences across EU Member States in terms of sustainability-oriented innovation in procurement.

Taking as a proxy the differences that emerge from the Eco-Innovation Scoreboard, it seems clear that this very different level of adoption of sustainability-related eco-innovation is likely reflective of the different approaches followed by the contracting authorities of the different Member States.

Such disparities create difficulties for policy design and coordination, as is acknowledged by the Commission and the limitations of its procurement strategy. The main interventions are thus dependent on Member States (and their sub-units).

3. Public procurement digitalisation beyond e-Procurement

Similarly to the discussion above, the bidirectional relationship between the use of procurement as a tool to foster innovation, and the adaptation of procurement processes in light of technological innovations is not a new issue. In fact, the transition to electronic procurement (eProcurement) was also one of the main drivers for the revision of the EU rules that resulted in the 2014 Public Procurement Package, as well as the flanking regulation of eInvoicing and the new rules on eForms. eProcurement (broadly understood) is thus an area where further changes will come to fruition within the next 5 years (see timeline below).

However, even a maximum implementation of the EU-level eProcurement rules would still fall short of creating a fully digitalised procurement system. There are, indeed, several aspects where current technological solutions can enable a more advanced and comprehensive eProcurement system. For example, it is possible to automate larger parts of the procurement process and to embed compliance checks (eg in solutions such as the Prozorro system developed in Ukraine). It is also possible to use the data automatically generated by the eProcurement system (or otherwise consolidated in a procurement register) to develop advanced data analytics to support procurement decision-making, monitoring, audit and the deployment of additional screens, such as on conflicts of interest or competition checks.

Progressing the national eProcurement systems to those higher levels of functionality would already represent progress beyond the mandatory eProcurement baseline in the 2014 EU Public Procurement Package and the flanking initiatives listed above; and, crucially, enabling more advanced data analytics is one of the effects sought with the new rules on eForms, which aim to significantly increase the availability of (better) procurement data for transparency purposes.

Although it is an avenue mainly explored in other jurisdictions, and currently in the US context, it is also possible to create public marketplaces akin to Amazon/eBay/etc to generate a more user-friendly interface for different types of catalogue-based eProcurement systems (see eg this recent piece by Chris Yukins).

Beyond that, the (further) digitalisation of procurement is another strategic priority for the European Commission; not only for procurement’s sake, but also in the context of the wider strategy to create an AI-friendly regulatory environment and to use procurement as a catalyst for innovations of broader application – along lines of the entrepreneurial State (Mazzucato, 2013; see here for an adapted shorter version).

Indeed, the Commission has formulated a bold(er) vision for future procurement systems based on emerging digital technologies, in which it sees a transformative potential: “New technologies provide the possibility to rethink fundamentally the way public procurement, and relevant parts of public administrations, are organised. There is a unique chance to reshape the relevant systems and achieve a digital transformation” (COM(2017) 572 fin at 11).

Even though the Commission has not been explicit, it may be worth trying to map which of the currently emerging digital technologies could be of (more direct) application to procurement governance and practice. Based on the taxonomy included in a recent OECD report (2019a, Annex C), it is possible to identify the following types and specific technologies with potential procurement application:

AI solutions

• Virtual Assistants (Chat bots or Voice bots): conversational, computer-generated characters that simulate a conversation to deliver voice- or text-based information to a user via a Web, kiosk or mobile interface. A VA incorporates natural-language processing, dialogue control, domain knowledge and a visual appearance (such as photos or animation) that changes according to the content and context of the dialogue. The primary interaction methods are text-to-text, text-to-speech, speech-to-text and speech-to-speech;

• Natural language processing: technology involves the ability to turn text or audio speech into encoded, structured information, based on an appropriate ontology. The structured data may be used simply to classify a document, as in “this report describes a laparoscopic cholecystectomy,” or it may be used to identify findings, procedures, medications, allergies and participants;

• Machine Learning: the goal is to devise learning algorithms that do the learning automatically without human intervention or assistance;

• Deep Learning: allows computational models that are composed of multiple processing layers to learn representations of data with multiple levels of abstraction;

• Robotics: deals with the design, construction, operation, and use of robots, as well as computer systems for their control, sensory feedback, and information processing;

• Recommender systems: subclass of information filtering system that seeks to predict the "rating" or "preference" that a user would give to an item;

• Expert systems: is a computer system that emulates the decision-making ability of a human expert;

Digital platforms

• Distributed ledger technology (DLT): is a consensus of replicated, shared, and synchronized digital data geographically spread across multiple sites, countries, or institutions. There is no central administrator or centralised data storage. A peer-to-peer network is required as well as consensus algorithms to ensure replication across nodes is undertaken; Blockchain is one of the most common implementation of DLT;

• Smart contracts: is a computer protocol intended to digitally facilitate, verify, or enforce the negotiation or performance of a contract;

• IoT Platform: platform on which to create and manage applications, to run analytics, and to store and secure your data in order to get value from the Internet of Things (IoT);

Not all technologies are equally relevant to procurement—and some of them are interrelated in a manner that requires concurrent development—but these seem to me to be those with a higher potential to support the procurement function in the future. Their development needs not take place solely, or primarily, in the context of procurement. Therefore, their assessment should be carried out in the broader setting of the adoption of digital technologies in the public sector.

4. Digital technologies & the public sector, including procurement

The emergence of the above mentioned digital technologies is now seen as a potential solution to complex public policy problems, such as the promotion of more sustainable public procurement. Keeping track of all the potential use cases in the public sector is difficult and the hype around buzzwords such as AI, blockchain or the internet of things (IoT) generates inflated claims of potential solutions to even some of the most wicked public policy problems (eg corruption).

This is reflective of the same hype in private markets, and in particular in financial and consumer markets, where AI is supposed to revolutionise the way we live, almost beyond recognition. There also seems to be an emerging race to the top (or rather, a copy-cat effect) in policy-making circles, as more and more countries adopt AI strategies in the hope of harnessing the potential of these technologies to boost economic growth.

In my view, digital technologies are receiving excessive attention. These are immature technologies and their likely development and usefulness is difficult to grasp beyond a relatively abstract level of potentiality. As such, I think these technologies may be receiving excessive attention from policy-makers and possibly also disproportionate levels of investment (diversion).

The implementation of digital technologies in the public sector faces a number of specific difficulties—not least, around data availability and data skills, as stressed in a recent OECD report (2019b). While it is probably beyond doubt that they will have an impact on public governance and the delivery of public services, it is more likely to be incremental rather than disruptive or revolutionary. Along these lines, another recent OECD report (2019c) stresses the need to take a critical look at the potential of artificial intelligence, in particular in relation to public sector use cases.

The OECD report (2019a) mentioned above shows how, despite these general strategies and the high levels of support at the top levels of policy-making, there is limited evidence of significant developments on the ground. This is the case, in particular, regarding the implementation of digital technologies in public procurement, where the OECD documents very limited developments (see table below).

Of course, this does not mean that we will not see more and more widespread developments in the coming years, but a note of caution is necessary if we are to embrace realistic expectations about the potential for significant changes resulting from procurement digitalisation. The following sections concentrate on the speculative analysis of such potential use of digital technologies to support sustainable procurement.

5. Sustainable digital procurement

Bringing together the scope for more sustainable public procurement (2), the progressive digitalisation of procurement (3), and the emergence of digital technologies susceptible of implementation in the public sector (4); the combined strategic goal (or ideal) would be to harness the potential of digital technologies to promote (more) sustainable procurement. This is a difficult exercise, surrounded by uncertainty, so the rest of this post is all speculation.

In my view, there are different ways in which digital technologies can be used for sustainability purposes. The contribution that each digital technology (DT) can make depends on its core functionality. In simple functional terms, my understanding is that:

• AI is particularly apt for the massive processing of (big) data, as well as for the implementation of data-based machine learning (ML) solutions and the automation of some tasks (through so-called robotic process automation, RPA);

• Blockchain is apt for the implementation of tamper-resistant/evident decentralised data management;

• The internet of things (IoT) is apt to automate the generation of some data and (could be?) apt to breach the virtual/real frontier through oracle-enabled robotics

The timeline that we could expect for the development of these solutions is also highly uncertain, although there are expectations for some technologies to mature within the next four years, whereas others may still take closer to ten years.

© Gartner, Aug 2018.

Each of the core functionalities or basic strengths of these digital technologies, as well as their rate of development, will determine a higher or lower likelihood of successful implementation in the area of procurement, which is a highly information/data-sensitive area of public policy and administration. Therefore, it seems unavoidable to first look at the need to create an enabling data architecture as a priority (and pre-condition) to the deployment of any digital technologies.

6. An enabling data architecture as a priority

The importance of the availability of good quality data in the context of digital technologies cannot be over-emphasised (see eg OECD, 2019b). This is also clear to the European Commission, as it has also included the need to improve the availability of good quality data as a strategic priority. Indeed, the Commission stressed that “Better and more accessible data on procurement should be made available as it opens a wide range of opportunities to assess better the performance of procurement policies, optimise the interaction between public procurement systems and shape future strategic decisions” (COM(2017) 572 fin at 10-11).

However, despite the launch of a set of initiatives that seek to improve the existing procurement data architecture, there are still significant difficulties in the generation of data [for discussion and further references, see A Sanchez-Graells, “Data-driven procurement governance: two well-known elephant tales” (2019) 24(4) Communications Law 157-170; idem, “Some public procurement challenges in supporting and delivering smart urban mobility: procurement data, discretion and expertise”, in M Finck, M Lamping, V Moscon & H Richter (eds), Smart Urban Mobility – Law, Regulation, and Policy, MPI Studies on Intellectual Property and Competition Law (Springer 2020) forthcoming; and idem, “EU Public Procurement Policy and the Fourth Industrial Revolution: Pushing and Pulling as One?”, Working Paper for the YEL Annual Conference 2019 ‘EU Law in the era of the Fourth Industrial Revolution’].

To be sure, there are impending advances in the availability of quality procurement data as a result of the increased uptake of the Open Contracting Data Standards (OCDS) developed by the Open Contracting Partnership (OCP); the new rules on eForms; the development of eGovernment Application Programming Interfaces (APIs); the 2019 Open Data Directive; the principles of business to government data sharing (B2G data sharing); etc. However, it seems to me that the European Commission needs to exercise clearer leadership in the development of an EU-wide procurement data architecture. There is, in particular, one measure that could be easily adopted and would make a big difference.

The 2019 Open Data Directive (Directive 2019/1024/EU, ODD) establishes a special regime for high-value datasets, which need to be available free of charge (subject to some exceptions); machine readable; provided via APIs; and provided as a bulk download, where relevant (Art 14(1) ODD). Those high-value datasets are yet to be identified by the European Commission through implementing acts aimed at specifying datasets within a list of thematic categories included in Annex I, which includes the following datasets: geospatial; Earth observation and environment; meteorological; statistics; companies and company ownership; and mobility. In my view, most relevant procurement data can clearly fit within the category of statistical information.

More importantly, the directive specifies that the ‘identification of specific high-value datasets … shall be based on the assessment of their potential to: (a) generate significant socioeconomic or environmental benefits and innovative services; (b) benefit a high number of users, in particular SMEs; (c) assist in generating revenues; and (d) be combined with other datasets’ (Art 14(2) ODD). Given the high-potential of procurement data to unlock (a), (b) and (d), as well as, potentially, generate savings analogous to (c), the inclusion of datasets of procurement information in the future list of high-value datasets for the purposes of the Open Data Directive seems like an obvious choice.

Of course, there will be issues to iron out, as not all procurement information is equally susceptible of generating those advantages and there is the unavoidable need to ensure an appropriate balance between the publication of the data and the protection of legitimate (commercial) interests, as recognised by the Directive itself (Art 2(d)(iii) ODD) [for extended discussion, see here]. However, this would be a good step in the direction of ensuring the creation of a forward-looking data architecture.

At any rate, this is not really a radical idea. At least half of the EU is already publishing some public procurement open data, and many Eastern Partnership countries publish procurement data in OCDS (eg Moldova, Ukraine, Georgia). The suggestion here would bring more order into this bottom-up development and would help Member States understand what is expected, where to get help from, etc, as well as ensure the desirable level of uniformity, interoperability and coordination in the publication of the relevant procurement data.

Beyond that, in my view, more needs to be done to also generate backward-looking databases that enable the public sector to design and implement adequate sustainability policies, eg in relation to the repair and re-use of existing assets.

Only when the adequate data architecture is in place, will it be possible to deploy advanced digital technologies. Therefore, this should be given the highest priority by policy-makers.

7. Potential AI uses for sustainable public procurement

If/when sufficient data is available, there will be scope for the deployment of several specific implementations of artificial intelligence. It is possible to imagine the following potential uses:

• Sustainability-oriented (big) data analytics: this should be relatively easy to achieve and it would simply be the deployment of big data analytics to monitor the extent to which procurement expenditure is pursuing or achieving specified sustainability goals. This could support the design and implementation of sustainability-oriented procurement policies and, where appropriate, it could generate public disclosure of that information in order to foster civic engagement and to feedback into political processes.

• Development of sustainability screens/indexes: this would be a slight variation of the former and could facilitate the generation of synthetic data visualisations that reduced the burden of understanding the data analytics.

• Machine Learning-supported data analysis with sustainability goals: this could aim to train algorithms to establish eg the effectiveness of sustainability-oriented procurement policies and interventions, with the aim of streamlining existing policies and to update them at a pace and level of precision that would be difficult to achieve by other means.

• Sustainability-oriented procurement planning: this would entail the deployment of algorithms aimed at predictive analytics that could improve procurement planning, in particular to maximise the sustainability impact of future procurements.

Moreover, where clear rules/policies are specified, there will be scope for:

• Compliance automation: it is possible to structure procurement processes and authorisations in such a way that compliance with pre-specified requirements is ensured (within the eProcurement system). This facilitates ex ante interventions that could minimise the risk of and the need for ex post contractual modifications or tender cancellations.

• Recommender/expert systems: it would be possible to use machine learning to assist in the design and implementation of procurement processes in a way that supported the public buyer, in an instance of cognitive computing that could accelerate the gains that would otherwise require more significant investments in professionalisation and specialisation of the workforce.

• Chatbot-enabled guidance: similarly to the two applications above, the use of procurement intelligence could underpin chatbot-enabled systems that supported the public buyers.

A further open question is whether AI could ever autonomously generate new sustainability policies. I dare not engage in such exercise in futurology…

8. Limited use of blockchain/DLTs for sustainable public procurement

By contrast with the potential for big data and the AI it can enable, the potential for blockchain applications in the context of procurement seems to me much more limited (for further details, see here, here and here). To put it simply, the core advantages of distributed ledger technologies/blockchain derive from their decentralised structure.

Whereas there are several different potential configurations of DLTs (see eg Rauchs et al, 2019 and Alessie et al, 2019, from where the graph is taken), the configuration of the blockchain affects its functionalities—with the highest levels of functionality being created by open and permissionless blockchains.

However, such a structure is fundamentally uninteresting to the public sector, which is unlikely to give up control over the system. This has been repeatedly stressed and confirmed in an overview of recent implementations (OECD, 2019a:16; see also OECD, 2018).

Moreover, even beyond the issue of public sector control, it should be stressed that existing open and permissionless blockchains operate on the basis of a proof-of-work (PoW) consensus mechanism, which has a very high carbon footprint (in particular in the case of Bitcoin). This also makes such systems inapt for sustainable digital procurement implementations.

Therefore, sustainable blockchain solutions (ie private & permissioned, based on proof-of-stake (PoS) or a similar consensus mechanisms), are likely to present very limited advantages for procurement implementation over advanced systems of database management—and, possibly, even more generally (see eg this interesting critical paper by Low & Mik, 2019).

Moreover, even if there was a way to work around those constraints and design a viable technical solution, that by itself would still not fix underlying procurement policy complexity, which will necessarily impose constraints on technologies that require deterministic coding, eg

• Tenders on a blockchain - the proposals to use blockchain for the implementation of the tender procedure itself are very limited, in my opinion, by the difficulty in structuring all requirements on the basis of IF/THEN statements (see here).

• Smart (public) contracts - the same constraints apply to smart contracts (see here and here).

• Blockchain as an information exchange platform (Mélon, 2019, on file) - the proposals to use blockchain mechanisms to exchange information on best practices and tender documentation of successful projects could serve to address some of the confidentiality issues that could arise with ‘standard’ databases. However, regardless of the technical support to the exchange of information, the complexity in identifying best practices and in ensuring their replicability remains. This is evidenced by the European Commission’s Initiative for the exchange of information on the procurement of Large Infrastructure Projects (discussed here when it was announced), which has not been used at all in its first two years (as of 6 November 2019, there were no publicly-available files in the database).

9. Sustainable procurement of digital technologies

A final issue to take into consideration is that the procurement of digital technologies needs to itself incorporate sustainability considerations. However, this does not seem to be the case in the context of the hype and over-excitement with the experimentation/deployment of those technologies.

Indeed, there are emerging guidelines on procurement of some digital technologies, such as AI (UK, 2019) (WEF, 2019) (see here for discussion). However, as could be expected, these guidelines are extremely technology-centric and their interaction with broader procurement policies is not necessarily straightforward.

I would argue that, in order for these technologies to enable a more sustainable procurement, sustainability considerations need to be embedded not only in their application, but may well require eg an earlier analysis of whether the life-cycle of existing solutions warrants replacement, or the long-term impacts of the implementation of digital technologies (eg in terms of life-cycle carbon footprint).

Pursuing technological development for its own sake can have significant environmental impacts that must be assessed.

10. Concluding thoughts

This (very long…) blog post has structured some of my thoughts on the interaction of sustainability and digitalisation in the context of public procurement. By way of conclusion, I would just try to translate this into priorities for policy-making (and research). Overall, I believe that the main area of effort for policy-makers should now be in creating an enabling data architecture. Its regulation can thus focus research in the short term. In the medium-term, and as use cases become clearer in the policy-making sphere, research should be moving towards the design of digital technology-enabled solutions (for sustainable public procurement, but not only) and their regulation, governance and social impacts. The long-term is too difficult for me to foresee, as there is too much uncertainty. I can only guess that we will cross that bridge when/if we get there…

Is Circular Economy a move towards or away from sustainability? A short piece on the (ab)use of the concept of circularity [guest post by Dr Lela Mélon]

With business sustainability in mind and in search of sustainable governmental behaviour, especially in terms of public purchasing practices, circularity seems like a fitting concept for fulfilling public needs in a sustainable manner (see eg Geissdoerfer et al: 2016). Given the hurdles with the implementation of green public procurement practices across the EU, and the struggles in furthering sustainable public procurement (going beyond environmental to also add social concerns), I expected that circular public procurement would be an exception and applicable only to a handful of cases. And indeed, it did not take much research to verify that the application of circularity across European public procurement is scarce at its best: while listed under green public procurement, circular public procurement exhibits few best practices across the EU that mostly arose at the local level (see eg this 2018 best practice report).

While it might be argued that circularity by definition requires local action, that does not prevent the development of practices at a regional, national or even supra-national level in specific sectors with potential to become circular, e.g. energy sector, construction sector and waste management. Yet, whether we speak about circularity in the framework of private markets or public procurement, it is absolutely indispensable to embed circular practices in the framework of sustainability and not simply formulate it under the framework of waste management.

Much has been said on recycling, less on the cycle. Seeing circularity as an exercise of recycling and bringing materials back into the loop has been widespread, leading to even higher production and consumption and straying away from true sustainability. That being said, the underpinning reasons for such developments do not lie solely in private market practices, but also stem from the lack of knowledge on circularity and policy incoherence on the national and EU level in general.

What is (true) circularity?

Applying to both private and public markets, the notion of circularity should be clear. Recycling comes last. The whole purchasing procedure needs to be rethought and redesigned to accommodate more sustainable decisions and close the loop of linear practices as in ‘buy, use, dispose.’ Already at the stage of making the purchase decision, circularity demands us to rethink: do we need the product, service or works in question? Could we upcycle a product that we already own to fulfil that need? Could the need be filled by buying a service instead of the product or conversely leasing or renting the product? If the answer to those questions is no, then we need to purchase the product, service or work in question demanding a long life-time evaluation model.

Here the companies engaging in circular production need to provide a life-long guarantee, user manual, strategic design that facilitates reparability, minimal use of raw materials and energy (and its responsible sourcing, accounting for the social aspect of sustainability), use of renewable energy and efficient service and maintenance in case of a product fault. Spare part guarantee, service agreements, small repairs, standard components and easy disassembly are the must-haves under a truly sustainable circular economy.

Reuse and sometimes upcycling are the key. Recycling under a circular model is truly the last resort and its success in extracting useful materials for further production actually depends on the way the product was designed: the absence of hazardous materials, the possibility to disassemble the product into different materials with ease, the possibility of downcycling and upcycling of the materials. These notions all run counter to the current linear economy: and the implications of such systemic change on business models and private markets as we know them will be significant, causing significant policy spill over effects and demanding the elimination of existing policy incoherences inhibiting such a transition. This piece aims to provide further food for thought on the system as it is regarding private and public markets; discussing the current state of affairs, the impediments to a higher uptake of circular practices and the policy spill over effects of a successful implementation of circularity as a general exercise.

Where are we at? – the European Commission’s Action Plan

In terms of EU policy on circular economy in general, the European Commission has issued an ambitious circular economy package—which surprisingly focuses on waste management and bringing resources back in the loop—coupled with two subsequent implementation reports in 2017 and 2019. While the package recognises that the value of circular economy lies also in job creation, savings for businesses and the reduction of EU carbon emissions; the action plan on the matter focuses heavily on reforming the waste management legislation, albeit briefly reflecting also on the broader aspects of circular economy such as job creation, innovative design, business models, research, re-manufacturing, product development and food waste. The wrong signal is therefore sent to the private and public market: the focus on getting scarce materials back into the loop instead of a systemic change of production processes themselves. This influences private and public markets and reinforces the idea that the only issue with traditional linear production and consumption processes is the scarcity of (raw) materials.

Further reinforcing this idea, the EU study on Accelerating the transition to the circular economy focuses on public funds employed to that effect, omitting the fact that this represents only a fraction of the funds needed for a true systemic change. The study has been seen as an accelerator for the deployment of the circular economy, discussed in the framework of new circular business models and in the framework of waste management (id at 10). While the need for extensive financing has been repeatedly highlighted (eg in this 2017 report’s estimate of EUR 320 billion by 2025) for a systemic transition to circular economy (with estimated combined benefits of such shift of EUR 500 billion), the focus of the report has been on providing such finance in the current ‘business as usual’ framework, advocating for higher investment in such transition by the EU, without a comparative assessment of the current private financial market frameworks and its indispensable role in such transition (cfr this call for integrating externalities in the existing risk assessment frameworks).

Arguing for a systemic approach and a stronger focus on private finance offerings, especially with regards to small and medium-size enterprises (see here and here), points to the insufficiency of public funds for the transition to a more circular economy. To boost the private finance offerings, there is a need for a systemic change of financial systems to account for the inherent risks of the current linear business models, thereby eliminating persistent unfair competitive advantage for linear business models in the access-to-finance scenario. Not incorporating the change of linear risk assessment practices in greater detail into the EU action plan is a pitfall that needs to be remedied, qualifying change that needs to occur regarding the traditional access-to-funding setting in order to accommodate circular business and the changes it entails for ‘business-as-usual’ also in terms of the access-to-finance.

The structural flaw of underestimating the risks of linear projects and overestimating the risks of circular economy projects will not be remedied simply by taxonomy and EU funds: the financial systems on their own need to ‘circularise’ their finance offerings: the world as we know it, business as usual, is about to change and it could cost them more than just their reputation. Asset backed loans will need to change into ‘relationship’ backed loans, which presupposes also changes and ameliorations to contract laws to ensure monetised value to relationships as steering wheels of the new circular economy.

The lack of circularity in finance influences the offerings of the private market and the innovation necessary for circular solutions, which will in turn influence also the success of circular public procurement: the public funds and practices in innovation procurement cannot produce a sufficient amount of circular procurement to create a strong movement on the private market.

What are the impediments to a higher uptake of circular practices and what are their implications?

Aside from these two broader policy concerns, there are some specific impediments to circularity in public procurement: the first is the low uptake of green public procurement (GPP) across the EU,[1] impeding the insertion of circularity as the next step of GPP and the second the lack of regional, national and supranational best practices to that effect.

The integration between public procurement and circular economy itself is at its early stages at the EU level, where the incorporation of social, environmental and economic specifications into public procurement is not at a sufficiently high level to produce an indirect effect on products and consumers themselves and thereby stimulating circular economy. Furthermore, as majority of circular innovation stems from small and medium sized enterprises, it is crucial to further facilitate their access to public procurement systems, aside from general efforts to support the implementation of sustainable public procurement.

While the Eco-design Directive 2009/125/EC incentivises Member States to implement waste-preventing public procurement strategies according to information about the products’ technical durability, simultaneously suggesting the recycling requirements to be designed accounting for corresponding requirements for waste treatment in the waste legislation related to product, significantly supporting the circular flow of substances and materials, it is still strongly focused on waste management. Once again, here the notion of circularity supports more the linear production models than it does true circularity: while waste management and preservation of materials is important, determining the initial need for production and the potential for lease, reuse and upcycle is more important in terms of circularity.

The second supporting tool for circular public procurement, the Environmental Footprint Initiative of the European Commission, aims at providing a harmonisation process for the development of a scientific and consensus-based method, trying to inform and direct consumer choices with clear and comparable environmental information. Again, while reliable information is an indispensable steppingstone for determining sustainability hotspots, it is a truly preliminary and indirect step towards circular procurement. It does not provide for a true move from linearity to circularity.

Aside from the general concerns introduced above, the private sector further encounters impediments to circularity in current legislation on plastics recycling, competition law and the general corporate law favouring and prioritising linear business practices, lacking clear guidance on circularity. These are all examples of policy incoherence, some representing a direct example of incoherence (the silence of corporate legal frameworks on the social norm of shareholder primacy,[2] the plastic packaging requirements preventing the use of recycled plastics), others an indirect example (competition law).

Coupled with the abovementioned issues of financial law, these impediments are sufficient to significantly reduce the development of new circular solutions beyond pure recycling efforts. Additionally, the indirect policy incoherence in terms of competition policy as it stands, needs to be revised simultaneously to other sustainable changes to EU legal frameworks, and we have not accounted yet for those changes to a significant extent. If circularity is to be a tool towards achieving true sustainability, the traditional notions of ‘separating’ competitors and keeping them from cooperating will need to be revised. Circular systems have a need to be interconnected, cooperating and sharing, especially as reuse, repair and upcycling are the building blocks of circular economy. This calls for a systemic change of competition laws in themselves.

Furthermore, to aid the financing of this transition, traditional property and contract law will need to develop additional institutions to account for a different economy, one not based on assets as in material assets but rather relationships as assets. The road towards true circularity is still long, but these policy spill over considerations need to be resolved simultaneously with other sustainable changes to areas directly connected with sustainability in order to achieve a timely change towards truly sustainable circularity.

Where to now?

To conclude, a systemic change requires efforts of policymakers, private and public market actors as well as consumers. The above presented reflections represent just a fraction of what we will have to deal with in terms of transition towards sustainability and I would love to hear about any additional concerns and/or solutions to the policy issue that you have encountered in your professional field. I would gratefully any feedback or suggestions at lela.melon@upf.edu.

Dr Lela Mélon

Lela Mélon is a lawyer and an economist, specialised in sustainable corporate law. Lela started her sustainability career in 2014 with her research on shareholder primacy in corporate law. She is currently charge of the Marie Curie Sklodowska funded project ‘Sustainable Company’ at the Pompeu Fabra University in Barcelona. She has co-authored and authored monographs, published several scientific articles in the field of sustainable corporate lawand sustainable public procurement and presented her work at conferences across Europe, as well as introduced sustainable corporate law curricula in several universities in Europe.

[1] Mélon, L. ‘More than a nudge? Arguments and tools for mandating green public procurement in the EU.’ Working Paper, Conference Corporate Sustainability Reforms Oslo 2019.

[2] Mélon, L. Shareholder Primacy and Global Business (Routledge 2018); Sjafjell, B. (2015) Shareholder Primacy: The Main Barrier to Sustainable Companies, University of Oslo Faculty of Law Research Paper No. 2015-37.

Some thoughts on evaluation framing, based on my academic experience with REF2021

As an academic, you are frequently required to evaluate other people’s work—and, for obvious reasons, your work is also permanently being assessed. After having completed quite a few evaluation tasks in the last few months, and having received feedback on my own work, I have generated some thoughts that I will seek to organise here.

These thoughts mainly concern a hypothesis or hunch I have developed, which would posit that framing the evaluation in ways that seek to obtain more information about the reasons for a specific ‘grade’ can diminish the quality of the evaluation. This is due to the fact that the evaluator can externalise the uncertainty implicit in the qualitative evaluation. Let me try to explain.

Some background

Academic evaluations come in different flavours and colours. There is the rather obvious assessment of students’ work (ie marking). There are the also well-known peer-review assessments of academic papers. The scales used (eg 1 to 10 for students, or a four-point scale involving rejection/major corrections (aka revise & resubmit)/minor corrections/acceptance for paper) for these type of evaluations are generally well-known in each relevant context, and can be applied with varying degrees of opacity or the reviewers’ and the reviewees’ identities.

There are perhaps less well-known evaluations of colleagues’ work for promotion purposes, as well as the evaluation of funding proposals or the assessment of academic outputs for other (funding-related) purposes, such as the REF2021 in the case of English universities.

The REF2021 provides the framework in which I can structure my thoughts more easily.

Internal REF2021 evaluations

REF2021 is an exercise whereby academic outputs (among other things) are rated on a five point scale—from unclassified (= 0) to a maximum of 4*. The rating is supposed to be based on a holistic assessment of the three notoriously (let’s say, porous) concepts of ‘originality, significance and rigour'—although there are lengthy explanations on their intended interpretation.

The difficult evaluation dynamic that the REF2021 has generated is a guessing game whereby universities try to identify which of the works produced by their academics (during the eligible period) are most likely to be ranked at 4* by the REF panel, as that is where the money is (and perhaps more importantly, the ‘marker of prestige’ that is supposed to follow the evaluation, which in turn feeds into university rankings… etc).

You would think that the relevant issue when asked to assess a colleague’s work (whether anonymously or not, let’s leave that aside) for ‘REF-purposes’ would be for you to express your academic criterion in the same way as the experts in the panel will. That is, giving it a mark of 0 to 4*. That gives you five evaluation steps and you need to place the work in one of them. This is very difficult and there is a mix of conflicting loyalties, relative expertise gaps, etc that will condition that decision. That is why the evaluation is carried out by (at least) two independent evaluators, with possible intervention of a third (or more) in case of significant discrepancies.

Having to choose a specific rating between 0 and 4* forces the evaluator to internalise any uncertainties in its decision. This is a notoriously invidious exercise and the role of internal REF evaluator is unenviable.

It also creates a difficulty for decision-makers tasked with establishing the overall REF submission—in the best case scenario, thus having to chose the ‘best 4*’ of a pool of academic outputs internally assessed at 4* that exceeds the maximum allowed submissions. Decision-makers have nothing but the rating (4*) on which to choose. So it is tempting to introduce additional mechanisms to gather more information from the internal assessors in order to perform comparisons.

Change in the evaluation framing

Some of the information the decision-makers would want to gather concerns ‘how strong’ is the rating given by the evaluator with some more granularity. A temptation is to transform the 5-point scale (0 to 4) into a 9 (or even 10) point scale by halving each step (0, 0.5*, 1* etc up to 4* — or even 4.5* or 4*+)—and there are, of course, possibilities to create more steps. Another temptation is to disaggregate the rating and ask for separate marks for each of the criteria (originality, significance and rigour), with or without an overall rating.

Along the same lines, the decision-makers may also want to know how confident the evaluator is of its rating. This can be captured through narrative comments, or asking the evaluator to indicate its confidence in any scale (from low to high confidence, with as many intermediate steps as you could imagine). While all of this may create more information about the evaluation process—as well as fuel the indecision or overconfidence of the evaluator, as the case may be—I would argue that it does not result in a better rating for the purposes of the REF2021.

A more complex framing of the decision allows the evaluator to externalise the uncertainty in its decision, in particular by allowing it to avoid hard choices by using ‘boundary steps’ in the evaluation scale, as well as disclosing its level of confidence on the rating. When a 4* that had ‘only just made it’ in the mind of the evaluator morphs into a 3.5* with a moderate to high level of confidence and a qualitative indication that the evaluation could be higher, the uncertainty squarely falls with the decision-maker and not the evaluator.

As well as for other important governance reasons that need not worry us now, this is problematic in the specific REF2021 setting because of the need to reconcile more complex internal evaluations with the narrower and more rigid criteria to be applied by the external evaluators. Decision-makers faced with the task of identifying the specific academic outputs to be submitted need to deal with the uncertainty externalised by the evaluators, which creates an additional layer of uncertainty, in particular as not all evaluators will provide homogenous (additional) information (think eg of the self-assessment of the degree of confidence).

I think this also offers broader insights into the different ways in which the framing of the evaluation affects it.

Tell me the purpose and I’ll tell you the frame

I think that one of the insights that can be extracted is that the framing of the evaluation changes the process and that different frames should be applied depending on the main purpose of the exercise—beyond reaching the best possible evaluation (as that depends on issues of expertise that do not necessarily change due to framing).

Where the purpose of the exercise is to extract the maximum information from the evaluator in a standardised manner, an evaluation frame that forces commitment amongst a limited range of possible outcomes seems preferable due to the internalisation of the uncertainty in the agent that can best assess it (ie the evaluator).

Conversely, where the purpose of the exercise is to monitor the way the evaluator carries out its assessment, then a frame that generates additional information can enhance oversight, but generates fuzziness in the grades. It can also create a different set of incentives for the evaluator, depending on additional circumstances, such as identification of the evaluator and or the author of the work being evaluated, whether this is a repeated game (thus triggering reputational issues) etc.

Therefore, where the change of frame alters the dynamics and the outputs of the evaluation process, there is a risk that an evaluation system initially designed to extract expert judgment ends up being perceived as a mechanism to judge the expert. The outcomes cannot be expected to simply improve, despite the system becoming (apparently) more decision-maker friendly.

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.

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)

AI & sustainable procurement: the public sector should first learn what it already owns

ⓒ Christophe Benoit (Flickr).

[This post was first published at the University of Bristol Law School Blog on 14 October 2019].

While carrying out research on the impact of digital technologies for public procurement governance, I have realised that the deployment of artificial intelligence to promote sustainability through public procurement holds some promise. There are many ways in which machine learning can contribute to enhance procurement sustainability.

For example, new analytics applied to open transport data can significantly improve procurement planning to support more sustainable urban mobility strategies, as well as the emergence of new models for the procurement of mobility as a service (MaaS). Machine learning can also be used to improve the logistics of public sector supply chains, as well as unlock new models of public ownership of eg cars. It can also support public buyers in identifying the green or sustainable public procurement criteria that will deliver the biggest improvements measured against any chosen key performance indicator, such as CO2 footprint, as well as support the development of robust methodologies for life-cycle costing.

However, it is also evident that artificial intelligence can only be effectively deployed where the public sector has an adequate data architecture. While advances in electronic procurement and digital contract registers are capable of generating that data architecture for the future, there is a significant problem concerning the digitalisation of information on the outcomes of past procurement exercises and the current stock of assets owned and used by the public sector. In this blog, I want to raise awareness about this gap in public sector information and to advocate for the public sector to invest in learning what it already owns as a potential major contribution to sustainability in procurement, in particular given the catalyst effect this could have for a more circular procurement economy.

Backward-looking data as a necessary evidence base

It is notorious that the public sector’s management of procurement-related information is lacking. It is difficult enough to have access to information on ‘live’ tender procedures. Accessing information on contract execution and any contractual modifications has been nigh impossible until the very recent implementation of the increased transparency requirements imposed by the EU’s 2014 Public Procurement Package. Moreover, even where that information can be identified, there are significant constraints on the disclosure of competition-sensitive information or business secrets, which can also restrict access. This can be compounded in the case of procurement of assets subject to outsourced maintenance contracts, or in assets procured under mechanisms that do not transfer property to the public sector.

Accessing information on the outcomes of past procurement exercises is thus a major challenge. Where the information is recorded, it is siloed and compartmentalised. And, in any case, this is not public information and it is oftentimes only held by the private firms that supplied the goods or provided the services—with information on public works more likely to be, at least partially, under public sector control. This raises complex issues of business to government (B2G) data sharing, which is only a nascent area of practice and where the guidance provided by the European Commission in 2018 leaves many questions unanswered.

I will not argue here that all that information should be automatically and unrestrictedly publicly disclosed, as that would require some careful considerations of the implications of such disclosures. However, I submit that the public sector should invest in tracing back information on procurement outcomes for all its existing stock of assets (either owned, or used under other contractual forms)—or, at least, in the main categories of buildings and real estate, transport systems and IT and communications hardware. Such database should then be made available to data scientists tasked with seeking all possible ways of optimising the value of that information for the design of sustainable procurement strategies.

In other words, in my opinion, if the public sector is to take procurement sustainability seriously, it should invest in creating a single, centralised database of the durable assets it owns as the necessary evidence base on which to seek to build more sustainable procurement policies. And it should then put that evidence base to good use.

More circular procurement economy based on existing stocks

In my view, some of the main advantages of creating such a database in the short-, medium- and long-term would be as follows.

In the short term, having comprehensive data on existing public sector assets would allow for the deployment of different machine learning solutions to seek, for example, to identify redundant or obsolete assets that could be reassigned or disposed of, or to reassess the efficiency of the existing investments eg in terms of levels of use and potential for increased sharing of assets, or in terms of the energy (in)efficiency derived from their use. It would also allow for a better understanding of potential additional improvements in eg maintenance strategies, as services could be designed having the entirety of the relevant stock into consideration.

In the medium term, this would also provide better insights on the whole life cycle of the assets used by the public sector, including the possibility of deploying machine learning to plan for timely maintenance and replacement, as well as to improve life cycle costing methodologies based on public-sector specific conditions. It would also facilitate the creation of a ‘public sector second-hand market’, where entities with lower levels of performance requirements could acquire assets no longer fit for their original purpose, eg computers previously used in more advanced tasks that still have sufficient capacity could be repurposed for routine administrative tasks. It would also allow for the planning and design of recycling facilities in ways that minimised the carbon footprint of the disposal.

In the long run, in particular post-disposal, the existence of the database of assets could unlock a more circular procurement economy, as the materials of disposed assets could be reused for the building of other assets. In that regard, there seem to be some quick wins to be had in the construction sector, but having access to more and better information would probably also serve as a catalyst for similar approaches in other sectors.

Conclusion

Building a database on existing public sector-used assets as the outcome of earlier procurement exercises is not an easy or cheap task. However, in my view, it would have transformative potential and could generate sustainability gains not only aimed at reducing the carbon footprint of future public expenditure but, more importantly, at correcting or somehow compensating for the current environmental impacts of the way the public sector operates. This could make a major difference in accelerating emissions reductions and should consequently be a matter of sufficient priority for the public sector to engage in this exercise. In my view, it should be a matter of high priority.

A quick, non-comprehensive update on circular economy and public procurement

A friend and I have been discussing sustainability and property regulation for a while. In particular, he has been quizzing me on the potential for public procurement to promote a (more) circular economy for a few years now. We last touched upon this in mid-2015. In a recent email exchange, he asked me to look at what had happened since at EU level. This is what I came up with. I thought I would share it in case someone is interested in a quick, non-comprehensive update on circular economy and public procurement. Here it is. Please feel free to add to this in the comments section!

In June 2017, the European Parliament published a report it had commissioned on 'Green Public Procurement and the EU Action Plan for the Circular Economy'. In October 2017, the Directorate General for the Environment of the European Commission published this brochure of best practices (of which I was rather critical in my blog). There have been additional best practice guides put together by entities receiving EU funding, eg ICLEI or CircularPP.

This is still a weak policy intervention in the form of best practice dissemination (ie even weaker than soft law guidelines), which is supported with some additional initiatives, such as the Circular Europe Network. However, in their own words 'the integration between PP and circular economy is still at its early stage at the EU level.' (Factsheet on Public Procurement and Circular Economy, tab 2.3).

Some countries are taking the use of procurement to push for a more circular economy to reduce the environmental impact of public sector activities more seriously than others, and the construction sector seems to be ahead of others (see eg this recent report). Denmark is perhaps at the forefront of trying to use procurement for a circular economy (see eg this case study), together with the other Nordic countries and The Netherlands (see eg this 2017 report, or the 10 case studies included in the construction sector report above). There is not much going on in the UK at all (I could only find a 2016 4-pager on general aspects of circular economy that mentions procurement in passing).

There are a couple of interesting-looking academic papers: Witjes & Lozano (2016) and Alhola et al (2018), the latter being the same authors of the report on the Nordic countries above.

** Postscript (11/10/2019 11.20am) - Thanks to Dr Lela Mélon for highlighting the March 2019 Report on ‘Accelerating the transition to a circular economy‘ and for pointing out that this is ‘an overarching policy example that omits the amount of private capital needed for a transition to occur at a noteworthy scale (e.g. mentioning the EU public funds to be employed to that effect but omitting the size of the whole funding needed for the transition)‘.

New working paper: "State aid and EU public procurement: more interactions, fuzzier boundaries"

I have uploaded a new working paper on SSRN. It is entitled “State aid and EU public procurement: more interactions, fuzzier boundaries“ and I have prepared for a new edition of the Research Handbook on European State Aid Law. Its abstract is as follows:

This chapter revisits the interaction between the EU rules on State aid and on public procurement. It probes the standard presumption that compliance with EU procurement rules excludes the existence of State aid because public tenders are apt to replicate market conditions and thus suppress any undue economic advantage. The chapter assesses the increasing number of points of interaction between both sets of rules that emerge from the novelties in the 2014 EU Public Procurement Package and the constant evolution of case law; and highlights some shortcomings of the standard presumption in relation to: the notion of State aid; R&D and pre-commercial procurement; ‘public house’ situations; negotiated procurement; abnormally low tenders; the procurement of services of general economic interest (SGEI); procurement itself as an SGEI; and procurement from ‘special organisations’. The chapter concludes that the boundaries of what constitutes State aid in the context of public procurement are fuzzier than ever. In doing so, the chapter offers a roadmap for further research in this area of EU economic law, as well as identifying areas that could benefit from additional guidance from the European Commission, in particular on benchmarking.

Full details of paper are as: Sanchez-Graells, Albert, State aid and EU public procurement: more interactions, fuzzier boundaries (October 8, 2019). To be published in L Hancher & JJ Piernas López (eds), Research Handbook on European State Aid Law (2nd edn, Edward Elgar, 2020) forthcoming. Available at SSRN: https://ssrn.com/abstract=3466288. As always, comments most welcome.

The Norwegian Supreme Court Gives its Final Word in the Fosen-Linjen Saga [guest post by Dag Sørlie Lund]

The Fosen-Linjen Saga has finally come to a close with the Norwegian Supreme Court’s Judgment. Dag Sørlie Lund* kindly provides a sharp summary of the case while we await for any official translations. His fuller critical assessment of the Judgment will be included in the EPPPL special issue we are working on.

The Norwegian Supreme Court Gives its
Final Word in the Fosen-Linjen Saga

The so-called Fosen-Linjen Saga has finally come to its long-awaited end by the judgment of the Norwegian Supreme Court of 27 September 2019, more than 6 years after the company AtB tendered for the procurement of ferry services between Brekstad and Valset in the County of Trøndelag.

The contract was initially awarded to the company Norled. The competitor, Fosen-Linjen, which was ranked as the runner-up, claimed Norled had been awarded the contract unlawfully, and managed to stop the signing of the contract through interim measures. In the interim measures procedure two errors were identified by the courts:

1. AtB had not required the necessary documentation for the award criteria “environment”; and

2. AtB had not verified the viability in Norled’s offer regarding fuel consumption (which was part of the criteria “environment”).

As a result of this, AtB decided to cancel the tender procedure, and restart the whole process.

Fosen-Linjen did not submit a new tender, but instead filed a law suit against AtB claiming damages for the positive interest, or, in the alternative, the negative contract interest. The negative contract interests essentially amounts to the costs of tendering (damnum emergens), while the positive contract interest essentially amounts to the loss of profit (lucrum cessans).

The Supreme Court’s judgment clarifies several key questions about public procurement law related to the threshold for damages, and for the requirement of causality between the breach and the damages. Furthermore, the ruling contains interesting assessments of legitimate grounds to cancel a tender procedure, and the significance of the fact that a tenderer submits an offer despite being aware of errors in the procurement documents for the possibility to receive damages. The judgment is unanimous for all but the question of causality for damages for the negative contract interest, where one justice had a concurring opinion with a slightly different approach. For the purposes of this summary, I will not go further into the differences in the concurring opinion.

The Principle of State liability for breaches of EEA Law

The Supreme Court starts out by grounding the liability for damages in the general principle of State liability for breaches of EEA law. According to this principle an EEA State may be held liable for breaches of its obligations where the following three conditions are met:

1. The breached provision of EEA law must be intended to confer rights on individuals and economic operators;

2. The breach must be considered as sufficiently serious; and

3. There must be a direct causal link between the breach of the obligation in question and the damage suffered by the aggrieved party.

The first condition was clearly met, and the case before the Supreme Court thus mainly concerned the question of the threshold for receiving damages and what it takes to establish a direct causal link for damages for negative costs. A particularly disputed question in the Fosen-Linjen Saga, has been whether the threshold for damages for the negative and the positive contract interests is different. Under Norwegian law, it has traditionally been easier to receive compensation for the negative costs than for the positive costs.

The Positive Contract Interest

The Supreme Court rejected Fosen-Linjen’s claim for damages for the positive interest since there were sufficient grounds to cancel the tender procedure. In fact, there were two grounds for cancelling the procedure.

First, the Supreme Court considered that the identification of the two errors in the interim measures proceedings raised serious doubts about the lawfulness of the procedure. These doubts were considered as sufficient grounds to cancel the tender procedure.

Second, it was also considered that the fact that AtB did not require the necessary documentation for the award criteria “environment”, also constituted sufficient grounds to cancel.

Consequently, the Supreme Court concluded that since the cancellation was lawful, Fosen-Linjen could not receive damages for the positive contract interest. This part of the judgment is somewhat confusing, since it appears to consider the question of causality rather than the question of whether the breach was sufficiently serious: since the tender procedure was lawfully cancelled, no one could ever be awarded the contract, and thus no one would ever have a claim for the loss of profit.

This is particularly confusing since the Appeals Selection Committee of the Supreme Court had explicitly rejected the question of causality for the positive contract interest from being heard by the Supreme Court. This is all the more puzzling since the Supreme Court appears to have been aware of this distinction, noting that the cancellation did not exclude the possibility for damages for the negative contract interest, which shows that the question of liability was not conceptually excluded by the fact of the cancellation.

The Negative Contract Interest

As mentioned, the traditional approach in Norwegian torts law is that the threshold is lower when it comes to damages for the negative costs.

Based on its reading of case law from the CJEU and the EFTA Court, the Supreme Court held, however, that the test for receiving damages, regardless of the categorization of the damages as negative or positive costs, is whether the breach in question may be considered “sufficiently serious”. The Supreme Court outright rejected the suggestion that the threshold might be lower under Norwegian tort law.

In the assessment of whether a breach is sufficiently serious, the Supreme Court noted that it may not be required to demonstrate fault or fraud, although both subjective and objective factors included in the traditional assessment of liability under national tort law, may be relevant to take into account.

Same same, but different

Despite this description of the test for receiving damages, the Supreme Court emphasized that the norm could not be characterized as more or less strict than would otherwise follow from Norwegian tort law, but that the assessment may be somewhat different.

The Supreme Court identified the norm as a sliding scale where the crucial point appears to be the level of discretion enjoyed by the contracting authority – from wide to none at all.

The rule that was breached in the tender procedure – namely the obligation to require necessary documentation for an award criterion – was found to be clear and precise. Accordingly, the Supreme Court found that AtB was liable for the negative costs. In that regard, it was pointed out that AtB twice received questions that raised doubts as to the lawfulness of the award criteria, which combined with the consequences caused by the breach, led to the conclusion that the threshold of “sufficiently serious” was passed.

It’s worth noting that despite the fact that the Supreme Court rejected that a contracting authority might escape liability by claiming not to possess the necessary powers, knowledge, means or resources, it still considered the complexity of the public procurement rules indicated a certain restraint or caution in establishing liability.

Direct Causal Link

Concerning the question of a direct causal link between the breach and the damage, the Supreme Court asked whether the tenderer would have submitted an offer if they had known about the error committed.

Even though the fact that AtB had not required the necessary documentation for the award criteria “environment” was clearly visible for Fosen-Linjen, the Supreme Court considered that this criterion was met since AtB had considered the procurement documents to be lawful despite the fact that the error had been pointed out twice during the tendering procedure. This part of the judgment is also confusing, as it is not entirely clear why the subjective view of the contract authority is relevant when assessing the question of causality.

Unanswered questions

The Supreme Court thus disentangled many key questions about liability for breaches of procurement rules, but some issues remain unanswered. For example, the Supreme Court did not rule on the question of whether liability is conceptually possible where the tendering process should have been cancelled, but this doesn’t happen. Furthermore, as mentioned above, the question regarding direct causal link for damages for the positive interest was not accepted to be heard by the Supreme Court, so the particularities of that assessment was not further clarified. Considering the attention these questions have received through the Fosen-Linjen Saga, it is probably only a matter of time before these will materialize themselves in future cases, with new sagas in national courts and in Luxembourg.

Dag Sørlie Lund

Dag Sørlie Lund is part of our European and Competition law team. He has previously worked at the Department of Legal Affairs in the Ministry of Foreign Affairs, the EFTA Court, the EFTA Surveillance Authority (ESA), and as an attorney. He has experience in advising clients in EU/EEA and competition law, including state aid and public procurement law.

Dag has handled a number of cases concerning the EFTA Surveillance Authority, and has pleaded several cases before the Court of Justice for the European Union and the EFTA Court. Dag has lived in Spain, Belgium and Luxembourg, and speaks Spanish and English fluently.

Some quick thoughts on NHS’s recommendations to Government and Parliament for an NHS Bill

On 26 September 2019, NHS England and NHS Improvement Strategy and Innovation Directorate published the "NHS’s recommendations to Government and Parliament for an NHS Bill" supporting the NHS Long-term Plan. This is a document that provides additional details on the initial proposals of 28 February 2019, after the results of a public consultation have been taken into account.

Having read and mulled it over, I think a specific passage of para 96 (in blue) evidences two major misunderstandings underpinning the approach adopted by NHS England and NHS Improvement.

First, there is an improper characterisation of the rules in the Public Contracts Regulations 2015 as exceedingly rigid and as preventing procurement of NHS services on the basis of quality and patient experience considerations over price or cost. This flies in the face of reg 67 PCR2015, which explicitly allows for trade-offs between price/cost and quality considerations in the award of *any type* of public contract, as the contracting authority is free to determine what is best value / most economically advantageous. This also ignores i.a. the special award criteria for healthcare and other social services in reg 76 PCR2015 and the extra flexibility this creates, as per the Crown Commercial Service’s guidance, or academic commentary such as eg Pedro Telles and mine.

Second, the subjection of NHS services procurement to PCR2015 rules is attributed to EU law. However, this ignores the UK's unilateral power to exercise discretion under very significant possibilities for structuring NHS governance in a manner that wouldn't trigger those rules. This includes the space for in-house & public-public cooperation under Directive 2014/24/EU, as well as possibility of creating voucher systems underpinning patient choice in a manner that would exclude procurement rules (under Falk Pharma/Tirkonnen, see here).

Ultimately, the totality of the Sept 2019 proposals continues to ignore the origin and implications of the UK's domestic choice of structuring NHS governance around an 'NHS internal market', and solely seek to de-regulate rather than de-marketise the NHS. The same issues I raised in written evidence to the House of Commons Health and Social Care Committee regarding the previous iteration of proposals by NHS England and NHS Improvement remain relevant.

In my opinion, they should be taken into due consideration in the context of scrutinising any future NHS Bill. After all, the new proposals have cherry-picked from the Health and Social Care Committee's report and ignored crucial parts of its recommendations [2] and [7] (see here for more details).

Failing to explore all possibilities under current rules (including under EU law) and pushing for the mere de-regulation of the NHS could have severe negative impacts on efficiency and oversight of NHS expenditure. I submit that it would not be in the public interest.