A conversation on horizontal policies in public procurement

I was kindly invited to talk about centralisation and public procurement at the Law School of the University of Lisbon last week by Prof. Miguel A. Raimundo. At the event, Prof. Nuno Cunha Rodrigues provided an initial overview on the opportunities that centralisation can create for the pursuit of horizontal or secondary policies. Based on my general views (here), I opposed the use of centralisation to achieve secondary policy goals, for the standard economic reasons, as well as for the issue of the democratic deficit that would ensue from allowing centralised purchasing bodies to act as market regulators.

Prof. Cunha Rodrigues has followed up on our discussion via email and has provided me with some detailed remarks (plus a short rebuttal/further thoughts I am adding at the end)(*). With his consent, I am posting them below (in black), accompanied by my own reaction to his points (in blue). I hope this "virtual" conversation on horizontal policies in procurement will be of interest. By all means, please feel free to comment.

Dear Albert:

As I told you personally, I´m a great admirer of your work which I´ve been following through your several publications and your blog. I saw your last post and I just wanted to make some comments on it.

Far too kind.

As a matter a fact, I don´t have a close view on secondary or horizontal policies. It´s still to be proved their efficiency knowing that State has several other tools in order to promote the same goals associated to secondary policies, like the use of sectorial legislation, taxation or subsidies.

In my view, this should suffice to at least refrain from their expansion, particularly under centralised procurement.

Nevertheless, I think we shouldn`t regret the importance of the (possible) use of public procurement to pursue (some) secondary policies like social policies. Said this, I just want to make some telegraphic notes:

i) It´s true that the pursue of secondary policies through public procurement does not have (enough) democratic legitimacy. Still, knowing that (most) of the central purchasing bodies in Europe directly depend on central government, we can say that centralisation of public procurement is the (ideal) way to develop secondary policies because governments can directly control those bodies and the policies they pursue (in Portugal, central government can send direct instructions to the central purchasing body). The issue of democratic legitimacy is one that can provoke a huge discussion namely in the field of EU law (and the powers of the European commission…);

I strongly disagree with this approach. The issue is quite significant because the establishment of higher requirements (green, social or otherwise) in procurement than in general consumption of goods in services shows a clear regulatory/legislative double-standard that can hardly be monitored or resolved through governmental control of the central purchasing body. There is no good reason why the public sector cannot purchase goods and services legally marketed to private buyers. If the government/legislator considers that a given product or service should not be consumed for objective reasons, it needs to legislate in that way. Otherwise, this approach does not only lead to a clear democratic deficit, but also to a cross-subsidy that can go both in favour of or against the public purse / consumer purse.

ii) Public bodies are subjected to the legality principle. As so, and knowing that most European constitutions (and the TFEU) acknowledge the precaution principle in environmental issues and also the equality principle, one can recognise that secondary policies (namely social policies) should be consider by public bodies on the decision of what to buy;

Yes, but only expressed and articulated (by hard law instruments) environmental and social rules. Again, as above, there is no reason why procurement policy needs to be more cautious in environmental or social terms than the explicit and legislated environmental and social policies themselves.

iii) Your last post mentions some articles that stress that set-asides are a bad ideia. Some of those articles come from the 80’s and the 90’s, knowing that (modern) secondary policies (like the one connected with environmental and social policies) appeared mainly last decade (after Concordia Bus case, although I’m aware of previous Du Pont de Nemours case and others) and that some authors have recognised their importance in the recent past, like Arrowsmith, Kunzlik and MacCrudden (despite the fact that some may disagree with these policies). After the Concordia Bus case, the 2004 and 2014 directives, the national experiences and, mainly, the ECJ cases (like Concordia Bus, Wienstrom and Ruffert) it became clear that there was a new role to public procurement in this field;

In my view there is no new role (maybe some more regulatory space, but no new role) for secondary policies in the current rules and, in economic terms, the situation is exactly the same assessed under the studies I refer to. I agree that new empirical studies would be really useful in trying to price or measure the distortions created in EU markets at present, but I would stress that the value of proper empirical work is that it allows us to test economic theories. And, as far as I can read, there is no question that secondary/horizontal policies create economic inefficiency. The burden of proof, in empirical terms, lies on the other side.

iv) The economic crises that some European countries have been facing showed the importance of public procurement as an economic policy tool, like we saw mainly between 2009 and 2010 when the European Commission inducted member states to spend more public money is order to stabilise economy;

I partially agree, in that there is an economic role to be plaid by public procurement as a macroeconomic policy. However, that is a decision on the level of expenditure and, possibly, on areas of priority. However, that has nothing to do with what should be bought or how. I develop these issues distinguishing the different economic roles of procurement in my book and I stick to that [A Sanchez Graells, Public Procurement and the EU Competition Rules, 2nd edn (Oxford, Hart, 2015) 52-56].

v) In fact, market failures must be covered by state and they can be through multiple ways (depending on how efficient they prove to be), namely by regulation through contract (but sometimes, for sure, not directly through public procurement but through other instruments such as sectorial legislation, taxes or subsidies).

Not sure about this point. However, market failures are not the only ones that concern procurement, which should also be wary of regulatory or government failures. Capture or gold-plating by the central purchasing body is at least equally worrying.

vi) In the EU law, secondary policies appeared in a shy way with the 2004 directives and they are one of the main causes of the 2014 directives so we can’t deny the will of the European legislator in this matter;

Yes, but that does not mean we need to acritically accept that whatever the legislator wants to do is in the society's best interest. There are too many theoretical and historical objections to list them here.

vii) If we exclude the use of secondary policies, we are comparing, at the end, public procurement with private procurement. Still, public procurement must follow public interest and this one is not always connected with an idea of the lowest price or efficiency (or an idea of simplification of public procurement).

I disagree. We are just disentangling the regulatory/public power of deciding what to buy from the economic mechanism of procurement, which should be concerned with how to buy that in the most efficient way.

Nevertheless, even the criteria of the lowest price can be used to promote secondary policies (e.g. through technical specifications or the use of eco-labels) and, on the other hand, by choosing the most economic advantageous proposal, public bodies can promote secondary policies even without a clear legal base, so every guidance we can give in this area will be helpful;

Guidance may or may not be helpful. I agree that secondary policies could permeate different parts of the procurement cycle. However, the rules on technical specifications are much more stringent than those on award criteria in terms of accepting equivalent solutions and limiting formal restrictions to participation. Hence, I would much rather see green procurement limited to technical specifications and social clauses to contract compliance requirements (both of which have been limited in Dutch coffee and Bundesdruckerei) than in award criteria, where the scenario is much less streamlined.

viii) We know that, at the end, secondary policies can determine that prices get higher for public bodies. Still, the goal of public procurement is not only to assure value for money but also to promote public interest and this one can allow public bodies to buy in a more expensive way in order to promote, v.g., social policies.

This is very contentious. I completely disagree. Arrowsmith (in mild terms) and Kunzlik (in more enthusiastic terms) may agree with you. Here is a summary of the academic "conversation" we have been having for a while.

ix) Public interest (and European interest) has raised environmental policy to one transversal European policy (and the ECJ has said that) that must be included in public procurement concerns (and it was not in the past). The ECJ has said the same about social policies, namely in the Viking case;

That sounds like a bit of a simplification to me, particularly because the CJEU has always been stressing the need to comply with enacted secondary rules, rather than with policies. In any case, the opposition to secondary policies is not to be extended to procuring goods or services in compliance with the applicable legislation, which is an altogether different discussion.

x) I´m aware that the use of secondary policies may cause distortions in the market (and in competition). But public procurement is not concerned just with the competition principle (knowing that this one has been raising its importance after FENIN-SELEX ECJ cases and the new directives). Here, proportionality principle may help to balance competition principle with the pursue of secondary policies connected with the public interest. In some cases, it might be necessary to exclude some competitors that act in the same relevant market (e.g. State can exclude competitors that sell cars that pollute excessively or sellers of inefficient lamps) in order to promote secondary policies, namely promoting a change in technology that its consider to be needed according to the public interest.

I disagree. If the State does not want excessively polluting cars, it needs to legislate against them. If it is legal to sell those cars, there is no justification for an exclusion of the offeror from public procurement. Secondary policies cannot be a fix for the inability to legislate appropriately.

xi) In the field of secondary policies, the use of soft law is a way to, step by step, get to hard law and sometimes it has a fundamental role in order to allow the operators to understand the functioning of hard law. For example, competition law wouldn`t really be comprehensive without soft law (knowing that, in most of the times, it follows ECJ case law) even if, sometimes, the road gets away from soft law (e.g. what happens with the relevant market definition and the modern economic approach to merger control). We can also see the same use of soft law in tax law and I think we shouldn`t deny it`s value in the interpretation and development of public procurement law in the future.

If we don´t have soft law, the discretionary power of public bodies would be even bigger knowing that the use of secondary policies is allowed in the 2014 directives in general terms. As so, soft law can have a role in order to make more clear the use of secondary policies (and the situations where they can´t be used) although we are aware of the risks concerning the frontier between hard law and soft law (that were already raised by the ECJ);

I disagree with this, particularly in the competition field. Soft law is an asymmetrical lye we tell ourselves simply to allow regulation to be developed below the radar screens. My more developed views are available at A Sanchez-Graells, Soft Law and the Private Enforcement of the EU Competition Rules (July 2010)].

xii) The use of social policies through public procurement was, in some countries, a case of success in the past (v.g. USA; UK; Canada; South Africa; Malasia) so we shouldn`t throw the possible use of it immediately away;

I remain to be presented with any evidence about the success of any of those policies in any of those jurisdictions.

Like I said, this is just a short reaction to your post, without quoting any article or book to support me, that I’m sending you with friendship and admiration. I really don`t have a close view on this issue but I think (and I agree with what you say on your blog) that, concerning secondary policies, we won`t go back after 2014 directives. As so, operators will need guidance in this matter in the future.

Well, it is certainly an area where we will continue holding academic debates. :)

Postscript: Some further thoughts by Prof. Cunha Rodrigues

i) You say that secondary policies, at the end, can produce "a cross-subsidy that can go both in favour of or against the public purse / consumer purse." I think that this idea is stick to one of economic efficiency that is not necessarily linked to public interest. Sometimes, it`s necessary to pay more (public purse / consumer purse) in order to get a superior social outcome or to have a change in technology so cross-subsidy can have a positive effect to tax payer in a near future (namely when we prove that the outcome is more efficient if compared with other public tools).

Promoting social policies buying to companies that employ handicapped persons may not satisfy economic efficiency but it will meet public interest and satisfy public procurement goals. Another example: every time technology moves forward, prices get higher at the beginning so State, through public procurement, can have a role in helping to develop that technology and getting prices to be cheaper, namely by buying those products. That happened, in several countries, for essence when some public bodies decide to buy electric cars (and, in those cases, I think that competition would be more distorted if we exclude from the market inefficient cars through hard law rather than excluding them through public procurement).

ii) You mentioned that “secondary policies cannot be a fix for the inability to legislate appropriately”. I think that this idea, at the end, would translate to hard law the decision to exclude some (inefficient) products from the market what might agravate the effect of distorting competition because: a) it wouldn´t allow private parties to decide what to buy; b) it would exclude private producers from the market, causing an even bigger distortion of competition than the one (eventually) caused by using secondary policies through public procurement.

This is somehow an idea similar to what happens in competition law where, in some cases, R&D can justify antitrust behavior (along with others conditions, for sure, according to article 101.º, n.º 3 of the TFEU). In both cases, one can say that competition principle or an idea of economic efficiency doesn`t necessary prevail. Naturally this example can’t be understood in cases where public procurement comes along with monopsony power (and I fully agree with you that the possible application of article 102.º of the TFUE can be wider, in the future, even knowing FENIN and SELEX cases, because of the role that central purchasing bodies can and will have under 2014 directives).