Some bold thoughts about the (distant?) future of public procurement in the EU

I was invited by the European Commission (DG Internal Market, Industry, Entrepreneurship and SMEs, Unit E4 - Economic Analysis and E-Procurement, @EU_Growth), to participate in a very stimulating brainstorming session on cooperative public procurement, public procurement aggregation and, in particular, Central Purchasing Bodies (CPBs). For yesterday's session, DG Growth assembled an interesting panel of practitioners, institutional representatives and academics, and made sure that very different opinions were represented and properly voiced. DG Growth must be praised for that.

On the substance, the general arguments for and against cooperative procurement strategies (centralisation, aggregation, occasional joint procurement) were discussed in some detail [for background, see A Sanchez Graells and I Herrera Anchustegui, "Impact of Public Procurement Aggregation on Competition: Risks, Rationale and Justification for the Rules in Directive 2014/24" (2014) University of Leicester School of Law Research Paper No. 14-35] and the representative of the OECD advanced some interesting statistics on OECD Member States' adoption of centralised and cooperative procurement that undeniably present it as a very strong trend in public procurement reform. Not a surprising insight, but the trends that emerge from their questionnaire (hopefully, soon to be published) raise a significant number of questions on how to support and/or regulate this phenomenon.

In my view, this is the point were the discussion got all the most interesting after Joaquim Nunes de Almeida, Director for Public Procurement at DG Growth, asked the experts two seemingly simple questions: 1) Should the existing and growing trend of cooperative/aggregate/centralised procurement be considered as something positive and favoured/supported or not? 2) If so, how can the European Commission do it? 

The majority of experts presented their personal views and were generally very supportive of the general trend of cooperative/aggregated/centralised procurement as a lever to achieve smart/lean procurement and an enhanced strategic use of procurement, and suggested some soft law and cooperative interventions for the Commission to undertake in close cooperation with Member States and the emerging (informal) CPB network. I was more skeptical. Let me give present some of my bold thoughts for the (maybe not so) distant future of public procurement in the EU. They may seem shocking, but I hope there is some value in them.

1. Centralisation is not necessarily here to stay
Centralisation will not be the dominant trend for a very long time and technology will generate a very significant increase of unregulated public procurement by facilitating direct award of very small procurement contracts through (alternative) electronic platforms. Centralisation or cooperative procurement is a result of the increased pressure to achieve savings (as a result of the crisis, and more generally) and is facilitated by the technological opportunities that e-procurement creates. These two levers are bound to be short (or mid) lived and to phase out in the future. 

On the one hand, because the savings that centralised procurement creates cannot grow indefinitely. There are limits to the economies of scale potentially achievable and, in a scenario of very quick expansion of centralised procurement volumes, there will soon be dis-economies of scope and, generally, x-inefficiency within CPBs as organisations that will loose their flexible and dynamic configuration as they grow and become more and more assimilated to 'classic' public sector institutions. 

Moreover, 'individual' contracting authorities will always retain procurement duties and, consequently, it is unavoidable that the organisation of a system with partial centralisation creates duplication of administrative resources, particularly if recourse to CPBs is voluntary for the 'individual' contracting authority. Additionally, the financial models of CPBs will create issues and, unless they operate on a cost and no margin basis, contracting authorities may decide to not resort to CPBs at all in order to save that part of the administrative cost of procurement, particularly if they do not perceive the CPBs as a generator of significant savings (or other advantages) as compared to the conduct of their own e-procurement processes (once they have the technology in place). There will always be delicate issues of political instrumentalisation of CPBs that may make cooperation difficult in day to day issues. And in case CPBs push for the strategic use of procurement (green, social, innovative) in ways that increase costs or risks, 'individual' contracting authorities' interests may not be alligned or best served by CPBs (as agency theory very clearly explains, see CR Yukins, Christopher R., "A Versatile Prism: Assessing Procurement Law Through the Principal-Agent Model" (2010) 40(10) Public Contract Law Journal 63].

In that regard, the mandatory uptake of e-procurement by April 2018 as a result of the implementation of the 2014 Directives will erode, if not suppress, the technological advantage that CPBs now enjoy as first movers. Once all contracting authorities have migrated to e-procurement (and they must do so, unless they completely transfer their procurement activities to CPBs, which does not seem like a plausible scenario because CPBs will never get to manage absolutely all the categories of products and services that contracting authorities need), the advantage of resorting to CPBs will be diminished. Once e-procurement is truly rolled-out, contracting authorities will have all technological tools in place to buy from alternative vendors, such as amazon or ebay, and they may as well do it. 

Once (if) aggregation is not the major consideration, 'individual' contracting authorities will have all incentives to carry out below the thresholds (unregulated) e-procurement and buy electronically all supplies (particularly) and services (possibly) they need. Of course, this will issue potential problems of circumvention of the Directives and the domestic rules that implement them. However, in a scenario of truly rolled-out e-procurement where each 'individual' contracting authority can buy for itself, it is unlikely that schools, hospitals, universities or small and medium sized public organisations will ever reach the value thresholds actually in place by purchasing commoditised goods (and services), which are the ones that CPBs trade in. Hence, the complex system of rules in the 2014 Directives may be come substantially unfit for purpose (or, as a colleague summed it up yesterday, 'obsolete').

2. Private competition will emerge and must be favoured through strict enforcement of competition law over CPBs
It follows from the above that one of the implicit and very significant future difficulties created by the emergence and growth of CPBs and other mechanisms of cooperative/centralised/aggregated procurement is that they are vulnerable to private competition. The system is currently being developed on the basis of an (implicit) legal monopoly granted to CPBs as the only organisations providing aggregation/rationalisation/e-procurement services to the public sector--or, in terms of Directive 2014/24 ancillary purchasing services. This is now legally protected as potentially unassailable under the rules of Art 37 Dir 2014/24, particularly with the protection for direct award of those services contracts to CPBs [art 37(4)], to the exclusion of competition from private suppliers of those services. However, this is not a desirable or even sustainable situation in the future.

Firstly, because the system is hoping for inter-CPB competition, particularly of a cross-border nature, so that CPBs compete to attract 'business' from 'individual' contracting authorities in other Member States (or regions within the same Member State). Secondly because CPBs are also authorised to offer services and goods in the private market (or at least not prohibited from doing so). This will have major implications for competition law enforcement on CPBs [see Sanchez Graells & Herrera Anchustegui, above, and A Sanchez Graells, Public procurement and the EU competition rules, 2nd edn (Oxford, Hart, 2015) 58-60, 255-57 and 347-52] and it is not only desirable, but very likely that DG Competition will have to, at some point, issue guidance on the application of Articles 101 and 102 TFEU to CPBs, without the protection of Article 106(2) TFEU for services of general economic interest (SGEIs) being necessarily available. State aid issues related to the application of Art 107(1) TFEU will also arise.

Second, because private competition is bound to appear (or, more likely, be strengthened), particularly as a result of technological development. Not only because existing online vendors will continue being the natural competition of any e-procurement system (be it run by a CPB, or otherwise). But also at platform level. Any company that can successfully develop a two-sided platform that offers procurement aggregation/rationalisation at a lower cost than CPBs, or that works in a more effective manner, will necessarily find a space in the market and challenge the incumbent position of CPBs (however big they can be at the time). It will be politically indefensible to insist on the use (voluntary or mandatory) of a CPB that is less efficient than alternative market players, particularly if the CPB also competes with them for private business--at which point, the issue would be also legally untenable and would trigger issues of competitive neutrality of the highest order [for background and general discussion, see TK Cheng, I Lianos and DD Sokol (eds), Competition and the State, Global Competition Law and Economics (Stanford, CA, SUP, 2014) and D Sappington and GJ Sidak, "Competition Law for State-Owned Enterprises" (2003) 71(2) Antitrust Law Journal 479-523].

3. The Commission can play an important role by creating training materials
The Commission can have a very important role at this stage, clarifying the limits of the regulatory framework derived from the 2014 Directives and creating useful training tool-kits that can be made available on-line for all contracting authorities in the Member States to acquire the necessary knowledge. They could also create new prizes, or refresh/boost the existing ones, to recognise and disseminate good practices.

Of course, training contrating officers is very difficult due to their sheer numbers, as well as the complexity of the 2014 procurement system. However, it should not (must not) be impossible. If it was impossible, then the deeper problem would be that EU public procurement law would be manifestly unfit for its purpose and a very significant transformation and simplification would be urgently needed (it is and will be more and more necessary, of course, but not desperately urgent; in any case, for criticism of the 2014 rules due to their complexity, see R Caranta, "The changes to the public contract directives and the story they tell about how EU law works", (2015) 52(2) Common Market Law Review 391-459; and S Arrowsmith, "Modernising the European Union’s Public Procurement Regime: a Blueprint for Real Simplicity and Flexibility" (2012) 21 Public Procurement Law Review 71-82).

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In short, then, my view is that in the long-run, public procurement centralisation/aggregation/cooperative procurement will become a part of the system, but by far not the entirety of the system, and that its relative importance will be diminished in the future by technological and market developments. In my view, the role for the Commission is twofold. DG Growth should focus on training and professionalization of all contracting authorities (and they have some initiatives under consideration) and DG Comp should focus on developing early guidance and a close monitoring system of the activities of CPBs and, more generally, powerful public buyers. Reversely, if centralisation and the market and legal protection of CPBs is embraced and protected, then this will be an instance of (inadvertent?) creation of a legal monopoly (and monoposony, in many markets) that can only result in social loss. I hope that my views, even if possibly extreme or shocking, at least contribute to a debate on centralisation that takes the long view.