Brexit & Procurement: Transitioning into the Void?


Dr Pedro Telles and I are putting the last touches to a new paper on Brexit and procurement (see here for an earlier analysis). In this working paper, we concentrate on the implications of the draft transition agreement of March 2018, as well as some of the aspects of a potential future EU-UK FTA. The abstract of the paper, which is available on SSRN and on which we sincerely invite any feedback, is as follows:

On 29 March 2017, the UK notified its intention of leaving the EU. This activated the two-year disconnection period foreseen in Article 50 TEU, thus resulting in a default Brexit at the end of March 2019. The firming up of a draft agreement on a transition period to run until 31 December 2020 can now provide a longer timescale for the Brexit disconnection, as well as some clarity on the process of disentanglement of the UK’s and EU’s legal systems. The draft transition agreement of 19 March 2018 provides explicit rules on public procurement bound to regulate ‘internal’ procurement trade between the UK and the EU for a period of over 15 months. However, the uncertainty concerning the future EU-UK relationship remains, and the draft agreement does not provide any indication on the likely legal architecture for future EU-UK trade, including through public procurement. The draft agreement has thus not suppressed the risk of a ‘cliff-edge’ disconnection post-Brexit, but rather solely deferred it. The transition is currently not into an alternative system of procurement regulation, but rather into the void. There have also been very limited developments concerning the UK’s and EU’s repositioning within the World Trade Organisation Government Procurement Agreement (WTO GPA), which creates additional legal uncertainty from the perspective of ‘external’ trade in procurement markets due to the absence of a ‘WTO rules’ default applicable to public procurement.

Against the backdrop of this legal uncertainty, this paper critically assesses the implications for public procurement of the March 2018 draft transition agreement. In particular, the paper identifies three shortcomings that would have required explicit regulation: first, the (maybe inadvertent) exclusion from the scope of coverage of the of the draft transition agreement of procurement carried out by the EU Institutions themselves; second, the continued enforcement of the rules on contract modification and termination; and third, the interaction between procurement and other rules. The paper also and flags up some of the areas for future EU-UK collaboration that require further attention. The paper then goes on to revisit the continued uncertainty concerning the EU’s and UK’s position within the WTO GPA. It concludes that it is in both the UK’s and the EU’s interest to reach a future EU-UK FTA that ensures continued collaboration and crystallises current compliance with EU rules, and to build on it to reach a jointly negotiated solution vis-a-vis the rest of WTO GPA parties.

The full details of the paper are as follows: P Telles & A Sanchez-Graells, 'Brexit and Public Procurement: Transitioning into the Void?' (April 20, 2018) SSRN working paper

Legal Archaeology: Timing of Brexit, CJEU case law & substantive public procurement rules


At the extremely thought-provoking conference "Trade Relations after Brexit: Impetus for the Negotiation Process", I had the chance to present some thoughts on the regulatory challenges that Brexit poses for EU public procurement regulation, and to explore potential solutions that could/should be designed in the context of an agreement regulating future EU-UK relationships. I already posted my general views here. However, the discussions at the conference made me think in more detail about the specific challenge of fostering substantive coordination post-Brexit--which is an unavoidable challenge if the UK is to have any sort of meaningful access to the EU internal market, and all the more in the context of an ambitious FTA.

Of course, this challenge is not all that peculiar to the area of public procurement, and the general problems that section 6(2) of the European Union (Withdrawal) Bill (EUWB) creates concerning the non-bindingness of the future case law of the Court of Justice have been extensively discussed by others. Indeed, by establishing that 'A court or tribunal need not have regard to anything done on or after exit day by the European Court, another EU entity or the EU but may do so if it considers it appropriate to do so', if unchanged, the EU (Withdrawal) Act would create a level of legal uncertainty that nobody desires--first and foremost, prominent UK Judges such as Lord Neuberger.

However, it seems to me that, should Brexit day come some time in 2019 or 2020, the effects of the EUWB could be rather undesirable--unless, of course, UK courts decided to systematically (and voluntarily) keep a close eye on the CJEU future case interpreting the 2014 Public Procurement Package. Why is that?

The UK transposed the 2014 Public Procurement Package by copying it out, primarily into the Public Contracts Regulations 2015 [A Sanchez-Graells, 'The Implementation of Directive 2014/24/EU in the UK', in S Treumer & M Comba (eds), Implementation of Directive 2014/24, vol. 8 European Procurement Law Series (Edward Elgar, forthcoming). ]. Thus, barring any intervening 'fine-tuning' of the transposition, on Brexit Day (and until such time as the PCR2015 are reformed, or EU procurement law subject to further revision), the domestic UK rules will be perfectly aligned with EU public procurement law. However, and rather counterintuitively, this cannot by itself ensure substantive coordination in the foreseeable future. How come?

As things stand, and unless I have missed something, the CJEU is yet to issue any judgment interpreting the three Directives included in the 2014 Public Procurement Package (Dirs 23, 24 and 25/2014/EU). On occasion, the Court has indirectly taken into consideration some of the reforms the 2014 Package brought about, but most of the rules where there is a sharp distinction between the pre-2014 and the post-2014 rules (which sometimes involve a 'flexible recast' or implicit reform of case law that got incorporated to the new Directives) remain untouched. Enter the EUWB.

According to section 6(3) EUWB, "Any question as to the validity, meaning or effect of any retained EU law is to be decided, so far as that law is unmodified on or after exit day and so far as they are relevant to it—(a) in accordance with any retained case law and any retained general principles of EU law, ...". So, when confronted with the need to interpret the PCR2015 (identical to the 2014 Package), the UK Courts will only be able to rely on 'old' CJEU case law, which may or may not be a good proxy of the interpretation the CJEU would (will) make of the revised rules, in particular where there is a clash between such 'old' case law and the new rules [for extended discussion, see GS Ølykke & A Sanchez-Graells (eds), Reformation or Deformation of the EU Public Procurement Rules (Edward Elgar, 2016)].

Moreover, given the different techniques of statutory interpretation applicable in the UK and those the CJEU tends to follow, even the most willing UK court may find itself carrying out complex exercises in 'legal archeology' to ascertain the extent to which the 'old' case law buried under the new rules is of any use in the construction of the latter. Oddly enough, should the UK courts--willingly, due to convenience, or inadvertently--give more weight to the 'old' case law than the CJEU itself (which could decide to go by the literal tenor of the new rules, even if they deactivate previous jurisprudential positions, to show deference to the EU legislators) the UK could end up with 'purer' EU public procurement rules than the EU itself. Surely not what the drafters of section 6(2) and (3) EUWB had in mind.

Of course, this hypothetical scenario is bound to lose relevance as time goes by and the CJEU has the chance to engage in the direct interpretation of the 2014 Package--and a long transition period may do away with the peculiarity derived from the current 'estimated' timing of Brexit and the recent reform of EU public procurement law. More generally, all in all, this is probably highly theoretical or even absurd, but I think it militates in favour of a flexible mechanism for UK courts to (voluntarily, sure) send references on interpretation to the CJEU post-Brexit, if there is to be substantive coordination--not solely on procurement, but in all areas of 'regulatory allignment' of a flavour or other, in the context of the agreement for future EU-UK relationships. Will the next wave of negotiations raise to this challenge?

Examining Brexit Through the GPA’s Lens: What Next for UK Public Procurement Reform?


Dr Pedro Telles and I have just published 'Examining Brexit Through the GPA’s Lens: What Next for UK Public Procurement Reform?' (2017) 47(1) Public Contract Law Journal 1-33 and, thanks to the permission of the American Bar Association, made it available through SSRN This is the abstract:

The United Kingdom has formally started the process of leaving the European Union (so called Brexit). This has immersed the UK Government and EU Institutions in a two-year period of negotiations to disentangle the UK from EU law by the end of March 2019, and to devise a new legal framework for UK-EU trade afterwards. The UK will thereafter be adjusting its trading arrangements with the rest of the world. In this context, public procurement regulation is broadly seen as an area where a UK ‘unshackled by EU law’ would be able to turn to a lighter-touch and more commercially-oriented regulatory regime. There are indications that the UK would simultaneously attempt to create a particularly close relationship with the US, although recent changes in US international trade policy may pose some questions on that trade strategy. Overall, then, Brexit has created a scenario where UK public procurement law and policy may be significantly altered.

The extent to which this is a real possibility crucially depends on the framework for the future trading relationship between the UK and the EU. Whereas ”EU-derived law” will not restrict the UK’s freedom to regulate public procurement, the conclusion of a closely-knit EU-UK trade agreement covering procurement could thus well result in the country’s continued full compliance with EU rules. Nonetheless, this is not necessarily a guaranteed scenario and, barring specific requirements in future free trade agreements between the UK and the EU or third countries, including the US, the World Trade Organisation Government Procurement Agreement (GPA) seems to be the only regulatory constraint with which future UK public procurement reform needs to conform. However, the position of the UK under the GPA is far from clear. We posit that the UK will face a GPA accession process and GPA members may see Brexit as an opportunity to obtain new concessions from the UK and the EU, which could be both in terms of scope of coverage or regulatory conformity. Further, given the current trend of creating GPA plus procurement chapters in free trade agreements, such as the US-Korea FTA, the GPA regulatory baseline will gain even more importance as a benchmark for any future reform of public procurement regulation in the UK, even beyond the strict scope of coverage of the GPA. Given the diversity of GPA-compliant procurement systems (such as the EU’s and the US’), though, the extent to which the GPA imposes significant restrictions on UK public procurement reform is unclear. However, we argue that bearing in mind the current detailed regulation in the UK might itself limit deregulation due to the need to comply with the international law principle of good faith as included in the 1969 Vienna Convention on the Law of Treaties and, to a certain extent, the United Nations Convention Anti-Corruption. 

The aim of this paper is to try to disentangle the multi-layered complexities of Brexit and to explore the issues that Brexit has created in the area of international public procurement regulation, both from the perspective of ‘internal’ EU law-related issues and with regard to broader ‘external’ issues of international trade regulation, as well as to assess the GPA baseline regulatory requirements, and to reflect on the impact these may have on post-Brexit public procurement reform in the UK.

International Seminar on the Transposition of the 2014 Public Procurement Directives

I was honoured to take part in the International Seminar on the Transposition of the 2014 Public Procurement Directives organised by the Institute of Local Law of the Autonomous University of Madrid and the Madrid City Council. These are the slides (in Spanish) I used to present my views on the UK's transposition of the 2014 Public Procurement Package.

Concerted withdrawal of bids for legal aid work: a cartel in public procurement. Could it be justified?

I just found out yesterday (thanks @Detig) about the London Criminal Courts Solicitors' Association (LCCSA) campaign to boycott on-going legal aid reforms (ie cuts to legal aid). In a nutshell, the LCCSA is asking its members to exchange information about their willingness to withdraw the bids they submitted to the Legal aid crime tender 2015

The LCCSA intends to use the information to inform their ongoing engagement with the Ministry of Justice (ie, put pressure and stop the cuts). Generally, this could be seen as a worthwhile act of protest against a policy that will deepen inequality in access to justice. However, the way they are implementing it is deeply concerning from a competition and public procurement perspective.

Similarly to past action from the Bar (see @AngusMacCulloch's good piece here), this is a textbook cartel (see also @PublicProcure additional remarks here). Independent firms are exchanging confidential commercial information in a way that is not required by their activity in the market. This is prohibited by the relevant UK and EU rules, as interpreted by the Court of Justice of the EU (CJEU) in several cases. Most recently, in MasterCard (C-382/12, EU:C:2014:2201, para 62), the CJEU stressed that
Without prejudice to the right of economic operators to adapt themselves intelligently, but independently, to the existing or anticipated conduct of their competitors (see judgments in Suiker Unie and Others v Commission, 40/73 to 48/73, 50/73, 54/73 to 56/73, 111/73, 113/73 and 114/73, EU:C:1975:174, paragraph 174; Ahlström Osakeyhtiö and Others v Commission, C‑89/85, C‑104/85, C‑114/85, C‑116/85, C‑117/85 and C‑125/85 to C‑129/85, EU:C:1993:120, paragraph 71; and Asnef-Equifax and Administración del Estado, C‑238/05, EU:C:2006:734, paragraph 53 and the case-law cited), Article [101 TFEU] catches all forms of cooperation and of collusion between undertakings, including by means of a collective structure or a common body, such as an association, which are calculated to produce the results which that provision aims to suppress (see, to that effect, judgments in Nederlandse Vereniging voor de fruit en groentenimporthandel and Frubo v Commission, 71/74, EU:C:1975:61, paragraph 30; van Landewyck and Others v Commission, 209/78 to 215/78 and 218/78, EU:C:1980:248, paragraph 88; and Eurofer v Commission, C‑179/99 P, EU:C:2003:525, paragraph 23).
Regarding the prohibition to exchange information in itself, in Asnef-Equifax (C-238/05, EU:C:2006:734, paras 51-52), the Court very clearly stressed that
According to the case-law on agreements on the exchange of information, such agreements are incompatible with the rules on competition if they reduce or remove the degree of uncertainty as to the operation of the market in question with the result that competition between undertakings is restricted (John Deere v Commission, paragraph 90, and Case C-194/99 P Thyssen Stahl v Commission [2003] ECR I-10821, paragraph 81).
In effect, it is inherent in the Treaty provisions on competition that every economic operator must determine autonomously the policy which it intends to pursue on the common market. Thus, according to that case-law, such a requirement of autonomy precludes any direct or indirect contact between economic operators of such a kind as either to influence the conduct on the market of an actual or potential competitor or to reveal to such a competitor the conduct which an operator has decided to follow itself or contemplates adopting on the market, where the object or effect of those contacts is to give rise to conditions of competition which do not correspond to the normal conditions of the market in question, taking into account the nature of the products or the services provided, the size and number of the undertakings and also the volume of the market (see Commission v Anic Partecipazioni, paragraphs 116 and 117, as well as the case-law cited).
Thus, there is no doubt that LCCSA's activity is in contravention of the applicable competition law provisions. It is true that the LCCSA is trying to create some safeguards on the circulation of that information.  According to their 'invitation to indicate a willingness to de-tender':
This information will be held on a confidential basis, with responses sent to and collated by one named solicitor member of the LCCSA committee who will not disclose the names of the firms submitting information to anyone including officers and any other committee members of the LCCSA unless and until that firm’s consent has been obtained for their name to be released to the LCCSA officers and committee.
The solicitor holding the information (who is from a firm not submitting any tender) would be able to provide to the President and the Vice President of the LCCSA committee the number of responses received, the numbers bidding, the numbers not bidding, the numbers indicating a willingness to refuse an offer if made or withdrawing a bid and the areas involved. 
However, these safeguards are insufficient to ensure that (with the consent of the participating firms), the information will not end up in the hands of their competitors. Moreover, the aim of the exchange of information is to boycott the Legal aid crime tender 2015, which in my view is a clear anti-competitive agreement prohibited because its object is to restrict or distort competition, so the actual effects of the exchange of information need not be proved. 

Moreover, it is taking place in a public procurement scenario, which can have further implications in terms of future debarment of these firms if found guilty [for discussion, see here and A Sanchez Graells, "Exclusion, Qualitative Selection and Short-listing in the New Public Sector Procurement Directive 2014/24" in F Lichere, R Caranta and S Treumer (ed) Novelties in the 2014 Directive on Public Procurement, vol. 6 European Procurement Law Series, (Copenhagen, Djøf Publishing, 2014)].

Photograph: Sean Smith for the Guardian
Sean Smith/Guardian
Could it be justified?
Despite the clear prohibition of the conduct in which LCCSA has engaged, given that it pursues a declared worthwhile objective and, in any case, could be seen as a manifestation of (informal) collective labour action and/or a right to demonstrate against the government, it is relevant to assess whether the invitation to indicate a willingness to de-tender campaign could be justified.

In my view, the possibility to justify it under Art 101(3) TFEU is very slim, if there is any. As stressed in Asnef-Equifax (para 65),
The applicability of the exemption provided for in Article [101(3) TFEU is subject to the four cumulative conditions laid down in that provision. First, the arrangement concerned must contribute to improving the production or distribution of the goods or services in question, or to promoting technical or economic progress; secondly, consumers must be allowed a fair share of the resulting benefit; thirdly, it must not impose any non-essential restrictions on the participating undertakings; and, fourthly, it must not afford them the possibility of eliminating competition in respect of a substantial part of the products or services in question (see, to that effect, Joined Cases 43/82 and 63/82 VBVB and VBBB v Commission [1984] ECR 19, paragraph 61, as well as Remia and Others v Commission, paragraph 38).  
And the application of the second condition requires that 'objective economic advantages might be such as to offset the disadvantages of such a possible restriction' (para 67), which is a very difficult test to apply in this case, particularly in view of the undertain outcome of LCCSA's campaign and the ensuing regulatory response by the Ministry of Justice, if any.

A longer shot would be to try to apply the doctrine of the CJEU regarding infringements of EU law based on the exercise of fundamental rights--as discussed in Schmidberger (C-112/00, EU:C:2003:333, paras 80 and ff). In that situation, which concerned a restriction of free movement of goods and not a competition infringement (and this, in itself, creates significant uncertainty as to the possibility of extrapolating the argument without more), 
neither the freedom of expression nor the freedom of assembly ... appears to be absolute but must be viewed in relation to its social purpose. Consequently, the exercise of those rights may be restricted, provided that the restrictions in fact correspond to objectives of general interest and do not, taking account of the aim of the restrictions, constitute disproportionate and unacceptable interference, impairing the very substance of the rights guaranteed (see, to that effect, Case C-62/90 Commission v Germany [1992] ECR I-2575, paragraph 23, and Case C-404/92 P X v Commission [1994] ECR I-4737, paragraph 18).
In those circumstances, the interests involved must be weighed having regard to all the circumstances of the case in order to determine whether a fair balance was struck between those interests.
The competent authorities enjoy a wide margin of discretion in that regard. Nevertheless, it is necessary to determine whether the restrictions placed upon intra-Community trade are proportionate in the light of the legitimate objective pursued, namely, in the present case, the protection of fundamental rights.
In a case involving similar acts of demonstration (albeti with use of force) for the purpose of forcing engagement with negotiations (Laval un Partneri, C-341/05, EU:C:2007:809), the assessment of proportionality of the boycott was strict and the CJEU determined that EU law prevented 'a trade union ... from attempting, by means of collective action in the form of a blockade (‘blockad’) of sites ... to force a provider of services ... to enter into negotiations with it'. Thus, this potential justification also seems unlikely to cover LCCSA's campaign.

What then?
Given that LCCSA's 'invitation to indicate a willingness to de-tender' and, generally, its attempts to boycott the MoJ's Legal aid crime tender 2015 run against competition law and they cannot be justified or exempted from the prohibition, the association may want to desist from this course of action and think about more creative (legal) ways of opposing the policy of cuts in this area. Otherwise, their efforts will be in vain and their main goal of positively influencing a system that ensures access to justice will be further diminished in case the LCCSA is found in breach of competition law and forced to pay penalties.

A political scientist's call (to the UK) to strengthen competition in the procurement of social services (Lamothe, 2014)

In its interesting paper 'How Competitive is "Competitive" Procurement in the Social Services?' (2014) The American Review of Public Administration 1-23 (advanced on-line access available here), Scott Lamothe conducts an interesting empirical study where he shows that using measures of competition for contracts that go beyond the crude number of tenders received (ie, assessing the quality of the bids submitted) casts new light on the assessment of the degree of effective competition in procurement settings. 

More importantly, his findings indicate that "while the measures used in earlier studies align reasonably well with the raw number of initial responders to competitive solicitations, they tend to overestimate competition when the quality component is included in the analysis. That is, social service markets may be even weaker than previously reported.

In view of that evidence from the US, EU policy-makers and legislators will be well-advised to read this paper and digest its insights before they embark into the transposition of Art 74-77 of Directive 2014/24 in a way that allows for a reduction in the competition for social services contracts that makes these markets even weaker. 

In the UK, this is particularly relevant for the transposition of Art 77 Dir 2014/24, where the Government insists in maximising the possibilities of limiting competition for the procurement of social and special services. This has been very recently stressed in the Government's response to the consultation on transposition through the Public Contracts Regulations 2015, which clearly emphasises that "The implementation of the proposed Regulation 77 [equivalent to Art 77 in the Directive] regarding reserved contracts for certain services is a strategic Government priority to support the mutuals programme" (para 132).  

The empirical evidence mentioned above suggests that this strategy is bound to create very poor results in the medium term, particularly because the lack of proper competition will not create appropriate checks and balances to the provision of those services by de facto monopolists.

Hence, the UK Government would be advised to further reconsider their strategy to maximise the carve-out from competitive procedures in the procurement of social and special services--not least because the regulatory constraints on these markets are also attenuated due to the structural conflict of interest that affects the sector regulator's ability to enforce competition and procurement rules in a proper way; as discussed in A Sanchez-Graells, Monitor and the Competition and Markets Authority (2014) University of Leicester School of Law Research Paper No. 14-32]. Will the UK Government respond to this wake up call?

Risk of 'sweet deals' for public sector #mutuals under the new #EU #publicprocurement rules leading to #monopolisation of social services

Article 76a of the final compromise text for a new Directive on public procurement creates a significant risk of abuse in the award of contracts for social services that may be of particular concern when read side by side with the UK Government's public sector mutualisation strategy.

Article 76a allows contracting authorities to reserve for the participation of given types of organisations (such as ‘public sector mutuals’, for instance) the award of contracts for certain services included in specific categories of the Common Procurement Vocabulary[1] in the areas of health, social and cultural services[2]—which basically comprise all or the most relevant medical services, personal services, educational and training services (including eLearning), sports and cultural services. 

In such cases, the contracting authority will need to make sure that the (type of) organisation chosen to be awarded the contract meets the following requirements: (a) its objective is the pursuit of a public service mission linked to the delivery of the services to be contracted; (b) its profits are reinvested with a view to achieving the organisation’s objective (and where profits are distributed or redistributed, this should be based on participatory considerations); (c) the structures of management or ownership of the organisation performing the contract shall be based on employee ownership or participatory principles, or shall require the active participation of employees, users or stakeholders; and (d) the organisation shall not have been awarded a contract for the services concerned by the contracting authority concerned pursuant to this Article within the past three years. Moreover, the maximum duration of the contract shall not be longer than three years and the call for competition shall make reference to this Article. There is no (maximum) value threshold for this exclusion to be effective.

Given that the Mutuals Taskforce has clearly recommended that the UK Government use the (direct) award of contracts as a tool to support, foster and consolidate the creation of public sector mutuals (Recomm 9), there is a risk that the carve-out (negotiated?) in the new EU public procurement rules leaves the award of such 'start-up contracts' fundamentally unchecked, since there will basically be no EU rules applicable in this case, regardless of the value of the contracts [which is also valid in relation to the EU rules on the control of State aid, which exclude health care and other social services from their scope of application; see art 2 of Decision 2012/21/EU].

Therefore, there is a clear risk that the public sector reform strategy ends up creating (3-year long, local) monopolies for the provision of those services in the hands of the newly spun-off public sector mutuals, which may extend their dominance beyond that point in time as incumbency advantages pile up. That would result in distortions of competition similar to those just identified by the Competition Commission in the market enquiry on private health care services and, in my view, is an undesirable prospect. 

In that regard, then, the OFT (and, soon enough, the CMA) seems to have a mounting amount of pressure to uphold its commitment in the 2013-14 Annual Plan to "focus on IT and local government issues in particular and work with government partners on a range of issues relating to the public sector reform agenda to ensure that government interventions maintain competitive markets. In addition to advocacy and influencing, [the OFT] will consider using the full range of tools at our disposal to tackle any breaches of competition law identified in public service markets" (emphasis added).

Otherwise, the structural changes that non-competitive mutualisation under the umbrella of Article 76a of the new EU public procurement rules can create may be difficult (if not impossible) to revert in the future. At any rate, however, the difficulty derived from the blurred application of competition rules in the health care sector after the National Health Service (Procurement, Patient Choice and Competition) (No. 2) Regulations 2013 were approved may require some creative enforcement efforts on the part of the OFT (and the European Commission).

[1] See the consolidated version available at, last accessed 2 September 2013.
[2] The specific references are 75121000-0 (Administrative educational services), 75122000-7 (Administrative healthcare services), 75123000-4 (Administrative housing services), 79622000-0 (Supply services of domestic help personnel), 79624000-4 (Supply services of nursing personnel), 79625000-1 (Supply services of medical personnel), 80110000-8 (Pre-school education services), 80300000-7 (Higher education services), 80420000-4 (E-learning services), 80430000-7 (Adult-education services at university level), 80511000-9 (Staff training services), 80520000-5 (Training facilities), 80590000-6 (Tutorial services), from 85000000-9 to 85323000-9 (fundamentally, all types of medical services), 92500000-6 (Library, archives, museums and other cultural services), 92600000-7 (Sporting services), 98133000-4 (Services furnished by social membership organisations), and 98133110-8 (Services provided by youth associations). 

UK's Competition Commission issues provisional findings on private healthcare markets

The UK's Competition Commission (CC) has published today its provisional findings and remedies to improve competition in private healthcare markets. All relevant documents can be accessed here.

The CC's provisional findings show a situation where hospitals hold a significant degree of market power derived from a lack of local competition (particularly in the case of companies that own clusters of hospitals in a given region), which is not compensated by the countervailing power of (even the largest) private medical insurance companies. The CC is consequently envisaging to recommend some structural remedies that may include the divestiture of up to 20 hospitals in different areas of the UK.

In my view, the analysis of this sector is difficult to understand because it is conducted in isolation. My impression is that public and private healthcare markets should be analysed together--or that, at least, their connections should receive more attention--since public healthcare seems an obvious constraint on the offer and demand of private healthcare. If that was correct, then, the proposed structural changes in this sector should take into consideration the significant reform of the National Health System (NHS) that is taking place and the effects that the recently adopted National Health Service (Procurement, Patient Choice and Competition) (No. 2) Regulations 2013 may generate in the provision of (public) healthcare in the UK in the near future.

In any case, it seems clear that the competitive landscape of the healthcare sector in the UK is about to suffer a significant change (in both its public and private dimensions) and that this is an area that deserves some careful policy-making for its immediate impact on the welfare of citizens and the costs (for private and public entities) of continuing to offer them satisfactory standards of healthcare. In that regard, it will be interesting to see what are the final remedies and recommendations due to be adopted by the CC in April 2014.

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

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

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

10.—(1) When commissioning health care services for the purposes of the NHS, a relevant body must not engage in anti-competitive behaviour [i.e. behaviour which would (or would be likely to) prevent, restrict or distort competition], unless to do so is in the interests of people who use health care services for the purposes of the NHS which may include—
(a) by the services being provided in an integrated way (including with other health care services, health-related services, or social care services); or
(b) by co-operation between the persons who provide the services in order to improve the quality of the services.
(2) An arrangement for the provision of health care services for the purposes of the NHS must not include any term or condition restricting competition which is not necessary for the attainment of—
(a) intended outcomes which are beneficial for people who use such services; or
(b) the objective referred to in regulation 2.

The only explanation provided in the Explanatory Memoradum is that

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

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

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

When will behaviour be anti-competitive and not in the interests of users of health care services?
Where a commissioner’s conduct is in the interests of patients its behaviour will not be inconsistent with the prohibition on anti-competitive behaviour in Regulation 10.
In assessing whether or not anti-competitive behaviour is in the interests of health care service users, Monitor will carry out a cost/benefit analysis. Monitor will consider whether by preventing, restricting or distorting competition behaviour gives rise to material adverse effects (costs) for health care service users.
If we find that behaviour gives rise to material costs, we will consider whether it also gives rise to benefits that could not be achieved without the restriction on competition.
Monitor will then weigh the benefits and costs against each other.

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

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

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

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

·               has limited the extent to which providers are able to compete to attract patients to their services, for example, by limiting the total number of patients a provider can treat or the income a provider can earn, or by restricting the providers to whom a provider can refer patients for further treatment, without objective justification;
·               has restricted the ability of providers to differentiate themselves to attract patients, such as, for example, by imposing minimum waiting times that providers must adhere to or restricting opening hours without objective justification; and
·               has reduced the incentives on providers to compete, such as, for example, by disclosing commercially sensitive information belonging to one provider to a different provider without objective justification.

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

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

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

Public sector reform in the UK: A procurement battlefield in the horizon?

With is forthcoming announcement of a new wave of privatisation, the Cabinet Office is envisaging a significant redesign of the public sector and the provision of public services in the UK

In broad strokes, the Ministers are preparing to spin off a significant number of state-owned services into independent companies that will be owned by the Government, private investors (with a share of up to 50%) and workers (up to 25%), and to which the Government will then guarantee contracts for a number of years – with the businesses free to sell their services in the market.

Such a strategy will reshape the UK public sector, but it will also have a very significant impact on competition in services markets (since the Cabinet Office is focusing on IT, personnel and legal functions, which could be provided by existing private suppliers in the markets concerned).

This is a strategy that deserves close scrutiny by the competition watchdog--as anticipated by the OFT in its 2013-14 Annual Plan, where it stresses that it "may focus on IT and local government issues in particular and work with government partners on a range of issues relating to the public sector reform agenda to ensure that government interventions maintain competitive markets. In addition to advocacy and influencing, [the OFT] will consider using the full range of tools at our disposal to tackle any breaches of competition law identified in public service markets." Maintaining competitive neutrality will be a major issue, as indicated by the OECD recently.

Importantly, the public sector reform will need monitoring from the public procurement perspective. Depending on how the privatisation and contracting out strategy is carried out, the Cabinet Office will create a complex scenario by running auctions  to acquire 'minority' stakes in the spin-off companies and (simultaneously?) running (open?) tenders or directly awarding the contracts to the newly created companies. 

If these procedures are not structured and timed in the proper manner, the UK government could easily fall foul of the relevant rules and exceptions to the current EU public procurement Directives--including, to name the most relevant ones, the 'public-public' cooperation exception, the 'in-house' provision exception, and the direct award of contracts on the basis of exclusive rights (which abuse determines the ineffectiveness of the contracts). 

It is worth noting that the current proposals for the reform of the EU procurement rules include some potential changes that could contribute to further legal complication, depending on the final calendar for the transposition of the new EU rules.

Moreover, the rules on State aid to services of general economic interest will also be relevant, particularly once the spin-off companies start competing in the market and incumbents or new entrants raise claims that public participation and public contracts allow them to cross-subsidise activities and compete unfairly for public and private business.

Given the multiple competition, public procurement and State aid implications of the new wave of public sector reform in the UK, this sector deserves close monitoring and will provide a myriad of opportunities for legal and economic analysis and research. Moreover, given that this is not the only strategy for public sector reform (since, at local level, aggregation of demand and pure public-public cooperation schemes are being developed), this promises to be an interesting battlefield.

Avoiding gold plating in the transposition of #EUlaw: A distinctive UK approach?

The Department for Business, Innovation and Skills has recently published its March 2013 'Gold-plating review' as a Report on the Operation of the Transposition Principles in the Government’s Guiding Principles for EU Legislation. The Report covers 88 proposals to implement EU measures over the eighteen-month period, from 1 July 2011 to 31 December 2012.

In my view, the Report clearly shows resistance to the prompt incorporation of EU Law into the UK legal system, as clearly indicated by the fact that "in 95% of cases over the eighteen-month period Departments have implemented on or after the transposition deadline, with only four examples where Departments sought agreement to implement measures early" (emphasis added).

Most remarkably, the UK Government is not shy to acknowledge the infringement of EU Law that belated transposition implies. And this should be worrying, not least because it can trigger the initiation of infringement procedures by the European Commission.

In my view, it is legitimate for Member States to take advantage of the transposition periods as they consider in their best interest. But it cannot be in the (national) public interest to breach EU Law by belatedly transposing Directives into the UK legal system. Even taking into consideration the interest of the UK in eventually renegotiating its terms of membership of the EU, only an exquisite compliance strategy will build a solid negotiating platform.

Therefore, contrary to the generally positive conclusion of the Report, I think that the UK Government should implement an effective strategy to make sure that no Directive gets transposed after its transposition deadline. That is a clear requirement for the proper transposition of EU Law. And it should not be overseen.