Bid rigging conspiracy in railroad electrification works: A very Spanish 'sainete'

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A case of bid rigging in works contracts for high-speed and conventional railroad electrification in Spain evidences a number of shortcomings in the domestic transposition of the 2014 rules on discretionary exclusion of competition law offenders from public procurement tenders, as well as some dysfunctionalities of their interpretation by the Court of Justice of the European Union (CJEU) in its Judgment of 24 October 2018 in Vossloh Laeis, C-124/17, EU:C:2018:855. The unilateral price adjustment of live contracts sought by the main victim of the cartel, the Spanish rail network administrator ADIF comes to raise very significant issues on the limits to the ‘self-protection’ (or private justice) for contracting authorities that are victims of bid rigging. In this post, I point to the main issues that puzzle me in this very Spanish sainete. I am sure there will be plenty debate in Spanish legal circles after the holidays…

Legal background: EU level: Art 57(4)(c) and (d) of Directive 2014/24/EU

As is well known, Article 57(4) of Directive 2014/24/EU establishes discretionary grounds for the exclusion of economic operators from public procurement tenders. In relation to economic operators that have breached competition law, there are two relevant grounds.

First, Art 57(4)(c) foresees the possibility of exclusion ‘where the contracting authority can demonstrate by appropriate means that the economic operator is guilty of grave professional misconduct, which renders its integrity questionable‘. This was interpreted by the CJEU as covering entities that had been sanctioned for breaches of competition law in relation to the earlier rules of Directive 2004/18/EC (Art 45(2)(d)) as an instance of their being ‘guilty of grave professional misconduct proven by any means which the contracting authorities can demonstrate’. The CJEU established in unambiguous terms that ‘the commission of an infringement of the competition rules, in particular where that infringement was penalised by a fine, constitutes a cause for exclusion under Article 45(2)(d) of Directive 2004/18’ in its Judgment of 18 December 2014 in Generali-Providencia Biztosító, C-470/13, EU:C:2014:2469 (para 35).

Second, Art 57(4)(d) allows for the exclusion ‘where the contracting authority has sufficiently plausible indications to conclude that the economic operator has entered into agreements with other economic operators aimed at distorting competition‘. The relationship between both exclusion grounds relating to competition law infringements is somewhat debated. I have argued elsewhere that Art 57(4)(c) should still be used as the legal basis for the exclusion of economic operators that have already been sanctioned for previous bid rigging offences, whereas Art 57(4)(d) creates an additional ground for exclusion based on indicia of contemporary collusion. For details, see A Sanchez-Graells, Public Procurement and the EU Competition Rules (2nd ed, Hart, 2015) 296-301.

Of course, discretionary exclusion on grounds of infringements of competition law can be modulated by the rules on self-cleaning in Art 57(6) Directive 2014/24/EU. It is also important to add that these discretionary exclusion grounds can be applied for a period not exceeding three years from the date of the relevant event, as per Art 57(7) Directive 2014/24/EU. The CJEU has interpreted the ‘relevant event’ in this context, and clarified that ‘where an economic operator has been engaged in conduct falling within the ground for exclusion referred to in Article 57(4)(d) of that directive, which has been penalised by a competent authority, the maximum period of exclusion is calculated from the date of the decision of that authority‘ (Vossloh Laeis, above, para 42)

Legal background: domestic level: the transposition by Law 9/2017

The transposition into Spanish law of these provisions has introduced some important modifications.

First, these exclusion grounds have been made mandatory under Article 71 of Law 9/2017 on Public Sector Procurement, as discussed by P Valcarcel, ‘Transposition of Directive 2014/24/EU in Spain: between EU demands and national peculiarities‘ in S Treumer & M Comba (eds), Modernising Public Procurement: The Member States Approach, vol. 8 European Procurement Law Series (Edward Elgar, 2018) 236-237. For a broader description of the Spanish system of mandatory exclusion (ie through ‘prohibiciones de contratar,’ or prohibitions on contracting), see A Sanchez-Graells, 'Qualification, Selection and Exclusion of Economic Operators under Spanish Public Procurement Law' in M Burgi, S Treumer & M Trybus (eds), Qualification, Selection and Exclusion in EU Procurement, vol. 7 European Procurement Law Series (Copenhagen, DJØF, 2016) 159-188.

Second, the grounds in Art 57(4)(c) and (d) of Directive 2014/24/EU have been transposed in a seemingly defective manner. Art 57(4)(d) has been omitted and Art 57(4)(d) is reflected in Art 71(1)(b) of Law 9/2017, according to which there is a prohibition to enter into a contract with an ‘economic operator … guilty of grave professional misconduct, which renders its integrity questionable, in matters such as market discipline, distortion of competition … in accordance with current regulations’ (own translation from Spanish).

Thirdly, Art 72(2) of Law 9/2017 foresees two ways in which the mandatory exclusion ground based on a prior firm sanction for competition infringements can operate. On the one hand, the prohibition to enter into a contract with competition law infringers ‘will be directly appreciated by the contracting bodies when the judgment or administrative resolution [imposing the sanction] had expressly established its scope and duration, and will be in force during the term indicated therein’ (own translation from Spanish). On the other hand—and logically, as a subsidiary rule—it is also foreseen that ‘In the event that the judgment or administrative resolution does not contain a ruling on the scope or duration of the prohibition to contract … the scope and duration of the prohibition shall be determined by means of a procedure instructed for this purpose, in accordance with the provisions of this article’ (own translation from Spanish). Such procedure is rather convoluted and involves a decision of the Minister of Finance on the advice of the State Consultative Board on Public Procurement.

Fourthly, and in an extreme pro-leniency fashion, Art 72(5)II of Law 9/2017 has established that the prohibition to enter into contracts will not apply to economic operators that have self-cleaned and, in particular, to those that have obtained leniency in the context of competition enforcement procedures. That is, there is an exemption from the otherwise applicable exclusion ground based on infringements of competition law for undertakings that demonstrate the ‘adoption of appropriate technical, organisational and personnel measures to avoid the commission of future administrative infractions, which include participating in the clemency program in the field of competition law‘ (own translation from Spanish).

It is also odd that the provision does not require economic operators to have ‘clarified the facts and circumstances in a comprehensive manner by actively collaborating with the investigating authorities‘, which was the main issue at stake in the Vossloh Laeis litigation.

A controversial decision by the Spanish National Commission on Markets and Competition (CNMC)

On 14 March 2019, the CNMC adopted a decision against 15 construction companies finding them responsible for a long-lasting bid rigging scheme to manipulate the tenders for public contracts works relating to different aspects of high-speed and conventional railroad electrification (full decision available in Spanish). One of the novel aspects of the decision is that the CNMC explicitly activated the prohibition to enter into contracts against the competition infringers. However, the CNMC did so in very peculiar manner.

The oddity of the decision mainly lies on the fact that CNMC decided not to establish the scope and duration of the prohibition to contract, but simply to refer the case to the State Consultative Board on Public Procurement (see pages 317-320). This was the object of criticism in a dissenting vote by Councillor María Pilar Canedo, who stressed that the CNMC should have set the scope and duration of the prohibition to contract in its decision (pages 366-370). The position of the CNMC is certainly difficult to understand.

On the one hand, the CNMC stressed that ‘regardless of the time limits within which the duration and scope [of the prohibition] must be set [by the Minister of Finance] ... it is possible to identify an automatism in the prohibition of contracting derived from competition law infringements, which derives ope legis or as a mere consequence of the adoption of a decision that declares said infraction, as established in the mentioned Article 71.1.b) of [Law 9/2017]‘ (page 319). On the other hand, however, the CNMC decided to (potentially) kick the effectiveness of such prohibition into the long grass by not establishing its scope and duration in its decision—and explicitly saying so (unnecessarily…). No wonder, contracting authorities will have some difficulty applying the automaticity of a prohibition which time and scope are yet to be determined.

Moreover, the CNMC was aware of the CJEU decision in Vossloh Laeis (above), to which it referred to in its own decision (in a strange manner, though). In that regard, the CNMC knew or should have known that, as a matter of directly applicable EU law, de facto the maximum exclusion period can run for three years, up to 14 March 2022. Therefore, by referring the file to the Minister of Finance via the State Consultative Board on Public Procurement and creating legal uncertainty as to the interim effects of a seemingly prohibition to contract with a yet to be specified scope and duration, the CNMC actually bought the competition infringers time and created a situation where any fianlly imposed prohibition to contract is likely to last for much less than the maximum three years.

The (for now) final twist: ADIF takes justice in its own hands

As if this was not enough, according to the Spanish press (see the main story in El Pais), the main victim of the cartel—the Spanish rail network administrator, ADIF—has now decided to take justice in its own hands.

According to the report, ADIF has written to the relevant companies announcing claims for damages—which is the ordinary reaction that could be expected. However, it has also taken the decision of demanding an anticipation of the compensation from those companies with which it has ‘live’ contracts, to which it has demanded a 10% price reduction. What is more, ADIF has decided to withhold 10% of the contractual price and to deposit in an escrow account before a notary, as a sort of sui generis self-created interim measure to ensure some compensation for the damages suffered from the cartel. The legal issues that this unilateral act generates are too many to list here. And these will surely be the object of future litigation.

What I find particularly difficult to understand is that, in contrast with this decisively aggressive approach to withholding payment, ADIF has awarded contracts to some of the competition infringers after the publication of the CNMC decision. And not a small number of contracts or for little amounts. In fact, ADIF has awarded over 280 contracts for a total value close to €300 million.

Thus, ADIF has largely carried out its business as usual in the award of public works contracts, both ignoring the rather straightforward argument of automaticity of the prohibition to contract hinted at by the CNMC— though based on a convoluted and rather strained interpretation of domestic law (Art 72(2) Law 9/2017)—and, more importantly, the discretionary ground for exclusion in Art 57(4)(d) of Directive 2014/24/EU.

There will certainly be some more scenes in this sainete…


New paper: ‘Screening for Cartels’ in Public Procurement: Cheating at Solitaire to Sell Fool’s Gold?

I have uploaded a new paper on SSRN, where I critically assess the bid rigging screening tool published by the UK’s Competition and Markets Authority in 2017. I will be presenting it in a few weeks at the V Annual meeting of the Spanish Academic Network for Competition Law. The abstract is as follows:

Despite growing global interest in the use of algorithmic behavioural screens, big data and machine learning to detect bid rigging in procurement markets, the UK’s Competition and Markets Authority (CMA) was under no obligation to undertake a project in this area, much less to publish a bid-rigging algorithmic screening tool and make it generally available. Yet, in 2017 and under self-imposed pressure, the CMA released ‘Screening for Cartels’ (SfC) as ‘a tool to help procurers screen their tender data for signs of illegal bid-rigging activity’ and has since been trying to raise its profile internationally. There is thus a possibility that the SfC tool is not only used by UK public buyers, but also disseminated and replicated in other jurisdictions seeking to implement ‘tried and tested’ solutions to screen for cartels. This paper argues that such a legal transplant would be undesirable.

In order to substantiate this main claim, and after critically assessing the tool, the paper tracks the origins of the indicators included in the SfC tool to show that its functionality is rather limited as compared with alternative models that were put to the CMA. The paper engages with the SfC tool’s creation process to show how it is the result of poor policy-making based on the material dismissal of the recommendations of the consultants involved in its development, and that this has resulted in the mere illusion that big data and algorithmic screens are being used to detect bid rigging in the UK. The paper also shows that, as a result of the ‘distributed model’ used by the CMA, the algorithms underlying the SfC tool cannot improved through training, the publication of the SfC tool lowers the likelihood of some types of ‘easy to spot cases’ by signalling areas of ‘cartel sophistication’ that can bypass its tests and that, on the whole, the tool is simply not fit for purpose. This situation is detrimental to the public interest because reliance in a defective screening tool can create a false perception of competition for public contracts, and because it leads to immobilism that delays (or prevents) a much-needed engagement with the extant difficulties in developing a suitable algorithmic screen based on proper big data analytics. The paper concludes that competition or procurement authorities willing to adopt the SfC tool would be buying fool’s gold and that the CMA was wrong to cheat at solitaire to expedite the deployment of a faulty tool.

The full citation of the paper is: Sanchez-Graells, Albert, ‘Screening for Cartels’ in Public Procurement: Cheating at Solitaire to Sell Fool’s Gold? (May 3, 2019). Available at SSRN: https://ssrn.com/abstract=3382270

Bid rigging, self-cleaning, leniency and claims for damages: A beautiful procurement mess? (C-124/17)

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In his Opinion of 16 May 2018 in Vossloh Laeis, C-124/17, EU:C:2018:316 (not available in English), Advocate General Campos Sánchez-Bordona has offered an interesting view on the interpretation of the grounds for discretionary exclusion of economic operators engaged in bid rigging. In particular, his proposed interpretation concerns the limitations of the contracting authority's ability to demand full and unrestricted cooperation from undertakings seeking to reassure them that they have self-cleaned after participating in collusive practices in public markets. This Opinion and the forthcoming CJEU Judgment in Vossloh Laeis will be relevant for the interpretation of Article 57 of Directive 2014/24/EU, as well as Article 80 of Directive 2014/25/EU, on which the case rests. In my view, the Vossloh Laeis Opinion raises difficult questions about the coordination of enforcement of mechanisms to prevent bid rigging in the fields of public procurement and competition law. It also creates some functional tensions with recent cases such as Generali-Providencia Biztosító, C-470/13, EU:C:2014:2469; and Impresa di Costruzioni Ing. E. Mantovani and RTI Mantovani e Guerrato, C-178/16, EU:C:2017:1000. Thus, it deserves some close analysis.

Vossloh Laeis - Background

This case concerns the aftermath of an investigation into bid rigging practices by the German competition authority (Bundeskartellamt), which established that '[d]uring the period from 2001 to 2011 Vossloh Laeis concluded agreements with other companies on the supply of rails and switches to the detriment of local public transport companies, private, regional and industrial railway companies and construction companies. The aim of the agreements was to divide up tenders and projects among the members of the cartel'. This resulted in the imposition of a fine of just under 3.5 million euros on the company Vossloh Laeis in 2016 by the Bundeskartellamt.

In the case that triggered the reference to the CJEU, a contracting entity whose procurement is covered by Directive 2014/25/EU (Stadwerke München) sought to exclude Vossloh Laeis from its qualification system on the basis that it had been fined for its participation in the cartel. It is important to stress that the relevance of the cartel for Stadwerke München was not simply remote or theoretical, but concerned it rather closely because this entity had been a victim of the anticompetitive practices carried out by Vossloh Laeis. This led Stadwerke München to seek damages compensation from Vossloh Laeis in civil litigation, as well as to exclude it from its list of approved contractors.

Vossloh Laeis sought to resist its exclusion from Stadwerke München's qualification system on the basis that it had taken self-cleaning measures and should thus be reinstated in the list of approved contractors on the basis of Article 57(6) of Directive 2014/24, to which the applicable Article 80 of Directive 2014/25 refers. In particular, Vossloh Laeis sought to persuade the contracting entity that it had taken organizational and personnel measures to clarify the facts and prevent their future repetition. It also indicated that it would compensate the damage caused by its illicit behavior. 

Stadwerke München rejected the claims of self-cleaning on the basis that (i) despite the uncovering of the cartel in 2011, Vossloh Laeis had not addressed the contracting entity or undertaken any initiative to clarify the facts as a whole; (ii) only in 2016 had Vossloh Laeis ceased to deny, in front of Stadwerke München, its participation in the relevant collusive practices, and even then it stressed that it had challenged the decision imposing the fine. Most importantly, Stadwerke München took issue with Vossloh Laeis' behaviour because (iii) it had not agreed to furnish a copy of the Bundeskartellamt's decision imposing the fine, so that Stadwerke München could examine it. Neither did Vossloh Laeis agree to cooperate with Stadwerke München in clarifying the infringement committed, since it understood that his cooperation with the competition authority was sufficient.

The Vossloh Laeis Opinion states that '[t]he referring court does not dispute (as it was stated in the sanctioning decision itself) that Vossloh Laeis had collaborated continuously and without restrictions with the German competition authority during the infringement procedure procedure' (para 17, own translation from Spanish). This creates a situation that may seem difficult to understand. Why would an undertaking that has already cooperated unreservedly with the competition authority not take the same approach to cooperation with the contracting entity? Is it a matter of opposition to red tape and duplication of effort? Or is there any secret that the economic operator is seeking to protect? Equally, on the side of the contracting entity, why is it so interested in the nitty-gritty details of the decision imposing the fine? Could it not just accept that the economic operator was sanctioned and is now trying to move on?

The importance of leniency programmes in this context

Even if the Opinion of AG Campos does not mention this at all, the dispute about access to the Bundeskartellamt's decision and Vossloh Laeis' refusal to cooperate with Stadwerke München in a parallel clarification of the facts needs to be placed in the context of the applicable leniency programme run by the Bundeskartellamt, and the civil litigation around the action for damages against Vossloh Laeis. This is important to understand the position of the parties, as well as the shadows that loom over the approach taken by AG Campos (discussed below).

As part of a leniency programme (not only Bundeskartellamt's, but those run by the contracting authorities of other Member States and the European Commission itself), economic operators that have participated in bid rigging offences can seek an exemption or reduction of the fines that would otherwise be applicable if they uncover the cartel and/or cooperate with the competition authority in its investigation (the degree of cooperation and the relevance of the information provided determining the level of 'discount' on the otherwise applicable fine).

In return for their cooperation, cartellists not only benefit from exemption or reduction of the fines, but also from some protection against claims for damages by the victims of their collusive behaviour. Indeed, competition authorities will take measures to ensure that leniency statements are not disclosed to the public, will include minimal parts of them in their final decisions imposing fines, and will redact relevant material from the public version of those decisions. This makes it virtually impossible for 'outsiders' to learn about the detailed ways in which the cartel functioned on the basis of public information resulting from the infringement procedure. Moreover, leniency programmes are specially protected by the Directive on competition damages (2014/104/EU), which requires Member States to ensure that 'for the purpose of actions for damages, national courts cannot at any time order a party or a third party to disclose ... leniency statements' (Art 6(6)(a)) (see also the position of the CJEU here).

This creates significant difficulties in the context of follow-on damages actions, where the previous investigation by the competition authority is of no avail to victims seeking redress. This would explain why Stadwerke München insisted in having access to the confidential version of the decision imposing a fine, and why Vossloh Laeis resisted such disclosure. It also clarifies how, in this specific context, cooperation with the competition authority is of no use to contracting entities and authorities seeking to understand the behaviour of the economic operator, as the opacity surrounding leniency programmes prevents them from benefiting from the investigation and findings of the competition authority. 

The Vossloh Laeis Opinion in its own terms

In own terms, the Opinion of AG Campos seems to be solely based on the conceptual premise that the dispute between Stadwerke München and Vossloh Laeis resulted not from the background discussed above, but rather from the peculiarity of the German rules that transposed Article 57(6) of Directive 2014/24/EU, which required that, for the purposes of self-cleaning, economic operators must demonstrate that they have 'fully clarified the facts and circumstances by actively collaborating with the investigating authorities and the contracting authority' (Art 125(1)(2) Gesetz gegen Wettbewerbsbeschränkungen, as reported in para 10 of the Opinion). This deviates from the literal wording of Article 57(6) of Directive 2014/24/EU, which foresees that 'the economic operator shall prove that it has ... clarified the facts and circumstances in a comprehensive manner by actively collaborating with the investigating authorities'. The analysis in the Opinion, thus, largely rests on the interpretation of the concept of 'investigating authorities' in Article 57(6) with the purpose of establishing whether it covers the contracting authority or entity itself (see para 2). The Opinion offers a good synthesis of the competing arguments in paras 26-36.

In that regard, the Opinion provides some relevant positions. First, that the requirements explicitly listed in Article 57(6) of Directive 2014/24/EU are mandatory and, consequently, contracting authorities and entities cannot accept claims of self-cleaning that do not meet them all (paras 40-41). Therefore, establishing the scope of the duty of collaboration in the clarification of the facts becomes paramount because its breach determines the impossibility of benefiting from any other self-cleaning measures adopted.

Second, on the specific issue of the entities included in the concept of 'investigating authorities', AG Campos takes the view that, despite the fact that Article 57 of Directive 2014/24/EU grants contracting authorities and entities some investigative powers, 'the exercise of these functions does not make the contracting authority one of the "investigating authorities" referred to in Article 57 (6), second paragraph of Directive 2014/24' (para 47, own translation from Spanish). In addition to other functional reasons on the way contracting authorities carry out their limited investigation for the purposes  of establishing the existence of an exclusion ground (paras 48-50), AG Campos concludes that, in general terms, 'the "investigating authorities" referred to in Article 57, paragraph 6, second paragraph, of Directive 2014/24 will not coincide with the contracting authorities. In front of the latter, the tenderer (or the company that aspires to be part of a classification system, as in this case) must prove that it has actively and thoroughly collaborated with the investigating authorities to clarify the facts. But this collaboration must be, by force, with an institution other than the contracting authority itself: otherwise, [the collaboration] would be, for the latter, a notorious fact that does not require any proof' (para 51, own translation from Spanish).

Finally, AG Campos also rejects the possibility for Member States to go beyond the scope of the collaboration foreseen in Article 57(6) of Directive 2014/24/EU in demanding that the economic operator seeking to benefit from its self-cleaning efforts not only collaborates with the 'investigating authorities' but also with the contracting authority or entity (paras 55-61). Interestingly, AG Campos stresses two main issues against this possibility: (i) that it would create a duplication of obligations required against those who, like the investigating authorities and the contracting authorities, perform different functions and (ii) that it 'could place the economic operator in a situation close to defenselessness when, in circumstances such as those in this case, the contracting authority claims to have suffered damages, because of the infringing conduct that led to the exclusion of [the economic operator], for which it requests compensation' (para 60, own translation from Spanish).

It is worth stressing that the case also concerns issues surrounding the maximum period of exclusion of economic operators that cannot benefit from self-cleaning (paras 62-86). However this post concentrates solely on the interpretation of Article 57(6) of Directive 2014/24/EU.

In my view, the Opinion of AG Campos advances a plausible interpretation of Article 57(6) of Directive 2014/24/EU. However, I would disagree with two issues. First, the fact that Member States cannot go beyond the minimum mandatory self-cleaning requirements established in the Directive on the grounds that this would result in a duplication of effort for economic operators does not make sense to me, in particular after the recent CJEU Judgment in Impresa di Costruzioni Ing. E. Mantovani and RTI Mantovani e Guerrato, C-178/16, EU:C:2017:1000 (see comment here), which AG Campos acknowledges but sets aside in his Opinion (para 57). Second, and more importantly, I think that the Opinion of AG in Vossloh Laeis does not work in the context of infringements of competition law covered by leniency programmes, which triggers the second of the arguments against an expansive functional interpretation of Article 57(6) on the grounds of the undertaking's procedural rights.

The Vossloh Laeis Opinion in the broader context of leniency programmes

Indeed, the main difficulty I have with the AG Opinion in Vossloh Laeis is functional. It is worth stressing that the implication of this Opinion is that a contracting entity or authority that knows that it has been the victim of a cartel offence cannot oppose self-cleaning of the competition law violator on the basis of its lack of cooperation, despite being in litigation with that undertaking over damages compensation. From the perspective of the infringer, this also means that participation in a leniency programme not only provides a shield from administrative fines and some protection from actions for damages, but also some protection from exclusion from procurement procedures. These are two negative results from the perspective of ensuring the effectiveness of competition law in public procurement markets and, in my view, runs against the thrust of previous decisions such as Generali-Providencia Biztosító, C-470/13, EU:C:2014:2469 (see comment here).

I also think that the way in which the Vossloh Laeis Opinion frames the issue of defenselessness is artificial. An economic operator that has infringed competition law and received a reduced fine as a result of its leniency application has already obtained a relevant practical advantage. Therefore, I see no problem in making it face a simple choice between either (i) sticking to the secrecy created by the leniency mechanism and thus accepting exclusion from procurement procedures for an adequate period of time, or (ii) waiving that secrecy vis-a-vis the contracting authority (which would implicitly require compensation of the damage resulting from the cartel), so that the contracting authority can form an adequate view of whether the organisational and personnel self-cleaning measures really address the root causes of the past illegal behaviour and, if appropriate, set aside the relevant exclusion ground.

The Vossloh Laeis Opinion allows the economic operator to avoid this simple choice and to have two bites at the cherry. It also makes it difficult for the contracting authority to satisfactorily carry our its limited investigative functions under Art 57(6). Without knowing exactly what happened, it is difficult to judge whether the self-cleaning measures are 'appropriate to prevent further criminal offences or misconduct'. Additionally, it forces the contracting authority to make this decision in a context where it can have other grounds to doubt the economic operators' loss of integrity, such as its resistence to provide damages compensation despite having engaged in illegal behaviour that damaged the contracting authority's interests.

Ultimately, if AG Campos was worried about the existence of a conflict of interest between the contracting authority that has an outstanding claim for damages and at the same time needs to assess the self-cleaning efforts of the economic operator--which is a fair enough point--it would have been interesting to learn about the ways in which Article 24 of Directive 2014/24/EU needs to be applied and interpreted in situations such as this. It would have also been interesting to explore in more detail the extent to which the discrete requirements for satisfactory self-cleaning in Article 57(6) interact as, in the case of leniency-related situations, the lack of collaboration with the contracting authority or entity has a bearing on the extent to which the economic operator can be seen to have 'undertaken to pay compensation in respect of any damage caused by the criminal offence or misconduct'. 

However, by not addressing these issues, the Vossloh Laeis Opinion seems to seek to protect the effectiveness of leniency programmes without even mentioning them, which in my view is an odd position to take.

New analysis of joint tendering under EU competition law: a few comments on Ritter (2017)

Cyril Ritter has made a new contribution to the analysis of joint tendering for public contracts under EU competition law in this interesting recent paper. Ritter's paper goes beyond previous discussion of the topic [eg my critical remarks on Thomas (2015), see here] and proposes an alternate analytical approach in many points. I find his analysis of different 'theories of harm' applicable to joint tendering interesting and insightful, and the special criteria he suggests for negotiated procedures and for tenders where one contractor is indispensable to two or more tenderers are thought-provoking. However, there are also aspects of Ritter's proposals which I do not see entirely clear, and where I do not think his paper goes much further than previous discussion of the topic.

One of the key issues that require clarification for the purposes of assessing whether join tendering breaches EU competition law (Art 101 TFEU) as an instance of anticompetitive joint selling concerns whether the members of the joint tender are competitors or not. On that point, Ritter emphasises that "what matters here is whether they are competitors for the purpose of the particular procurement procedure at issue" (p 4). After a review of the relevant ECJ case law, Commission's guidelines and administrative practice in the area of EU competition law enforcement, he proposes that the relevant question is to assess whether a firm has "real concrete possibilities" to bid for the contract being tendered (see p. 6). In his view, the burden of proof rests with the authority, but it can be shifted where the "authority brings substantial evidence that the parties are potential competitors" (ibid). Substantively, his main test requires assessing whether the firms have independent ability to bid for the contract, which is determined by the "ability to meet the tender specifications -- in terms of having sufficient spare capacity, equipment, staff, regulatory permits, quality certifications, etc" (p. 7). Interestingly, Ritter excludes the possibility of carrying out an analysis of the undertakings' intention to bid for the contract (pp. 9-10).

At this point, Ritter reaches the need to assess the extent to which it can be objectively determined that an undertaking had the ability to bid independently for a contract for which it has decided to bid jointly with others. He points out at the disagreement between Thomas an myself (see here) concerning whether the possibility of giving up alternative projects can/should (not) be included in the analysis. Ritter considers that the discussion may be beside the point, and that the issue rather requires an assessment of "what happens when a party to the joint tender would not be able to bid on its own (perhaps because capacity is allocated to other projects), but could have done so by hiring more staff, buying or renting more equipment, or teaming up with someone else? Should it be considered a potential competitor?" (p. 8).

Interestingly, this brings Ritter's proposed test very close to Thomas', where the latter indicates that it is important not to ignore "the possibility that each undertaking might nonetheless be able to submit an independent bid, by bringing in specialist resources from outside. If it were in fact feasible for each undertaking to submit a tender in this way, then surely it cannot be excluded that a joint bid would restrict competition. The real question is rather whether, in the absence of the joint bid, there could in fact have been two or more independent bids". And, more specifically, when Thomas clarifies that "One possible approach to this issue would be to ask whether, in the ordinary course of business, each undertaking would normally bring in such resources from outside. Alternatively, and more precisely, are such resources demonstrably available on reasonable terms and in time to prepare and submit the tender, from an undertaking that is not a competitor in the procurement procedure?".

As I said when I commented on Thomas' paper, I find this line of argument exceedingly restrictive. Conceptually, because it relies on an assessment of whether the parties of the teaming/joint bidding agreement could have cooperated with other undertakings or complemented their capacities in a different way (including the need to source additional capacity from elsewhere), which fundamentally and in itself proves the point that they were unable to submit bids individually or with a total independence from third parties (including suppliers or providers of services, as well as employees, although this raises the tricky issue of the need to contain the analysis within the limits of the concept of undertaking for the purposes of EU competition law enforcement). Once this is clear, I see no good reason for the assessment to rely on whether there were alternative potential partners that joint bidders could have (independently?) teamed up with, not least because this would require an excessive amount of second-guessing by procurement and competition authorities, who may not be the best placed to query business decisions ex post facto.

Indeed, the difficulty with this line of assessment is that it would require second-guessing business strategies and preferences actually revealed by the undertaking -- which decided to participate in the joint bid with its specific partners, rather than engaging in any of the other (theoretically) possible alternative business strategies -- and compare them with an alternative scenario envisaged by the enforcement authority. Even if Ritter advises against extracting hard and fast conclusions from such an analysis (p. 9), he does indicate that "the rule of thumb is that the parties to a joint tender are competitors if it reduces the number of tenders that realistically could have been made otherwise" (ibid).

Overall, this comes to indicate the difficulties in excluding the applicability of Art 101(1) TFEU to cases of joint tendering, which are likely to be considered potentially restrictive of competition in most instances if a strict objective assessment of the joint tenderers' ability to have tendered for the contract (independently, or with others) is carried out, as proposed by Thomas and Ritter. However, this does not necessarily eschew the analysis (although it does effectively reverse the burden of proof) towards the finding of infringements, provided that the possibility of declaring prima facie restrictive joint tendering agreements exempted under Art 101(3) TFEU properly concentrates on the analysis of their efficiency. Ritter addresses this issue towards the end of his paper (pp. 15-16).

In that regard, Ritter considers that the parties to the joint tendering agreement need to be able to show that

  • the joint tender improves the value proposition to the customer, e.g. in terms of price, or, more likely, in terms of quality (first and second conditions of Article 101(3); this assessment may require giving a monetary value to non-price factors);
  • achieving those efficiencies would not have been possible through a less restrictive alternative, such as hiring personnel or equipment, or teaming up with another firm which is not a competitor (third condition of Article 101(3); this assessment may entail an element of counterfactual analysis); and
  • the joint tender does not "afford such undertakings the possibility of eliminating competition" with respect to the procurement procedure at issue, i.e. the joint tender is unlikely to be the only tender (fourth condition of Article 101(3)) (Ritter (2017) 16, emphasis added)

Once more, this test also seems rather stringent and, in particular, its second aspect can be rather problematic. In its literal reading, the equivalent condition of Art 101(3) TFEU requires that the agreement does not "impose on the undertakings concerned restrictions which are not indispensable to the attainment of these objectives". A strict reading, such as Ritter's, to the effect that this requires that "achieving those efficiencies would not have been possible through a less restrictive alternative, such as hiring personnel or equipment, or teaming up with another firm which is not a competitor (third condition of Article 101(3); this assessment may entail an element of counterfactual analysis)" would create the effect of conflating the test for the application of Art 101(1) TFEU and the exemption of Art 101(3) TFEU with the logically circular and perverse implication that any teaming agreement that is found prima facie restrictive and in breach of Art 101(1) TFEU because the parties could have sought additional personnel or equipment, or teamed up with a third party (itself not a competitor), is also necessarily excluded from exemption under Art 101(3) TFEU precisely because of those reasons.

The need to distinguish the elements for an analysis under Art 101(1) and Art 101(3) TFEU when the assessment includes the need to consider potential competition triggers some difficult issues. In the context of public procurement, this requires settling whether the assessment of the need for the (potential) competitive restriction implicit in the joint tender to generate the claimed efficiencies is, either (a) limited to the agreement under analysis, or (b) should also include the potential alternative business strategy which (theoretical) existence brought the joint tendering agreement under scrutiny in the first place. Existing European Commission Guidelines on  the application of Article 101(3) of the Treaty can provide a framework for this analysis.

The key part of the Art 101(3) TFEU Guidelines is para [76] and, more precisely, the consideration that "It is particularly relevant to examine whether, having due regard to the circumstances of the individual case, the parties could have achieved the efficiencies by means of another less restrictive type of agreement and, if so, when they would likely be able to obtain the efficiencies. It may also be necessary to examine whether the parties could have achieved the efficiencies on their own" (emphasis added). Applied to the specific point, I read this to require an assessment of whether a less restrictive agreement between the same parties would have allowed the joint tender and, potentially, whether they could have generated the same efficiencies (strictly) on their own, quod non because of the previous determination that they would have needed "hiring personnel or equipment or teaming up with a non-competitor" -- which in my view does not fit the counterfactual of an analysis of the ability of the party to bid for the tender all things being equal, which would have determined its classification as an actual competitor. My objection is that proceeding in the way Ritter suggests (ie considering the potential scenario of alterative business strategy both at Art 101(1) and Art 101(3) stages) would create, if not a circular or self-referential logic, at least a double whammy for the joint tenderers because their condition of potential competitors would not only be used to bring their agreement under Article 101(1) TFEU, but also to exclude its exemption under Article 101(3) TFEU -- which does create substantive analytical conflation in my view.

In my opinion, an alternative analysis is preferable, to the effect that 

... undertakings concluding joint bidding and teaming agreements should be able to prove that they can only submit a compliant tender if they participate together, or that the terms of their joint tender are substantially better for the public buyer than those they could offer independently—ie, that there are specific and measurable efficiencies derived from the teaming or joint bidding strategy and that they are passed on to the public buyer. For their part, contracting authorities will need to be on the lookout for potential negative impacts on competition in the market, as well as the inclusion of unnecessary restrictions in the teaming and joint bidding documents (A Sanchez-Graells, Public procurement and the EU competition rules, 2nd edn (Oxford, Hart, 2015) 339, footnote omitted and emphasis added).

Or, in other words, I think that -- for the purposes of the application of Art 101(3) TFEU -- the analysis needs to rest on whether the joint tenderers have limited their collaboration to what was necessary to create the efficiency of their joint bid, or have rather improperly taken that chance to further restrict competition amongst them. But it should not revisit the same theoretical counterfactual analysis that brought the agreement under Art 101(1) TFEU scrutiny to begin with.

An EU Competition Law Primer for Public Procurement Students

My friend and colleague Dr Carina Risvig Hamer asked me to contribute a chapter on EU competition law to her forthcoming handbook on EU public procurement she is about to publish with Djøf Forlag. She is writing it in Danish to support her teaching at the University of Southern Denmark. Thus, the book is unlikely to reach a wider English-speaking audience. This is why I decided to post the chapter on SSRN, in case there are some non-Danish procurement students interested in a first introduction to EU competition law issues.

As the abstract indicates, this chapter aims to identify the key areas where EU competition law is relevant from a public procurement perspective: that is, mainly, the prevention and sanctioning of procurement manipulation by suppliers (bid rigging) and the granting of distortive State aid that advantages some of them over others. It also focuses on potential abuses of market power by undertakings holding a dominant position, but it assesses this potential distortion of competition to a more limited extent. Once these areas are identified, the chapter describes the basic EU competition rules that apply in each of these different cases, as well as their interpretation in the case law of the CJEU. The main goal of this chapter is to provide public procurement students with an overall view and basic understanding of the EU competition rules more directly relevant to procurement practice.

The paper's full reference is: A Sanchez-Graells, 'An EU Competition Law Primer for Public Procurement Students' (October 18, 2015). Available at SSRN: http://ssrn.com/abstract=2675787.

New paper on intersection of competition law and public procurement

During the Spring of 2014, Dr Jonathan Galloway and Dr Francesco De Cecco of the Newcastle Law School organised a seminar series on ‘The Intersections of Antitrust: Competition Law and…’ and I was fortunate to be invited to present my views on the interaction between competiton law and public procurement. A condensed re-run of the presentations will take place in London on 15 September 2015 in a joint LSE/Newcastle event.

This seminar series is now turning into an edited collection to be published by Oxford University Press. I have uploaded my contribution on SSRN, which abstract is as follows:
The interaction between competition law and public procurement has been gaining visibility in recent years. This paper claims that these two bodies of EU economic law mainly intersect at two points, or in two different dimensions.

Firstly, they touch each other at the need to tackle anticompetitive practices (or bid rigging) in public tenders. This has attracted significant attention in terms of the enforcement priorities of competition authorities and led to recent regulatory developments in the 2014 EU public procurement Directives aimed at increasing the sanctions for bid riggers.

Secondly, competition and public procurement cross again at the need to avoid publicly-created distortions of competition as a result of the exercise of buying power by the public sector, or the creation of regulatory barriers to access to public procurement markets. This second intersection has been less explored and the development of regulatory solutions has been poor in both the fields of EU competition law and EU public procurement law. Moreover, the protection of the ‘public mission’ implicit in the public procurement activity led the CJEU to deform the concept of undertaking in a way that can distort EU antitrust enforcement beyond public procurement markets.

This paper assesses these issues and stresses the possibilities for a better integration of competition considerations in public procurement through the principle of competition of the 2014 Directives. 
Full details of the paper are: A Sanchez-Graells, 'Competition Law and Public Procurement', in J Galloway (ed), Intersections of Antitrust: Policy and Regulations (Oxford, OUP, 2016).

Another interesting paper on corruption and (induced) collusion in public procurement (Gong & Zhou, 2015)

Still on the topic of interaction between corruption and collusion, or how corrupt officials can create or consolidate collusion in procurement markets, I have come across another interesting recent paper: T Gong & N Zhou, "Corruption and marketization: Formal and informal rules in Chinese public procurement" (2014) 9(1) Regulation & Governance 63-76. 

This time, the research focuses on the Chinese experience and shows shockingly (not) similar trends to the Russian case study mentioned yesterday. The paper forcefully argues that 'empirical findings from China indicate that the relationship between market liberalization and corruption is more complex and nuanced than conventional wisdom suggests'. 

Some of the most interesting insights refer to the collusion (in broad terms) of bidders and public officials to avoid the application of formal public procurement rules (72-73) which, once again, will sound very familiar to scholars and practitioners with experience in any jurisdiction.
 

Interesting paper on corruption and (induced) collusion in public procurement (Ostrovnaya & Podkolzina, 2015)

In their recent paper "Antitrust Enforcement in Public Procurement: the Case of Russia" (2015) 11(2) Journal of Competition Law & Economics 331-352, M Ostrovnaya and E Podkolzina of the International Laboratory for Institutional Analysis of Economic Reforms discuss an example of interaction between corruption and (apparent) collusion in public procurement for drugs in Russia. 

I found the paper an interesting read and some of their insights on how corrupt officials can create or consolidate collusion in procurement markets will certainly ring many bells. This was an issue we recently discussed extensively at a knowledge exchange event at the Law School of the University of Sussex, and one that seems to be triggering increased attention in academic and practitioner circles.

Ostrovnaya and Podkolzina's analysis clearly shows that antitrust intervention against the public sector's restrictive procurement practices was resisted by a specific public buyer, which most likely decided to resort to an orchestrated system of bid covers (or passive bidding, as they label it) to avoid further antitrust intervention--thus deviating the attention of the antitrust watchdog towards the behaviour of the (certainly non-innocent) bidders. 

Their case study will be a useful guideline for the development of more effective competition rules applicable to the public sector. Or, at least, a warning against naive assumptions that antitrust intervention can ipso facto exclude issues of (induced) collusion in procurement markets.

New SSRN short paper on Art 18(1) Dir 2014/24 and other competition and procurement issues

I have been invited by the e-Competitions Bulletin to write the third edition of my foreword to their special issue on public procurement. I have uploaded the draft on SSRN and the paper is now downloadable as A Sanchez Graells, 'Public Procurement: A 2015 Updated Overview of EU and National Case Law' (June 1, 2015), available at http://ssrn.com/abstract=2613076.

Some difficult questions on the interaction between public procurement and competition law

I was invited to participate in the Irish Society for European Law (ISEL) Public Procurement Forum a couple of days ago. 

The session started off with two presentations from distinguished members of the Irish Competition and Consumer Protection Commission (Pat Kenny, Member with responsibility for Criminal Enforcement and Úna Butler, Legal Advisor, Competition and Consumer Protection Commission), who respectively addressed issues concerning bid rigging and consortium bidding in public tenders by SMEs. Both presentations were excellent and I had not much left to say. In view of that, I just launched some 10 groups of difficult questions to the audience. The debate that ensued was really interesting. 

I am reproducing a reworked version of the 10 questions below, in the hope that they can be useful to researchers trying to find topics in the area of public procurement and competition law. Hopefully, some (of my) answers will be available in the 2nd edition of my book. Of course, I am happy to exchange views on these and any other issues at: a.sanchez-graells@le.ac.uk.

A) In relation to bid rigging and the application of Article 57(4) of Directive 2014/24

1. How will contracting authorities treat instances of contemporaneous bid rigging? Will they be allowed (by Member States) to exclude tenderers or candidates right away or will they have to stay proceedings and get the competition authorities involved? How will this play-out in relation to the very short deadlines required by procurement procedures and, in particular, the 10-day standstill obligation under Directive 2007/66

2. What procedural guarantees will be necessary to ensure that a "presumption of guiltiness" is not constructed? How wide will the protection under Article 47 CFREU be [on that key point, see M Safjan and D Düsterhaus, "A Union of Effective Judicial Protection: Addressing a Multi-level Challenge through the Lens of Article 47 CFREU" (2014) 33(1) Yearbook of European Law 3-40]. What if, in the future, they are proven wrong? Will excluded tenderers and candidates be entitled to significant damages?

B) In relation to joint participation or consortium bidding [particularly in relation to Arts 19(2) and 63 of Directive 2014/24]

3. From a competition law perspective, it is clear that joint bidding will be controversial when actual or potential competitors enter into consortium agreements.In that case, the application of Article 101(3) TFEU requires efficiencies to be generated by the agreement (and those to be passed on to consumers). This creates some difficult issues, such as: must those efficiencies be solely economic? If yes, how can we square that with the growing inclusion of non-economic considerations in award criteria, and particularly with the special rules in Art 76 of Directive 2014/24 regarding the procurement of social and special services? If not, how can we square this with the general enforcement of Art 101(3) TFEU [and the on-going controversy on the use of non-economic factors]? Can we take into account SME-specific issues, such as the existence of high opportunity costs (such as iddleness of capacity available to the contracting authority) or the creation of social benefits? Can efficiencies be created in the public procurement market at the expense of general open markets, or reversely [on this, see the thought provoking post by Alfonso Lamadrid "On the (mis)application of Article 101(3): of judicial capture and cross-market assessments", Chillin' Competition].

4. How must those efficiencies or other advantages be documented? Can at some point the burden of proof reverse, so that the contracting authority needs to disprove indicia of advantage submitted by the (wannabe) joint tenderers? Will the competition authority be involved/available to assess that evidence? How can they make sure that they are building the right counter factuals? Is this not too complicated within the scope of a procurement process with tight deadlines?

5. On the point of exchanges of information, when is the exchange assessed, during the exploratory conversations (where maybe too much information could be disclosed) or at the moment of submission of the tenders? How can companies make sure that they exchange the absolute minimum of necessary information and how can a "need to know" test be developed safely? Given that SMEs may be reluctant or incapable of protecting their proprietary information through IP rights, how can they not be deterred from participating in order to protect their business secrets? Which specific assurances can they get that their information will not be disclosed at debriefing stage (particularly if a competitor challenges the technical capacity of the consortium)?

6. How will ancillary restrictions be treated in the field of consortium agreements? Would non-poaching clauses be allowed? If so, would it be justified to include 2 year non-compete/non-poaching clauses on employees and consortium partners, even if the tender is unsuccesful? If not, how can this not become a significant deterrent for SMEs strongly reliant on the technical knowledge of a very limited number of (difficult to replace) staff?

7. Even if the rules in Art 63(3) in fine of Directive 2014/24 establishes that contracting authorities can require joint liability for the execution of the contract, members of consortia (and particularly SMEs) will be tempted to reallocate liability internally (through side letters, or otherwise). Is this compatible with the procurement rules? If it is, should the contracting authorities be informed? Should financial guarantees be required to a larger extent? If it is not allowed, would such liability redistribution / indemnity agreements fall foul of Art 63(3) Dir 2014/24 and/or Art 101(2) TFEU? If the law is not clear on this point, will this not be a very significant deterrent for consortium bidding?

8. Where an undertaking participates in more than one bid, particularly as a specialised sub-contractor, it holds (relative) market power. Does this bring it under the prohibitions of Art 102 TFEU, particularly as price discrimination is concerned? Would that sub-contractor, then, be forced to quote the same prices and conditions to all groupings of tenderers? Can they not enter into exclusivity agreements or simply decide to only deal with a given consortium on the strength of existing business relationships?

9. Can rules on conflict of interest now affect the possibility to participate as part of different consortia with different composition of members in different projects? At what point would being in a "network" of consortia arrangements create significant risks for the undertaking, particularly as being perceived as a nexus for the exchange of information?

10. What is the interaction between SME support, public procurement and State aid? Particularly in innovation partnerships that may be concluded with a consortium of innovative SMEs (or start-ups), how is it possible to avoid the undercover granting of State aid [cf the issues that arise whene SMEs that spin-off from universities enter into subsequent contracts here: State aid and (university) software licensing: who's interested? (T-488/11)]? How and when should the evaluation of the expected innovation be carried out? Can SMEs actually engage in the complex legal negotiations needed to comply with the requirements of Art 31(6) of Directive 2014/24 ex ante?

New Book: G Racca & C Yukins (eds) "Integrity and Efficiency in Sustainable Public Contracts" (Brussels, Bruylant, 2014).


The new book on "Integrity and Efficiency in Sustainable Public Contracts. Balancing Corruption Concerns in Public Procurement Internationally" edited by Profs. Racca and Yukins is now available.

As the editors indicate

Ensuring efficiency and integrity throughout the public procurement cycle is essential to a sound allocation of taxpayers’ money. Yet public contracts are plagued by corruption, collusion, favoritism and conflicts of interest. This book addresses these problems from sophisticated, academic, institutional and practical perspectives.
The book’s ambition is to shape the public debate in the procurement community by highlighting how corruption implies violations of fundamental rights and undermines the fiduciary relationship between citizens and public institutions. The analysis underlines how corruption may stem from - and yet be resolved - through the exercise of discretion in the public procurement system. Focusing on the effects of public corruption and private collusion on procurement integrity, the book marks the features of misconduct and suggests needed counter-measures. The work also emphasizes that the pursuit of efficiency and integrity in public contracts must be rooted in professional skills, and in ethical regulations and training for public officers.
The research reflected in these pieces comes from sources around the world, and offers an excellent foundation for further development of these topics. Expanding on prior research, this volume builds on a more active transnational academic cooperation and exchanges of ideas on integrity in public contracts for the benefit of citizens.
This book is intended as both a textbook and an edited collection and it is available as an e-book too. The authors of the chapters are all specialists in their respective fields, and their different geographical and professional perspectives represent a valuable contribution to the scientific literature.
I have contributed a chapter on “Prevention and Deterrence of Bid Rigging: A Look from the New EU Directive on Public Procurement”, which SSRN version is available here.

Isn't silence golden? A comment on Menager's "Communication in Procurement" (2013)

In a recent thought-provoking paper, Lucie Ménager questions one of the basic assumptions in competition law enforcement against bidding rings in public procurement: that pre-tender communication amongst bidders is prejudicial. In her working paper "Communication in procurement: silence is not golden", she claims that
Contrary to the conventional wisdom, the buyer's expected revenue and the surplus need not decrease with collusion, and the ex-ante surplus increases with the amount of information revealed in equilibrium. This is because when communication is cheap, bidders cannot directly collude on higher prices. Rather, communication leads to a competition between fewer, but more aggressive bidders, which entails more allocative efficiency and a decrease in the total wasteful entry cost (emphasis added).
The proposition indeed seems to challenge conventional wisdom about cartelization in public procurement markets and, consequently, the assumptions of the model deserve some close consideration. It is also relevant to stress that, throughout the paper, the author herself waters down this claim and its implications--which may have warranted a revision of the abstract (?).
 
In my view, the example used as the rationale for the paper (the well known Boeing-Airbus struggle over a $40bn USAF aircraft contract between 2008-11) might have primed the author in some of her considerations, which may downplay the relevance of the fact that reputation-based messages or threats are usually of scant significance in public procurement markets, unless very specific circumstances concur--which, mainly, boil down to the (pre-)existence of a very closed oligopoly, the presence of (very high) bidding costs, and a situation where all members of the colluding oligopoly communicate public messages before the tender [conditions that will be introduced slowly and progressively into the model, but which are not clearly spelled out from the beginning].
 
The paper eventually acknowledges these restrictions in its technical construction (where the preexistence of a cartel is clearly indicated as a condition for the 'cheap-talk' game; see pages 10 and 12), but it may not be equally clear in the narrative--where there is no clear indication as to the very rare occurrence of all of the conditions for the game equilibria to hold. 
 
Moreover, the author itself stresses that, even within the model,
Keeping participation secret from bidders could then be a way to prevent collusion. This is consistent with the competition authorities' recommendation according to which sellers should not be allowed to communicate about their intention to participate. Though, this solution is practically hard to implement in the case of public procurements, for which bid preparation may last several years (p. 17, emphasis added).
This also bears stressing, as only a very limited number of procurement projects require the preparation of bids over a number of years.
  
Also, it needs to be underlined that the 'cheap talk' strategy is only relevant if there are significant (discrete) participation costs that the bidder can (completely) avoid if (as a result of the signalling derived from the 'cheap talk phase') it decides to stay out of the procurement. However, and very relevant here, significant participation costs are incurred upfront where bidders are invited/accepted to complex procurement procedures (such as competitive dialogues in the EU) and which are necessary to even reach the phase where bidders have a relatively clear idea of the 'private' valuation or production costs--and that, in my view, would require incorporating the role of 'sunk costs' into the decision-making processes analysed in the game.
 
Finally, it is also worth emphasising that, despite the design of the model as a repeated game (or, at least, its requiring some prior experience by the bidders in tendering against each other), dynamic (welfare) effects are not taken into account. In that regard, it would still be required to assess whether the potential allocative efficiency derived from a decrease in total wasteful participation costs is not outweighed by negative dynamic effects, such as market exit, reduction of innovation or, eventually, the evolution of the 'soft cartel' necessary for the model to work into a full-fledged hard cartel (where cheap talk is no longer cheap, but an all encompassing bid rigging strategy--something that the author will reckon as a sort of an after-thought in her concluding remarks).
 
In my view, the very extreme (and sometimes artificial and disconnected from the way particularly complex procurement processes work) assumptions of the model may reduce the validity (or, rectius, the practical relevance) of some of the findings of the paper--or, at least, of the normative propositions that could be derived therefrom. To her merit, it should be stressed that the author herself acknowledges that by indicating that
We do not think [these] results advocate authorizing communication between sellers in public procurements, though. Clearly, if communication is not cheap, sellers can either collude on higher prices, which indeed increases public spending, or on bid rotation schemes which are generally inefficient. Rather, we think these results emphasize how di fferent can be the outcome implications of cheap-talk and binding communication(emphasis added).
After reading the paper, and particularly because cheap talk is twinned to high participation costs (which eventually force bidders to put their money where their mouth is), it is hard to actually appreciate the differences between such 'cheap talk' and other forms of 'binding' communication within cartel rings. It follows that it is also difficult to extract any normative recommendation from the paper (and this should be stressed, as a superficial reading of the title, abstract and introduction may provide the contrary impression). Its scope is much narrower than it could seem at first glance and no changes on the existing rules and enforcement priorities agains bid rigging should be derived from the findings of the paper. Much ado about nothing? Nonetheless, in purely intellectual terms, it is interesting to read, particularly for game theory scholars.

Difficult balance between #transparency and #competition in #publicprocurement

This paper stresses the negative impact that the excessive levels of transparency imposed by public procurement rules can have on competition for public contracts and, more generally, on the likelihood of cartelisation of the markets where public procurement takes place. The paper critically assesses some recent Judgments of the Court of Justice of the European Union and the General Court from this perspective and shows how the top EU Courts are still oblivious to the fact that excessive transparency may diminish the effectiveness of procurement by reducing competition. It also indicates that the case law itself has unused balancing tools that may help reduce the negative impact of excessive transparency, particularly if coupled with a reduction of the financial incentives offered to litigants that have no other claim than a 'mere' lack of compliance with full transparency. The paper concludes that a reform in the enforcement and oversight mechanisms oriented towards the setting up of a semi-opaque review system would overcome some of the deficiencies identified in the current case law from a law and economics perspective.
Sánchez Graells, A 'The Difficult Balance between Transparency and Competition in Public Procurement: Some Recent Trends in the Case Law of the European Courts and a Look at the New Directives' (November 2013). University of Leicester School of Law Research Paper No. 13-11. Available at SSRN: http://ssrn.com/abstract=2353005.

Public Procurement and Competition: Some Challenges Arising from Recent Developments in EU Public Procurement Law


I have just published on SSRN a new paper on "Public Procurement and Competition: Some Challenges Arising from Recent Developments in EU Public Procurement Law": http://ssrn.com/abstract=2206502.


The paper updates some of my previous commentary to the competition law implications of the ongoing reforms of EU public procurement rules, particularly in view of the 2 October 2012 revised Compromise Text published by the EU Council: http://register.consilium.europa.eu/pdf/en/12/st14/st14418.en12.pdf 

This is the abstract:
The relationship between public procurement and competition has recently been receiving an increasing amount of attention, both in academic and policy-making circles. It is becoming common ground that public procurement holds a complex and bidirectional relationship with market competition and that, consequently, a tighter link between public procurement and competition law enforcement needs to be established.
This paper explores the recent OECD push for more competition in public procurement and its role as an influential factor in the ongoing reform of EU public procurement rules. Afterwards, it critically assesses three of the main challenges to keeping public procurement precompetitive: (i) the difficult balance in terms of procurement transparency created by the clash between competition and corruption concerns; (ii) the magnification of the undesired (potential) anticompetitive effects of public procurement that centralised procurement may generate, as well as its increasing use as an improper tool of market regulation; and (iii) the possible competitive distortions and the potential advantages resulting from the generalization of eProcurement. The conclusions extract some common patterns derived from the previous analysis and suggest some policy recommendations mainly oriented at boosting oversight and professionalization of procurement.
The paper is due to appear in C Bovis (ed) Research Handbook on European Public Procurement (Elgar Publishing, 2013).

New Year's Resolution: Fight Bid Rigging Effectively (OECD Recomm of 17 July 2012)

I know it might be a bit too soon to start thinking about New Year's Resolutions. However, around these dates, well organised public procurement and competition authorities should be planning their activities and enforcement priorities for 2013. Therefore, it might be a good time to suggest that they focus and deploy a sufficient amount of resources in giving effect to the OECD's 17 July 2012 Recommendation on Fighting Bid Rigging in Public Procurement.

The OECD's Recommendation captures most of the key elements that can make a public procurement system either pro-competitive or potentially distortive of market competition, and particularly sets out that
Members assess the various features of their public procurement laws and practices and their impact on the likelihood of collusion between bidders. Members should strive for public procurement tenders at all levels of government that are designed to promote more effective competition and to reduce the risk of bid rigging while ensuring overall value for money.
To this effect, officials responsible for public procurement at all levels of government should:
1.   Understand, in co-operation with sector regulators, the general features of the market in question, the range of products and/or services available in the market that would suit the requirements of the purchaser, and the potential suppliers of these products and/or services.
2.   Promote competition by maximising participation of potential bidders by:
i)   establishing participation requirements that are transparent, non-discriminatory, and that do not unreasonably limit competition;
ii)   designing, to the extent possible, tender specifications and terms of reference focusing on functional performance, namely on what is to be achieved, rather than how it is to be done, in order to attract to the tender the highest number of bidders, including suppliers of substitute products;
iii)   allowing firms from other countries or from other regions within the country in question to participate, where appropriate; and
iv)   where possible, allowing smaller firms to participate even if they cannot bid for the entire contract.
3.   Design the tender process so as to reduce the opportunities for communication among bidders, either before or during the tender process. For example, sealed-bid tender procedures should be favoured, and the use of clarification meetings or on-site visits attended personally by bidders should be limited where possible, in favour of remote procedures where the identity of the participants can be kept confidential, such as email communications and other web-based technologies.
4.   Adopt selection criteria designed i) to improve the intensity and effectiveness of competition in the tender process, and ii) to ensure that there is always a sufficient number of potential credible bidders with a continuing interest in bidding on future projects. Qualitative selection and award criteria should be chosen in such a way that credible bidders, including small and medium-sized enterprises, are not deterred unnecessarily from participating in public tenders.
5.   Strengthen efforts to fight collusion and enhance competition in public tenders by encouraging procurement agencies to use electronic bidding systems, which may be accessible to a broader group of bidders and less expensive, and to store information about public procurement opportunities in order to allow appropriate analysis of bidding behaviour and of bid data.
6.   Require all bidders to sign a Certificate of Independent Bid Determination or equivalent attestation that the bid submitted is genuine, non-collusive, and made with the intention to accept the contract if awarded.
7.   Include in the invitation to tender a warning regarding the sanctions for bid rigging that exist in the particular jurisdiction, for example fines, prison terms and other penalties under the competition law, suspension from participating in public tenders for a certain period of time, sanctions for signing an untruthful Certificate of Independent Bid Determination, and liability for damages to the procuring agency. Sanctions should ensure sufficient deterrence, taking into account the country’s leniency policy, if applicable.
All these recommendations, which are further developed in the OECD 2009 Guidelines for fighting bid rigging in public procurement are well-designed and their proper implementation may indeed contribute to strengthen competition for public contracts and to prevent and effectively identify and sanction instances of bid rigging. 

For more detailed proposals, the reader may want to consult my normative recommendations, based on the current EU public procurement rules [Sanchez Graells, Public Procurement and the EU Competition Rules (Oxford, Hart Publishing, 2011)].

Cartels in public procurement: A short comment on Heimler's (2012) J Comp L & Econ 8(3): 1-14

Prof. Alberto Heimler has recently published the interesting piece 'Cartels in Public Procurement' (2012) J Comp L & Econ 8(3): 1-14 [available, but maybe for subscribers only, here]. In his paper, Prof. Heimler discusses the specific features of bid-rigging as a particularly stable instance of collusion and presents some proposals to reduce the administrative burden and increase the incentives for procurement officials to track potential instances of bid rigging and to report them to the competition authorities, even on the basis of a mere suspicion (ie without need to provide full proof of the infringement). 

The abstract of his piece shows these general ideas:
Public procurement markets differ from all others because quantities do not adjust with prices but are fixed by the bidding authority. As a result, there is a high incentive for organizing cartels (where the price elasticity of demand is zero below the base price) that are quite stable because there are no lasting benefits for cheaters. In such circumstances, leniency programs are unlikely to help discovering cartels. Since all public procurement cartels operate through some form of bid rotation, public procurement officials have all the information necessary to discover them (although they have to collect evidence on a number of bids), contrary to what happens in normal markets where customers are not aware of the existence of a cartel. However, in order to promote reporting, the structure of incentives has to change. For example, the money saved from a cartel should at least, in part, remain with the administration that helped discover it and the reporting official should reap a career benefit. In any case, competition authorities should create a channel of communication with public purchasers so that the public purchasers would know that informing the competition authority on any suspicion at bid rigging is easy and does not require them to provide full proof.
This 'mainstream' description of his paper is perfectly in line with most economic and legal scholarship in this field and his work is an interesting reminder of the need to increase the liaison between public procurement and competition authorities, as well as to create a set of incentives (or a dedicated position) for public buyers to act as competition watchdogs of sorts or, more generally, as competition advocates [along the same lines, see A Sanchez Graells, Public Procurement and the EU Competition Rules (Oxford, Hart Publishing, 2011) 385-389]. Moreover, Prof. Heimler offers a couple of interesting insights that should be taken into consideration in the design of effective public procurement systems against bid rigging.

On the one hand, Prof. Heimler clearly indicates the diverging financial interests in bidding rings as opposed to 'general' cartels, which make leniency programs (potentially) less effective in this type of market settings:
Contrary to what happens in normal markets, bid-rigging cartels are much more stable. While in normal markets, quantities and prices are found simultaneously, in bidding markets, quantities are set by the organizer of the bid and the bidding is just used to find the lowest price associated with those quantities. Bid riggers know that by reducing prices (with respect of the agreed ones), they do not achieve any increase in the quantities sold. Rather, they just increase their profit at the expense of competitors and, most importantly, only for one bid. Once there is defection for one bid, the cheater knows (because of the transparency rules in public procurement) that he will be discovered and competition will prevail for all future bids. As a result of these characteristics, partly structural and partly rule-based, the incentive to cheat in bid rigging is much less pronounced than in normal markets (where cheating can be kept secret, at least for some time) (p. 7).
On the other hand, the level of transparency that is structurally implicit in public procurement settings makes it much easier for (properly trained) procurement officials to detect instances of bid rigging and to react:
Contrary to normal cartels, where the participating firms agree on prices or on territories so that customers face an information gap with respect to competitive prices, bid rigging in public procurement requires that the participating firms agree on the bid participation strategy (who wins and at what price; who will participate today; and who wins and who participates in future bids). As a result, bid riggers leave a lot of evidence on the strategies pursued that a well-trained public administration official could indeed identify. As a result, while a public procurement cartel is stable on the supply side, it could be discovered by due diligence on the demand side. This is the opposite of what happens with private market cartels (p. 12).
However, Prof. Heimler also includes a couple of final recommendations to make bid rigging more difficult that, in my opinion, would raise more issues than they would solve. Indeed, he proposes that:
There are also some very important procedural and legal steps that should be taken to make bid rigging much more difficult.
The first is to centralize purchases (or make sure that bids are not made artificially too small so that the construction of a large infrastructure project cannot be easily divided up among all the firms in the industry). This way, the information on the different bids can be found within the same organization so that any irregularity across different bids can be more easily identified. Furthermore, a centralized purchasing agency can organize bids of higher value (purchasing for a number of administrations) so that bids would be more infrequent and bid-rigging agreements would be more difficult to maintain.
Also, the rules that favor small firms in their participation in tenders, in which individually they would not be able to participate because of their small size, should be made much more rigorous. In particular, temporary consortia should only be allowed if comprised by firms producing complementary goods or services, while simple horizontal consortia should be prohibited. In fact, temporary consortia between rivals are very often a tool for enforcing a cartel more so than a way to increase competition (p. 13, emphasis added).
In my opinion, the first objective (centralization of information to make detection easier) can be attained simply by improving reporting and analysis mechanisms (along the lines of Articles 83 to 87 in the 2011 proposal for new EU public procurement Directives, now significantly reduced), rather than by conducting centralized procurement (which can lead to market foreclosure and other knock-on effects that are detrimental in economic terms).

Regarding the second proposal, I do not see how restricting SME's participation through consortia (ie limiting participation to larger companies) would reduce rather than increase the likelihood of collusion--since it would be equivalent to creating an oligopolistic (sub)market for larger companies, to which those large(r) contracts would be reserved. 

Hence, I would strongly recommend not taking any of those two actions, at least until some further (empirical) research is conducted in this field.

Public buyers will self-protect against bid rigging

Another of the interesting developments included in the compromise text that reflects the current status of negotiations for the modernisation of  EU public procurement rules (http://tinyurl.com/modernisationcompromise) is the inclusion of a new Article 54(3) that clarifies that tenderers affected by any grounds for exclusion can be disqualified by contracting authorities at any time:
Contracting authorities may at any moment during the procedure exclude an economic operator where it turns out that the economic operator in question is, in view of acts committed either before or during procedure, in one of the situations referred to in Article 55(1) to (3).
This is a relevant clarification that prevents a rigid interpretation that would have limited the possibility to exclude tenderers at the beginning of the procurement process (ie only at selection stage).

Notwithstanding the above, and maybe most interestingly, this provision is coupled with a new Article 55(3)(d) in virtue of which a tenderer can be excluded
where the contracting authority can demonstrate that the economic operator has entered into agreements with other economic operators aimed at distorting competition.
This is an important development in terms of reducing the impact of bid rigging on procurement, which stresses the need for contracting authorities to cooperate closely with competition watchdogs (both at regional and national levels, and with the European Commission's Directorate General for Competition) and that opens the door to potential difficulties in terms of due process (eg what is the burden of proof to be discharged by contracting authorities?) and an eventual conflict of enforcement competences (both by administrative bodies and in terms of judicial review, particularly where competition matters are assigned to specialised courts).

Therefore, when the time to transpose Articles 54 and 55 of the new Directive (if adopted in the terms of the compromise text) comes, it will be interesting to revisit the institutional architecture of procurement authorities to ensure the appropriate collaboration channels with antitrust authorities (on this, see A Sanchez Graells, Public Procurement and the EU Competition Rules [2011] Hart Publishing 381-389).