Cross-border joint public procurement: some reflections on the puzzling Art 39(2) Dir 2014/24

I gave a seminar on "The emergence of trans-EU public law: public procurement as a case study" yesterday at UEA Law School. My presentation (below) was largely based on this earlier paper of mine, where I discuss the new rules on centralised, joint and cross-border procurement in Directive 2014/24/EU (Arts 37-39). It also aimed to go beyond the technical aspects of the paper in exploring how these new mechanisms of cross-border cooperation between public buyers can help us identify the emergence of trans-EU public law, either of a substantive or 'conflict of laws' type.

The discussion eventually turned on Art 39(1)II Dir 2014/24, which states: "Contracting authorities shall not use the means provided in this Article [ie mechanisms of cross-border collaborative procurement] for the purpose of avoiding the application of mandatory public law provisions in conformity with Union law to which they are subject in their Member State."

This can be seen as an anti-circumvention clause aimed at ensuring that contracting authorities do not seek to disapply mandatory domestic rules by 'escaping' their jurisdiction through international collaboration--and, consequently, as a rule aimed at preserving the competential split between Member States and the EU in an area that arguably exceeds the procurement remit and goes to the core of the principle of national procedural and organisational autonomy.

However, participants in the seminar raised the point that it can also be seen as a 'Trojan horse' indicating further legal integration (and further regulation of these mechanisms in a future 6th iteration or generation of EU public procurement Directives) through the test of 'EU compatibility' of domestic mandatory public law provisions. I find this a very interesting thought, which is worth exploring in more depth. For now, I can only offer a few initial reflections.

From that perspective of 'EU law tests creeping into mandatory domestic public law requirements', and taking the example of free movement of goods, the question would be whether Art 39(1)II Dir 2014/24 does no more than recreate the mechanism of Art 36 TFEU--ie bring to the area of public procurement a 'public policy' (+ proportionality) test that mandatory public law requirements need to meet in order to justify the restriction on free movement that derives from preventing contracting authorities from resorting to enabling provisions for collaborative cross-border procurement. Or, on the contrary, whether it creates a separate test of 'EU law compatibility' that can actually go beyond what could be defended by Member States from a free movement of goods perspective by forcing an interpretation based on the effet utile of the rules in Dir 2014/24 itself--which would, almost by definition, result in more limited scope for absolute restrictions on the possibility to engage in collaborative cross-border joint procurement.

Either way, and having in mind recent cases on 'public policy' justifications for restrictions on free movement of goods, such as the DocMorris 2 case, it seems plausible that Art 39(1)II Dir 2014/24 may effectively be used in the future to demolish traditional public law requirements applicable to public procurement (such as subjection to domestic public contract law, language requirements, etc) on the basis that they disproportionately (or absolutely) restrict the possibility to engage in collaborative cross-border procurement.

For the purposes of the emergence of trans-EU public law, this would be a clear lever for the transformation of Member States' domestic public law requirements applicable to procurement activities, not least because internal market-type analysis would start being applied to public purchasing arrangements and their regulation in a different and possibly more stringent fashion.

So this is an area where I plan to keep an eye in the future and where I would appreciate input concerning any cases that may be developing at domestic level in the Member States. Either now or in the future.

Interesting Procurement Paper (Li & Xu, 2016): A Blueprint for Variable Remuneration of Public Procurement Officers? A Warning against some types of Centralised Procurement?

I have just read the paper by D Z Li and M Xu, 'Competition in Procurement Auctions with Corruption' (February 2, 2016), which assesses an interesting scenario of competition in public procurement tenders where the person in charge of running the procedure (the procurement officer, or 'bureaucrat', in their terminology) can require bribes from winning bidders, and where those bribes can be proportionate to the final value of the contract awarded.

Their paper is interesting because it fleshes out the incentives that a bureaucrat that expects to obtain a rent at the end of the procedure has, both in terms of affecting the number of bidders (to reduce it), and the level of disclosure of information (to conceal information in order to cover the corrupt practice). My personal intuition is that their insights should be useful to consider non-corrupt scenarios involving buyer rents other than bribes and, in particular, the introduction of bonuses or other variable retribution mechanisms for public buyers, which could well create the same incentives (as discussed below). Moreover, I find the paper thought-provoking because (legitimate) kick-backs are used to finance the activities of central purchasing bodies, which raises issues of their impact on social welfare if they behave like individual bureaucrats would (as also discussed below).

The paper and its model

As they explain in their abstract:

We study the effects of corruption on equilibrium competition and social welfare in a public procurement auction. A bureaucrat runs the auction on behalf of the government. He invites firms into the auction at positive costs, and may request a bribe from the winning firm afterward[s]. We first show that, in the absence of corruption, the bureaucrat invites more firms than social optimum under quite standard assumptions. Secondly, the effects of corruption on competition and social welfare vary across different forms of bribery. In the case of fixed bribe, corruption has no effect on equilibrium competition, yet [it does] induce social welfare loss due to the distortion cost of increased public spending. In the case of proportional bribe, the corrupt bureaucrat will invite less firms into the auction, which may result in Pareto-improving allocation in equilibrium. Finally, we also show that information disclosure may consistently induce more firms to be invited, if compared with the case of no information disclosure, no matter [whether] there is corruption or not.

I find some of the assumptions and insights of their paper particularly thought-provoking. They (implicitly) base their model on the existence of an agency relationship between the bureaucrat and the government, as well as between the government and society at large [for discussion, see here and here and, in Spanish, here]. This makes the model interesting from the perspective of the social externalities that improperly designed public procurement models can create, particularly if they allow public buyers to pursue (self-serving) goals that do not align with promotion of social welfare.

In their paper, Li & Xu explain that 'the government is modelled as a government division ... who cares about its own procurement pay-off rather than the overall social welfare' (p. 2). This can lead to designing the procurement process in a manner that invites too many interested bidders because 'the optimal number of firms that maximizes the government's pay-off is larger than the efficient number of firms that maximizes social welfare' (ibid), and due to the fact that 'the government prefers [a] higher level of competition in the procurement process' than would be socially efficient (p. 3). The undesirability of the excessive number of bidders is mainly derived from the costs they incur in order to participate in the tender, which are wasted for all those that did not stand a real chance of winning the contract (or, indeed, for all except the winning bidder).

The main insight of their paper is that, while the existence of a fixed bribe hurts both the government and society at large due to the higher cost of procurement, the existence of a proportionate bribe may 'increase social welfare [by inducing an efficient number of firms, or just one firm, to be invited], yet it hurts the government, as the government prefers higher level of competition in the procurement process' because that reduces its (private) procurement cost and imposes the externality derived from excessive tendering costs assumed by the disappointed private bidders [for discussion on the absence of consideration of these costs in economic surveys supporting recent public procurement law reforms in the EU, see here].

Their insight is based, among other elements, on the 'standard assumption for procurement auctions that firms' cost distribution is of decreasing reversed hazard rate (DRHR)' (p. 1, for an explanation of the reversed hazard rate and how it operates, see here). As Li & Xu explain, 'The intuition behind this ... is that increasing competition will gradually squeeze out the expected rent of the winning firm. Furthermore, the expected rent converges to zero when the number of firms approaches to infinity'. Or, in very simple words, that the lower the number of bidders, the higher the expected rent by those that participate. That is what would allow bidders to tender less competitive prices when competitive pressure is reduced (ie less bidders are invited), which would also be in the interest of the bureaucrat expecting to receive a proportional bribe (a higher rent for the winning bidder carries a higher rent for the bureaucrat as well).

They also stress in clear terms that 'information disclosure will increase both the efficiency and the optimal number of firms in the procurement auction. The intuition is that, under information disclosure, firms' cost estimates become more heterogen[e]ous, and therefore, for [a] given number of firms, the auction becomes less competitive than before' (p. 13). Furthermore, 'under information disclosure, firms become more heterogen[e]ous in their cost estimates, and the winning rent, which [in their model] is the difference between the lowest and second lowest costs, may also get larger as well'. However, t'when a corrupt bureaucrat can control information release, it would be more difficult to detect corruption. As we know, information disclosure implies more firms to be invited into the auction, and corruption under the proportion[ate] bribe implies less firms to be invited. The combined effects of these two are mixed'. Overall, then, the implications of their findings seems to be that a corrupt bureaucrat will have mixed incentives on whether to reduce the volume of information disclosed in the tender process because more information may increase its own proportionate rent, but it will also trigger both more interest in the tender and more risk of detection of the corruption.

a blueprint for variable remuneration of procurement officers?

As mentioned, my intuition is that these insights can be useful to consider non-corrupt scenarios involving 'bureaucrat' rents other than bribes and, in particular, the introduction of bonuses or other variable retribution mechanisms for public buyers, which could well create the same incentives. My intuition is that, should the bureaucrat have a legal financial incentive to obtain a rent a the end of the tender, and should the existence of this rent not need to be hidden, it would have an incentive to pursue strategies that maximize social value (even if not necessarily government pay-offs) by disclosing information that reduces the number of potentially interested bidders for which the tender is not actually competitive. Moreover, the financial incentive could include an element of reverse proportionality, so that the bonus would be larger when the government pay-off is increased (ie when the total cost of the procurement is reduced as much as possible within the framework of the competition between the efficient number of bidders). If this is true, then, one of the main aspects that Member States should consider going forward would not only be linked to decisions on how to transpose and develop the rules for restricted procedures and for procurement procedures involving negotiations, but also linked to the establishment of appropriate systems of incentives for procurement officers (bureaucrats) to make the right choice of procedure and to conduct the tender in a way that is aligned with social welfare and with (intra)governmental pay-offs.

what implications for kick-back based central purchasing financing?

Central purchasing bodies (CPBs) can be financed in many ways, but a popular model is for them to receive kick-backs (in the form of rappels of fees) from suppliers included in the framework agreements and other contracts that CPBs manage. Those kick-backs are generally proportionate the value of the call-offs that end-user contracting authorities place with each supplier. In that case, the CPB is not in a different economic position than a procurement officer (bureaucrat) expecting to receive a proportionate rent (or bribe) at the end of the procurement process it runs. Therefore, it seems to me that one of the transferable insights of Li & Xu's paper is that CPBs will be structurally in a situation where they might as well aim to achieve the highest rent, which would require for them to reduce the number of bidders and (possibly, but not necessarily) the information disclosed at the outset of the procedure, so as to reduce the number of competitors and increase their expected rents--thus triggering higher kick-backs for the CPB. This would match well with the intuition that CPBs can become self-interested organisations in the way they run their framework agreements, and not pay excessive attention to the real interest of their principal (end-user contracting authorities) or society at large, particularly if the use of their services is mandatory (ie if they do not need to justify net advantages, at least for the end-user contracting authorities, in order to attract volume of orders).

If this intuition holds true, it would be interesting to look at the impact of the financing of CPBs through kick-backs in more detail, in order to assess whether this system of financial incentives and rewards fosters social welfare overall, or is only beneficial for the CPB (and/or, the government) at the expense of broader social interests. This would be particularly relevant if, as anecdotal evidence indicates, access to centralised procurement is difficult for most firms (and, in particular, SMEs), so that CPBs structurally reduce the number of bidders for their (large) contracts, which the model in the paper would suggest increases the rents for both the CPBs and the included suppliers, but imposes both direct costs on government (through higher procurement costs that could be achievable in alternative settings of increased competition within CPB procurement) and indirect social costs via externalities [for discussion of some of these economic issues, see here].

Interesting paper on resistance to collaborative/centralised public procurement (Mason & Meehan: 2016)

I have just read the paper C Mason & J Meehan, ‘Collaborative public procurement: institutional explanations of legitimised resistance’ (2016) 22 Journal of Purchasing & Supply Management, forthcoming [a draft preliminary version of the paper is available on SSRN: http://ssrn.com/abstract=2152740]. 

The paper focuses on the very operational and subjective reasons that can lead practitioners involved in collaborative or centralised procurement to resist the roll-out of these innovative procurement strategies. I found their findings regarding financial reporting implications and job security particularly relevant because they bring home a reality bite that we need to incorporate into legal research if we are worried about the effectiveness of the rules we create.

In the rather more technical terms of the abstract:
The paper explores the barriers to regional collaborative public procurement. It reports the results of an empirical study of five public sector authorities in the emergency services sector in the UK. Exploring the barriers to collaborative procurement through the lens of institutional theory we frame the inter- and intra-organizational strategic resistant responses to isomorphic pressures. The study took a multi-stakeholder approach involving 70 individuals spanning budget holders, operational managers, procurement, and finance across 30 spend workstreams. The results show that operational barriers to collaborative procurement persist at national, regional, organizational and individual levels. While these barriers are used overtly as the rational defence, covert strategic responses of institutional logics, protectionism and symbolic tick-boxing legitimize stakeholder resistance to numerous isomorphic forces and further entrench the operational barriers. The findings contribute to an understanding of choice mechanisms in public procurement research by exploring where, and why, tensions and conflicts occur in collaborative public procurement strategies, both within, and between, organizations. The study contributes to, and addresses a central issue in institutional theory: identifying the social processes embedded in rational decision-making processes. By focusing on different internal stakeholder perceptions and their motivations, we add to current thinking on how organizations create internal power and agency structures through institutional logics to legitimize their actions. The results highlight the criticality of understanding underpinning motivation in behaviour in institutional theory and the links between operational and strategic processes. From an applied perspective, the research highlights that failure to provide sufficient evidence while applying pressure at a political level leads to tick-box approaches to collaborative procurement risking long-term damage and sub-optimized performance.
It is definitely well worth a read. 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 * * *

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

A conversation on horizontal policies in public procurement

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

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



Dear Albert:

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

Far too kind.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Postscript: Some further thoughts by Prof. Cunha Rodrigues

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

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

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

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

Paper on centralisation of procurement and competition law

Ignacio Herrera Anchustegui, from BECCLE - University of Bergen, and I have just completed a working paper on the new rules on centralisation and occasional procurement under articles 37-39 of Directive 2014/24. The paper assesses the risks, rationale and justification for the rules on centralisation and aggregation of public procurement in Directive 2014/24. The paper is entitled "Impact of public procurement aggregation on competition. Risks, rationale and justification for the rules in Directive 2014/24" and is now part of the University of Leicester School of Law Research Paper Series.
 
The paper explores the justifications advanced for the aggregation of purchasing and the countervailing risks it generates. In both cases, it focusses in economic and administrative aspects. It then proceeds to a summary overview of the new rules for the aggregation of public procurement in Directive 2014/24, and emphasised how the Directive is expressly recognising possibilities that clearly exceed the more modest approach in Directive 2004/18. Moving on, it then focusses on the potential justification for certain activities now permitted by the 2014 rules, and engages in a critical assessment of their competitive impact. The paper briefly highlights the far-reaching and not necessarily positive implications that a maximisation of the centralisation and aggregation possibilities under Directive 2014/24 could have, and proposes that strict competition law enforcement will be necessary to avoid undesired consequences. Some suggestions for further research are provided by way of conclusions.
 
The full paper is available for download on SSRN. Its full citation is:

Sánchez Graells, Albert and Herrera Anchustegui, Ignacio, Impact of Public Procurement Aggregation on Competition. Risks, Rationale and Justification for the Rules in Directive 2014/24 (December 5, 2014). University of Leicester School of Law Research Paper No. 14-35. Available at SSRN:  
http://ssrn.com/abstract=2534496.
 
 

US DoD to consolidate contracting for healthcare professionals in view of GAO recommendation

The US Government Accountability Office (GAO) has released a Report on Defense Health Care (GAO-13-322), where it concludes that the Department of Defense (DoD) needs a strategic approach to contracting for health care professionals. According to GAO, 
DoD does not have a consolidated agency-wide acquisition strategy for medical services. In the absence of such a strategy, contracting for health care professionals is largely fragmented. For example, the military departments had not consolidated their staffing requirements by developing joint contracts beyond a limited number of instances amounting to about 8 percent of the fiscal year 2011 spending on health care professionals. The departments have made efforts to use multiple-award contracts to consolidate intraservice staffing requirements, but GAO identified several instances where multiple task orders were placed for the same type of provider in the same area or facility. A more consolidated strategic sourcing strategy could allow DOD to acquire medical services in a more cost-effective way.
Therefore, GAO is recommending that the Secretary of Defense develops a DoD-wide strategic approach to contracting for health care professionals, with which DoD concurs. This means that there are winds of consolidation in US DoD healthcare procurement. Hopefully it will take into consideration previous GAO recommendations concerned with consolidation and centralisation, as discussed here in relation to inter-agency agreements.