Public procurement digitalisation: A step forward or two steps back? [guest post by Dr Kirsi-Maria Halonen]

In this guest post, Dr Kirsi-Maria Halonen offers some exploratory thoughts on the digitalisation of public procurement, its difficulties and some governance and competition implications. This post is based on the presentation she gave at a Finnish legal research seminar “Oikeustieteen päivät”, Aalto University, on 28-29 September 2019.

Digitalisation of procurement - background and goals

Digitalisation and e-procurement are considered to enhance the efficiency of the procurement process in the EU’s internal market. In line with the European Commission’s 2017 Procurement Strategy, procurement digitalisation can unlock better and faster transparency across the internal market, thus ensuring the possibility for economic operators to become aware of business opportunities, the facilitation of access to public tenders and the dissemination of information on the conditions of the award of public contracts.

Beyond mere transparency gains, procurement digitalisation is also expected to Increase the integrity of the awarding process and the public officials involved, thus fostering corruption prevention and good administrative practices. Finally, digitalisation is also expected to open new, more efficient monitoring possibilities both before and after contract execution, as well as the deployment of advanced big data analytics.

Directive 2014/24/EU and procurement digitalisation

Digitalisation and e-procurement are some of the main goals of Directive 2014/24/EU. Since October 2018, these rules impose the mandatory use of electronic communications throughout the whole public contract award procedure (eCommunication), the submission of tenders in electronic form (eSubmission) and created detailed rules for procedures meant solely for eProcurement, as well as simplified information exchange mechanisms (such as the ESPD) to facilitate electronic processing of procurement information.

Although the digital requirements in the Directive do not yet cover pre-award market consultations or post-award contracts and contract amendments, there are some trends to indicate that these may be the next areas of digitalisation of procurement.

State of the art at Member State level

Many Member States have taken digitalisation and transparency in public procurement even further than the requirements of Directive 2014/24/EU. Many contracting authorities use eProcurement systems for the management of the entire life-cycle of the tendering process. In Finland, there is now consolidated experience with not only an eProcurement system, but also with an open access Government spend database. Similarly, Portugal, Spain, Italy, Slovakia and Poland have also created open access contract registers for all public contracts and contract amendments.

Additionally, many Member States are committed to wider transparency outside the procurement procedures. For example, there is an emerging practice of publication of pre-tendering market consultation documents or audio/video meeting records. It is also increasingly common to provide open access to contract performance documents, such as bills, payments and performance acceptance (eg the UK national action plan on open contracting).

Concerns and opportunities in the digitalisation of procurement

Given the current trends of development of digital procurement, it is necessary to reflect not only on the opportunities that the roll-out of these technologies creates, but also some concerns that arise from increased transparency and the implications of this different mode of procurement governance. Below are some thoughts on four interrelated dimensions: corruption, SME participation, adoption of blockchain-base and algorithmic tools, and competition for public contracts.

Corruption

Public Procurement and other commercial relationships (eg real estate development) between public and private sector are most vulnerable to corruption (as repeatedly stressed by the OECD, Transparency International, Finnish National Bureau of Investigation, etc). In that regard, it seems clear that the digitalisation of procurement and the increased transparency it brings with it can prevent corruption and boost integrity. Companies across the EU become aware of the contract award, so there is less room for national arrangements and protectionism. Digitalisation can make tendering less bureaucratic, thus lessening the need and room for bribes. eProcurement can also prevent (improper) direct communication between the contracting authority and potential tenderers. Finally, the mere existence of electronic documentation makes it easier to track and request documents at a later stage: illegal purchases are not that easy to “hide”.

Yet, even after the roll-out of electronic documentation and contract registers, there will remain issues such as dealing with receipts or fabricating needs for additional purchases, which are recurring problems in many countries. Therefore, while digitalisation can reduce the scope and risk of corruption, it is no substitute for other checks and balances on the proper operation of the procurement function and the underlying expenditure of public funds.

SME participation

One of the goals of Directive 2014/24/EU was to foster procurement digitalisation to facilitate SME participation by making tendering less bureaucratic . However, tendering is still very bureaucratic. Sometimes it is difficult for economic operators to find the “right” contracts, as it requires experience not only in identifying, but also in interpreting contract notices. Moreover, the effects of digitalisation are still local due to language barriers – eg in Finland, tendering documents are mostly in Finnish.

Moreover, the uncertainty of winning and the need to put resources into tendering are the main reasons for not-bidding by SMEs (Jääskeläinen & Tukiainen, 2018); and this is not resolved by digital tools. On the contrary, and in a compounding manner, SMEs can be disadvantaged in eProcurement settings. SMEs rarely can compete in price, but the use of e-procurement systems "favours" the use of a price only criterion (in comparison to price-quality-ratio) as quality assessment requires manual assessment of tenders. The net effect of digitalisation on SME participation is thus less than clear cut.

Blockchain-based and algorithmic tools

The digitalisation of procurement creates new possibilities for the use of algorithms: it opens endless possibilities to implement algorithmic test for choosing “the best tender” and to automate the procurement of basic products and services; it allows for enhanced control of price adjustments in e-catalogues (which currently requires manual labor); and it can facilitate monitoring: eg finding signs for bid rigging, cartels or corruption. In the future, transparent algorithms could also attack corruption by minimizing or removing human participation from the course of the procurement procedure.

Digitalisation also creates possibilities for using blockchain: for example, to manage company records, official statements and documents, which can be made available to all contracting authorities across EU. However, this also creates risks linked to eg EU wide blacklists: a minor infringement in one Member State could lead to the economic operator’s incapability of participating in public tenders throughout the EU.

The implications of the adoption of both algorithmic and blockchain-based tools still requires further thought and analysis, and this is likely to remain a fertile area for practical experimentation and academic debate in the years to come.

Competition

Open public contract registers have become a part of public procurement regime in EU Member States where corruption is high or with a tradition of high levels of public sector transparency. The European Commission is pushing for their creation in all EU jurisdictions as part of its 2017 Procurement Strategy. These contract registers aim to enhance integrity of the procurement system and public official and to allow public scrutiny of public spending by citizens and media.

However, these registers can facilitate collusive agreements. Indeed, easier access to detailed tendering information facilitates monitoring existing cartels by its members: it provides means to make sure ”cartel discipline” is being followed. Moreover, it may facilitate the establishment of new cartels or lead to higher / not market-based pricing without specific collusive agreements.

Instead of creating large PDF-format databases of scanned public contracts, the European Commission indeed encourages Member States to create contract registers with workable datasets (user friendly, open, downloadable and machine-readable information on contracts and especially prices and parties of the contract). This creates huge risks of market failure and tendering with pricing that is not based on the market prices. It thus requires further thought.

Conclusions

Digitalisation has and is transforming public procurement regime and procedures. It is usually considered as a positive change: less bureaucracy, enhanced efficiency, better and faster communication and strengthening integrity of public sector. However, digitalisation keeps challenging the public procurement regime through eg automated processes and production of detailed data - leaving less room for qualitative assessments. One can wonder whether this contributes to the higher-level objectives of increasing SME participation and generating better value for money.

Digitalisation brings new tools for monitoring contracting authorities and to detect competition distortions and integrity failures. However, there is a clear risk in providing “too much” and “too detailed” pricing and contract information to the market operators – hence lowering the threshold of different collusive practices. It is thus necessary to reconsider current regulatory trends and to perhaps develop a more nuanced regulatory framework for the transparency of procurement information in a framework of digitalised governance.

Kirsi.jpeg

Guest blogger

Dr Kirsi-Maria Halonen is a Doctor of Laws and Adjunct Professor, Senior Lecturer in Commercial Law at University of Lapland. She is also a current Member of the European Commission’s Stakeholders Expert Group on Public Procurement (SEGPP, E02807), the Research Council at Swedish Competition Authority, the Finnish Ministry of Finance national PP strategy working group (previously also national general contract terms for PP (JYSE) working group), the Finnish Public Procurement Association, of which she is a board member and previous chair, and the European Procurement Law Group (EPLG).

In addition to public procurement law, Kirsi-Maria is interested in contract law, tort law, corruption and transparency matters as well as state aid rules. She is the author of several articles (both in English and in Finnish) and a few books (in Finnish). Most recently, she has co-edited Transparency in EU Procurements. Disclosure within Public Procurement and during Contract Execution, vol 9 European Procurement Law Series (Edward Elgar, 2019), together with Prof R Caranta and Prof A Sanchez-Graells.

My approach to public procurement and competition: A rebuttal to Prof Arrowsmith (2012) and Prof Kunzlik (2013)

I am at the latest stages of updating my monograph Public Procurement and the EU Competition Rules (Oxford, Hart), which 2nd edn will be published by Hart again in 2015. Preparing the revision of the book, and seeing that the 1st edn raised some criticism by very notable procurement scholars, I thought that it would be good to write an introduction that provides some context. The following is from this introduction and basically amounts to a rebuttal of the arguments developed by Professor Sue Arrowsmith and Professor Peter Kunzlik to my 1st edn, both of them published in the Cambridge Yearbook of European legal studies. Hopefully, this rebuttal will contribute to a transparent academic debate about public procurement--and it will persuade readers to look for the new edition as soon as it is available Needless to say, further comments from Arrowsmith or Kunzlik would be enriching.
 
* * *
 
From an academic perspective, it has been remarkable to see how the first edition of this book has sparked a rather intense, estimulating and fruitful debate between Professor Sue Arrowsmith, Professor Peter Kunzlik and myself about the ultimate goal of the EU public procurement rules. More specifically, we seem to hold very different views about the meaning of ‘competition’ and the ensuing economic efficiency, as well as their place in the EU procurement Directives. I think that the readers of this second edition will benefit from a short summary of this academic debate, since it fundamentally underpins the work in this book.
 
(1) Professor Sue Arrowsmith’s contention that the pro-competitive framework on which this book is based constitutes a stretched and distorted reading of the competition elements included in the EU public procurement Directives and their interpreting case law.

Professor Sue Arrowsmith criticises my competition-oriented approach in a section of her article ‘The Purpose of the EU Procurement Directives: Ends, Means and the Implications for National Regulatory Space for Commercial and Horizontal Procurement Policies’ [(2011-2012) 14 Cambridge Yearbook of European legal studies 1–47].
 
She argues for her own interpretation of the goal of the EU rules and tries to limit their scope in search for some ‘regulatory space’ for Member States. This is part of a larger endeavour of hers, likely to carry on in the written proceedings of her coming conference on “Rethinking ‘economic’ derogations and justifications under the EU’s free movement rules” within the Current Legal Problems 2014-15 series.  
 
In her 2012 paper, Professor Arrowsmith considered that my book espouses ‘a broad notion of competition as a tool for replicating the private sector market’ in the public procurement setting. She considers that such point of departure should be rejected, as it is a misunderstanding of the concept of competition embedded in the pre-2014 public procurement Directives, which she considers limited to ‘removing discrimination and barriers to entry into the competitive market, and implementation of the competitive procedures for transparency reasons’. She adopted a rather positivistic approach and stressed that ‘[i]t seems significant that while non-discrimination, transparency and equal treatment were written into the directives as general principles, [its] ‘competition’ provisions are confined to specific areas’. She eventually concluded that ‘a broad interpretation of the directives as being concerned with replicating market competition is incorrect. While apparently supported by some statements in the jurisprudence these are based on misunderstanding and such a broad interpretation, it is submitted, represents unwarranted judicial reorientation of the directives’ rules’ (all quotes from pages 25–34). My reaction to the line of criticism voiced by Professor Arrowsmith is as follows.

Firstly, I am not sure that my approach can be conceptualised as an attempt to make the directives ‘replicate market competition’. I would submit that it is rather an attempt to properly integrate them within an environment of market competition. Or, put differently, this is an attempt to avoid public procurement rules from distorting or restricting the competition that already takes place in the market, or from preventing the competition that would emerge but for the constraints imposed by the procurement rules. 

Secondly, as to the point that this approach is flawed and based on misunderstandings, taking exclusively into account the pre-2014 materials, I would suggest that Professor Arrowsmith’s views do not lie on the strongest economic foundations. Professor Arrowsmith basically comes to the view that EU public procurement rules are concerned with preventing barriers to trade within the internal market (by means of transparency and non-discrimination), but that this has nothing to do with economic efficiency derived from undistorted competition because the ultimate objective of the rules (beyond internal market integration per se) belongs to the domestic regulatory space of the Member States. However, economic efficiency must, by necessity, derive from the completion of the internal market if that results in stronger competitive pressures for economic operators.
 
Furthermore, as the Court of Justice of the EU has very recently stressed in an interpretation of the 2004 public procurement Directives, the ultimate objective of the internal market rules and the EU public procurement Directives is to allow all the economic operators involved to achieve economic efficiency derived from competition strategies unaffected by restrictive procurement decisions—in particular, even if that is attained by deriving a competitive advantage from the differences between the respective rates of pay applicable in different Member States (Judgment in Bundesdruckerei, C-549/13, EU:C:2014:2235, 34). It seems very clear that EU public procurement rules, just as everywhere else, are concerned with economic efficiency. Hence, limited doubt can seriously be cast on the fundamental proposition that the development of the internal market, including public procurement rules, and its supporting system of competition rules aim at generating economic efficiency by relying on (economic) market mechanisms.

Thirdly, and from a more legalistic perspective, the development of the EU public procurement rules in the revised 2014 Directives also disprove the point that the general principle of competition does not exist and that competition considerations are limited or confined to specific areas. As discussed at length in Chapter 5 of this second edition, article 18(1) of Directive 2014/24 now clearly consolidates the principle of competition amongst the general principles of the system. It is true that the wording of this provision could have been clearer and that there are significant interpretative questions that need being addressed, but it should be acknowledged that by clearly stating that ‘The design of the procurement shall not be made with the intention … of artificially narrowing competition [and that]competition shall be considered to be artificially narrowed where the design of the procurement is made with the intention of unduly favouring or disadvantaging certain economic operators’, Directive 2014/24 stresses the relevance of competition considerations across the board and provides an interpretative tool that is likely to further develop the pro-competitive orientation of the system of EU public procurement rules in the coming years. In my view, this is a truly welcome development, and not only because it clearly supports the ideas and approach developed in the first edition of this book and now further refined in this second edition. As has always been my conviction, a competition-oriented public procurement system is necessary for the public sector to properly carry out their missions with the minimum distortion of private sector activities and, ultimately, with the minimum loss of social welfare. 

In the 2005 second edition of her magnificent treatise The Law of Public and Utilities Procurement, 2nd edn (London, Sweet and Maxwell, 2005) 432, Professor Arrowsmith had indicated that ‘competition might be developed as a general principle with the same status as transparency and equal treatment. The very broad conception of competition endorsed by the Advocate General [Stix-Hackl in case C-247/02 Sintesi] was criticised … it was suggested that the directives are merely concerned with removing restrictions on participation in competitions held in public markets. However, a general principle of competition could properly be developed to support this latter objective of removing restrictions on participation’. Consequently, even if back in 2005 she already stressed the same points she later emphasised in the 2012 paper regarding transparency and non-discrimination, she seemed to be open to a development such as the ‘creation’ of a principle of competition like the one now included in article 18(1) of Directive 2014/24.
 
However, when she now reads that article in 2014, she considers that it ‘appears to be simply a manifestation of the more general equal treatment principle, as designing any aspect of the procurement for this reason [ie, ‘unduly favouring or disadvantaging certain economic operators’] rather than based on the needs and preferences in the project would clearly infringe that principle’ (The Law of Public and Utilities Procurement. Regulation in the EU and the UK, Vol. 1, 3rd edn (London, Sweet & Maxwell, 2014) 631). Professor Arrowsmith has overlooked the first part of the clause of article 18(1) of Directive 2014/24, where contrary to what she concluded regarding the 2004 rules, it is at least clear that competition is ‘elevated’ to the same altar of the general principles of the EU public procurement system as equality, non-discrimination, transparency and proportionality.

Overall, there is very little left to support Professor Arrowsmith’s view that the pro-competitive approach advocated for in this book is based on misunderstanding. On the contrary, I would claim that the arguments presented in the first edition paved the way for a stronger recognition of the existence of the principle of competition embedded in the EU public procurement Directives, which has now culminated in its explicit consolidation in article 18(1) of Directive 2014/24. That being said, this second edition will provide the reader with arguments why this is a development that still requires further fine-tuning and optimisation. And this is an endeavour to which I plan to continue dedicating my academic efforts.
 
(2) Professor Peter Kunzlik’s argument that this book ‘as well as being a scholarly analysis within the neoliberal normative frame, is a manifesto for the neoliberalisation of public procurement regulation in the EU’ and is ‘the most systematic statement’ of the argument that ‘the dominating aim of the EU procurement directives is to advance competition in the sense of a competition doctrine intended only to achieve efficiency’.

The further debate with Professor Peter Kunzlik was equally refreshing. Indeed, he thought that Arrowsmith had fallen short from exhausting the criticism of the first edition of this book and further expanded it in his article ‘Neoliberalism and the European Public Procurement Regime’ [(2012-2013) 15 Cambridge yearbook of European legal studies 283, 312–56]. Interestingly, Kunzlik took a completely different approach and focussed his criticism on the ideology that he imputes to the book (and myself, by extension). I must say that I am not completely dissatisfied by the label of ‘neoliberal manifesto’ and that, as Kunzlik recognises, this is something I disclose rather openly in the book when I warn the reader that 'this is a ‘free-market type’ study of competition in the public procurement environment'. However, when it comes to the details of his criticism, I think that Kunzlik fails to provide a convincing argument for the following reasons.

Kunzlik starts off with a very lengthy discussion of Neoliberalism to set the tone for his criticism, and then goes on to acknowledge Arrowsmith’s position. Taking issue with both her and my positions, Kunzlik indicates that he aims to ‘offer a third approach to the relevance of competition and value for money in EU public procurement regulation’. He considers that ‘the concept of ‘competition’ to which the public procurement directives relate is not the ‘efficiency’ concept suggested by [Sanchez] Graells, but rather a ‘structure of competition’ concept that is concerned to protect the structure of the market and equality of competitive opportunity of traders in the interests of customers, competitors and ultimate consumers. It is a concept that in the public procurement context simply requires that the law must ensure equality of opportunity for potential tenderers and a structure of competition for public contracts that allows sufficient opportunities for EU-wide competition, thereby ensuring the integrity of the internal market—the very same objectives that are asserted by Arrowsmith’ (quotes from pages 327 and 335). Kunzlik was trying to square a circle between Arrowsmith’s and my position. However, beyond the dismissive way in which he uses the terms efficiency and neoliberalism, there are no such differences in the implications of his and my arguments. Indeed, I do not see any third view in his proposal.

I find it even harder to understand how his argument deviates from the ones presented in this book when he stresses that ‘the public procurement directives do have a competition objective. However, … the objective in question is not to achieve ‘efficiency’ in the sense contended by [Sanchez] Graells, but to ensure a structure of competition for public contracts to be opened up to EU-wide competition on the basis of equality of competitive opportunity’ (340). Tertium non datur. I struggle to understand how equality of competitive opportunity on an EU-wide level does not amount to (facilitating) economic efficiency. Consequently, I hope the reader will agree with me in that there is no ‘third view’ and that, once it is accepted (as he does) that the public procurement directives do have a competition objective, the argument is over—regardless of the ideological content one tries to give to it.

Overall, then, I think that the academic debate (as I understand it) strongly supports the approach taken in this book, where these and other criticisms are addressed in further detail. There is nothing left for me to say. It is now for you, dear reader, to decide.

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.