Oracles as a sub-hype in blockchain discussions, or how my puppy helps me get to 10,000 steps a day

Photo: Rob Alcaraz/The Wall Street Journal.

Photo: Rob Alcaraz/The Wall Street Journal.

The more I think about the use of blockchain solutions in the context of public procurement governance—and, more generally, of public services delivery—the more I find that the inability for blockchain technology to reliably connect to the ‘real world’ is bound to restrict any potentially useful applications to back-office functions and the procurement of strictly digital assets.

This is simply because blockchain can only generate its desirable effects of tamper-evident record-keeping and automated execution of smart contracts built on top of it to the extent that it does not require off-chain inputs. Blockchain is also structurally incapable of generating off-chain outputs by itself.

This is increasingly widely-known and is generating a sub-hype around oracles—which are devices aimed at plugging blockchains to the ‘real world’, either by feeding the blockchain with data, or by outputting data from the blockchain (as discussed eg here). In this blog post, I reflect on the minimal changes that I think the development of oracles is likely to have in the context of public procurement governance.

Why would blockchain be interesting in this context?

Generally, the potential for the use of blockchain and blockchain-enabled smart contracts to improve procurement governance is linked to the promise that it can help prevent corruption and mistakes through the automation of decision-making through the procurement process and the execution of public contracts and the immutability (rectius, tamper-evidence) of procurement records. There are two main barriers to the achievement of such improvements over current processes and governance mechanisms. One concerns transactions costs and information asymmetries (as briefly discussed here). The other concerns the massive gap between the virtual on-chain reality and the off-chain real world—which oracles are trying to bridge.

The separation between on-chain and off-chain reality is paramount to the analysis of governance issues and the impact blockchain can have. If blockchain can only displace the focus of potential corrupt or mistaken intervention—by the public buyer, or by public contractors—but not eliminate such risks, its potential contribution to a revolution of procurement governance certainly reduces in various orders of magnitude. So it is important to assess the extent to which blockchain can be complemented with other solutions (oracles) to achieve the elimination of points of entry for corrupt or mistaken activity, rather than their displacement or substitution.

Oracle’s vulnerabilities: my puppy wears my fitbit

In simple terms, oracles are data interfaces that connect a blockchain to a database or a source of data (for a taxonomy and some discussion, see here). This makes them potentially unreliable as (i) the oracle can only be as good as the data it relies on and (ii) the oracle can itself be manipulated. There are thus, two main sources of oracle vulnerability, which automatically translate into blockchain vulnerability.

First, the data can be manipulated—like when I prefer to sit and watch some TV rather than go for a run and tie my fitbit to my puppy’s collar so that, by midnight, I have still achieved my 10,000 daily steps.* Second, the oracle itself can be manipulated because it is a piece of software or hardware that can be tampered with, and perhaps in a way that is not readily evident and which uncovering requires some serious IT forensics—like getting a friend to crack fitbit’s code and add 10,000 daily steps to my database without me even needing to charge my watch.**

Unlilke when these issues concern the extent to which I lie to myself about my healthy lifestyle, these two vulnerabilities are highly problematic from a public governance perspective because, unless the data used in the interaction with the blockchain is itself automatically generated in a way that cannot be manipulated (and this starts to point at a mirror within a mirror situation, see below), the effect of implementing a blockchain plus oracle simply seems to be to displace the governance focus where controls need to be placed towards the source of the data and the devices used to collect it.

But oracles can get better! — sure, but only to deal with data

The sub-hype around oracles in blockchain discussions basically follows the same trend as the main hype around blockchain. The same way it is assumed that blockchain is bound to revolutionise everything because it will get so much better than it currently is, there are emerging arguments about the almost boundless potential for oracles to connect the real world to the blockchain in so much better ways. I do not have the engineering or futurology credentials necessary to pass judgement on this, but it seems to me plain to see that—unless we want to add an additional layer about robotics (and pretty evolved robotics at that), so that we consider blockchain+oracle+robot solutions—any and all advances will remain limited to improving the way data is generated/captured and exploited within and outside the blockchain.

So, for everything that is not data-based or data-transformable (such as the often used example of event tickets, which in the end get plugged back to a database that determines their effects in the real world)—or, in other words, where moving digital tokes around does not generate the necessary effects in the real world—even much advanced blockchain+oracle solutions are likely to remain of limited use in the context of procurement and the delivery of public services. Not because the applications are not (technically) possible, but because they generate governance problems that merely replace the current ones. And the advantage is not necessarily obvious.

How far can we displace governance problems and still reap some advantages?

What do I mean that the advantage is not necessarily obvious? Well, imagine the possibility of having a blockchain+oracle control the inventory of a given consumable, so that the oracle feeds information into the blockchain about the existing level of stock and about new deliveries made by the supplier, so that automated payments are made eg on a per available unit basis. This could be seen as a possible application to avoid the need for different ways of controlling the execution of the contract—or even for the need to procure the consumable in the first place, if a smart contract in the blockchain (the same, or a separate one) is automatically buying them on the basis of a closed system (eg a framework agreement or dynamic purchasing system based on electronic catalogues) or even in the ‘open market’ of the internet. Would this not be advantageous from a governance perspective?

Well, I think it would be a matter of degree because there would still need to be a way of ensuring that the oracle is not tampered with and that what the oracle is capturing reflects reality. There are myriad ways in which you could manipulate most systems—and, given the right economic incentives, there will always be attempts to manipulate even the most sophisticated systems we may want to put in place—so checks will always be needed. At this stage, the issue becomes one of comparing the running costs of the system. Unless the cost of the blockchain+oracle+new checks (plus the cybersecurity needed to keep them up and properly running) is lower than the cost of existing systems (including inefficiencies derived from corruption and mistakes), there is no obvious advantage and likely no public interest in the implementation of solutions based on these disruptive technologies.

Which leads me to the new governance issue that has started to worry me: the control of ‘business cases’ for the implementation of blockchain-based solutions in the context of public procurement (and public governance more generally). Given the lack of data and the difficulty in estimating some of the risks and costs of both the existing systems and any proposed new blockchain solutions, who is doing the math and on the basis of what? I guess convincingly answering this will require some more research, but I certainly have a hunch that not much robust analysis is going on…

_____

* I do not have a puppy, though, so I really end up doing my own running…

** I am not sure this is technically doable, but hopefully it works for the sake of the example…

An incomplete overview of (the promises of) GovTech: some thoughts on Engin & Treleaven (2019)

I have just read the interesting paper by Z Engin & P Treleaven, 'Algorithmic Government: Automating Public Services and Supporting Civil Servants in using Data Science Technologies' (2019) 62(3) The Computer Journal 448–460, https://doi.org/10.1093/comjnl/bxy082 (available on open access). The paper offers a very useful, but somehow inaccurate and slightly incomplete, overview of data science automation being deployed by governments world-wide (ie GovTech), including the technologies of artificial intelligence (AI), Internet of Things (IoT), big data, behavioral/predictive analytics, and blockchain. I found their taxonomy of GovTech services particularly thought-provoking.

Source: Engin & Treleaven (2019: 449).

Source: Engin & Treleaven (2019: 449).

In the eyes of a lawyer, the use of the word ‘Government’ to describe all these activities is odd, in particular concerning the category ‘Statutes and Compliance’ (at least on the Statutes part). Moving past that conceptual issue—which reminds us once more of the need for more collaboration between computer scientist and social scientists, including lawyers—the taxonomy still seems difficult to square with an analysis of the use of GovTech for public procurement governance and practice. While some of its aspects could be subsumed as tools to ‘Support Civil Servants’ or under ‘National Public Records’, the transactional aspects of public procurement and the interaction with public contractors seem more difficult to place in this taxonomy (even if the category of ‘National Physical Infrastructure’ is considered). Therefore, either additional categories or more granularity is needed in order to have a more complete view of the type of interactions between technology and public sector activity (broadly defined).

The paper is also very limited regarding LawTech, as it primarily concentrates on online dispute resolution (ODR) mechanisms, which is only a relatively small aspect of the potential impact of data science automation on the practice of law. In that regard, I would recommend reading the (more complex, but very useful) book by K D Ashley, Artificial Intelligence and Legal Analytics. New Tools for Law Practice in the Digital Age (Cambridge, CUP, 2017).

I would thus recommend reading Engin & Treleaven (2019) with an open mind, and using it more as a collection of examples than a closed taxonomy.

Governance, blockchain and transaction costs

Bitcoin Traces / Martin Nadal (ES)

Bitcoin Traces / Martin Nadal (ES)

Blockchain is attracting increasing attention as a new technology capable of ‘revolutionising’ governance, both in the private or public sector. In simple terms, blockchain is seen as an alternative to the way information is (securely) stored and rules are enforced, regardless of whether those rules are agreed in a contract, or result from legislation or administrative decision-making.

Some examples include the governance of illegal agreements to distort competition (cartels) (see eg this paper by Thibault Shrepel), or the management of public procurement (eg in this paper by Hardwick, Akram and Markantonakis, or these thoughts by Bertrand Maltaverne). These examples explore how the technology allows for the creation of ‘self-executing’ sets of rules that would be capable of overcoming so far intractable governance problems (mostly, about trust: eg among the cartellists, or in public officials).

This could create opposite effects in the governance of public procurement. For instance, this could make the detection and correction of bid rigging very difficult (if not impossible) or, conversely, allow for a corruption-free procurement architecture. Therefore, the impact of the technology (in principle neutral) on existing governance systems can ultimately be seen as an ‘arms race’ between the private and public sector as, ultimately, the one that gets ahead will be able to exploit the technology to its advantage.

This justifies some calls for both investment in new technologies by the public sector (as the private sector has its own incentives for investment), and regulation of private (and public) use of the technology. I have no objection to either of these recommendations. However, I think there is an important piece of the puzzle that tends to go missing in this type of analysis.

Indeed, most of this discussion brushes over the important limitations of smart contracts. These limitations are both linked to the fact that the computational logic underpinning smart contracts can only operate on the basis of complete information/rules, and that the computing power necessary to implement smart contracts can currently only process extremely simple contracts.

The latter issue may be dismissed as a mere ‘a matter of time’, but given that it has been estimated that it is currently only possible to create a blockchain-based procurement process capable of holding 700-word-long tender documentation (Hardwick, Akram and Markantonakis, 2018: 6), there seems to be a very long road ahead, even accepting Moore’s Law on the growth of computational power.

This first issue, though, is more difficult to set aside. As rightly stressed by Davidson, De Filippi and Potts in their ‘must read’ paper, ‘the obvious problem is that blockchains only work on complete contracts, whereas most in-the-world firms ... are largely (entirely?) made of incomplete contracts'; ‘a blockchain is an economic world of complete contracts’ (2016: 9).

In my view, this should raise significant doubts as to the likely extent of the ‘revolution’ that blockchain can create in complex settings where the parties structurally face incomplete information. Procurement is clearly one such setting. There are a few reasons for this, my top three being that:

  • First, the structural incompleteness of information in a setting where the public buyer seeks to use the public tender as a mechanism of information revelation cannot be overstated. If it is difficult for contracting authorities to design ‘sufficiently objective’ technical specifications and award criteria/evaluation methods, the difficulties of having to do so under the strictures of computational logic are difficult to imagine.

  • Second, the volume of entirely digital procurement (that is, the procurement of entirely digital or virtual goods and services) is bound to remain marginal, which creates the additional problem of connecting the blockchain to the real world, with all the fallibility and vulnerability that so-called oracles bring with them.

  • Third, blockchain technology in itself creates an additional layer of transaction costs—at least at the stage of setting up the system and ‘migrating’ to a blockchain-based procurement mechanism. Bearing in mind the noticeable and pervasive difficulties in the much simpler transition to e-procurement, this also seems difficult to overstate.

Therefore, while there will clearly be improvements in specific (sub)processes that can be underpinned by blockchain instead of other cryptographic/cybersecurity solutions, I remain quite skeptical of a blockchain-based revolution of procurement governance. It may be that I still have not advanced enough in my research to identify the 'magic technological solution’ that can do away with transaction costs, so any pointers would be most appreciated.

Procurement governance and complex technologies: a promising future?

Thanks to the UK’s Procurement Lawyers’ Association (PLA) and in particular Totis Kotsonis, on Wednesday 6 March 2019, I will have the opportunity to present some of my initial thoughts on the potential impact of complex technologies on procurement governance.

In the presentation, I will aim to critically assess the impacts that complex technologies such as blockchain (or smart contracts), artificial intelligence (including big data) and the internet of things could have for public procurement governance and oversight. Taking the main risks of maladministration of the procurement function (corruption, discrimination and inefficiency) on which procurement law is based as the analytical point of departure, the talk will explore the potential improvements of governance that different complex technologies could bring, as well as any new governance risks that they could also generate.

The slides I will use are at the end of this post. Unfortunately, the hyperlinks do not work, so please email me if you are interested in a fully-accessible presentation format (a.sanchez-graells@bristol.ac.uk).

The event is open to non-PLA members. So if you are in London and fancy joining the conversation, please register following the instructions in the PLA’s event page.

Are English Universities likely to stop having to comply with EU public procurement law?

One of the elements implicit in the on-going discussion about higher education reform in England concerns the extent to which changes in the funding and governance structure of HEFCE (to be transformed into the Office for Students, or any other format that results from the consultation run by BIS) can free English universities from their duty to comply with EU public procurement law. 

The issue is recurring in the subsequent waves of higher education reform in England, and the same debate arouse last summer following BIS statements that the most recent reform (lifting the cap on student numbers) would relieve English universities of their duty to comply with EU public procurement law (see discussion here).

Overall, then, there is a clear need to clarify to what extent English universities are actually and currently obliged to comply with EU public procurement rules, both as buyers and as providers of services. That analysis can then inform the extent to which in the future English universities are likely to remain under a duty to comply with EU public procurement rules.

In this study we provide an up-to-date assessment of situations in which universities are bound by public procurement rules, as well as the combined changes that market-based university financing mechanisms can bring about in relation to the regulation of university procurement and to the treatment of the financial support they receive under the EU State aid rules. National differences in funding schemes are likely to trigger different answers in different EU jurisdictions. This study uses the situation of English universities as a case study.
The first part focuses on the role of universities as buyers. The traditional position has been to consider universities bound by EU public procurement rules either as state authorities, or because they receive more than 50% public funding. In the latter case, recent changes in the funding structure can create opportunities for universities to free themselves from compliance with EU public procurement rules.
In the second part, we assess the position of universities as providers. Here the traditional position has been that the State can directly mandate universities to conduct teaching and research activities. However, new EU legislation contains specific provisions about how and when teaching and research need to be procured if they are of an economic nature. Thus, accepting the exclusion of university services from procurement requirements as a rule of thumb is increasingly open to legal challenge.
Finally, the study assesses if and in how far universities can benefit from exemptions for public-public cooperation or in-house arrangements either as sellers or buyers. 
The full paper is available on SSRN: http://ssrn.com/abstract=2692966.

We have submitted our piece of research to BIS as part of the consultation on the green paper. We hope that our research and the insights it sheds can inform the discussion on the new mechanisms for the allocation of the teaching grant to English universities (and particularly the discussion around Q18 of the consultation).

Further thoughts on the competition implications of public contract registries: rebuttal to Telles

Some 10 days ago, Dr Pedro Telles and I engaged in another of our procurement tennis games. This time, the topic of contention is the impact of public contract registers on competition. I published a first set of arguments (here) and Pedro replied (here) mainly stressing that I had not paid enough attention to the potential upsides of such registers. 

Pedro advocated some potential sources of economic benefits derived from the use of public contract registers aimed at full transparency of tender and post-award procurement documentation, of which I would pick: 1) reduced opportunities for price arbitrage and 2) more scope for antitrust intervention by competition authorities possessing better data on what is going on in procurement markets. His arguments are well developed and can be seen as attractive. However, on reflection, there are still reasons why they do not necessarily work. In this post, I address these two issues and explain why I am still sceptical that they can result in any actual economic upsides. I am expecting Pedro to follow up with more arguments, which would be certainly welcome.

1) What about the 'single market theory = law of one price' approach?
The discussion on price arbitrage implicitly rests on the economic 'law of one price' whereby, in simple terms, a specific good should be traded at a single price in all locations. However, that 'economic law' rests on a large number of assumptions, which are particularly fit to commodity markets and ill suited to complex contracts for goods, or most definitely for services. 

In fact, even in highly competitive markets for commoditised products, the law of one price does not hold, at least if conceived in strong terms (ie strictly one price for a given good) instead of relaxing it to require a convergence or clustering of prices [for an interesting empirical paper stressing these insights, see K Graddy, 'Testing for Imperfect Competition at the Fulton Fish Market' (1995) 26(1) The RAND Journal of Economics 75-92]. 

Thus, focussing on arbitrage issues for anything other than very homogeneous commodities traded under standard contract clauses can fall foul of the due recognition of the assumptions underlying the 'law of one price'. Pedro acknowledges this: "yes, I am talking about a commodity, but then a lot of public procurement is made around commodities, including oil". On this point, however, I think data does not support his views.

According to the 2011 PwC-London Economics-Ecorys study for the European Commission 'Public procurement in Europe-Cost and effectiveness', commodities and manufactured goods only account for about 10% in value and 14% in number of procurement procedures subjected to the EU rules (see here page 45). Thus, the issue of price arbitrage is certainly not of first magnitude when the effects of public contract registers are assessed from an economic perspective.

(c) Anderson for eQuest
2) What about more intervention by competition authorities based on better (big) data?
On this point, Pedro and I agree partially. It is beyond doubt that, as he puts it, there are "potential upsides of having more data available in terms of cartel fighting. What can be done when reams and reams of contract data are available? You can spot odd behaviours. For example, you can corroborate a whistleblower account and you can then check if certain collusive practice/tactic is happening in other sectors as well." That is why, on my original post, I advocated for "[o]versight entities, such as the audit court or the competition authority, [to] have full access" to public contract registers.

However, as I also suggested (probably not in the clearest terms), in order to enable competition law enforcement on the basis of better data, there is no need for everyone to have (unlimited) access to that data. The only agent that needs access is the competition authority. More importantly, indiscriminate disclosure is not technically necessary, particularly when public contract registries are electronic and can be designed around technical devices giving differentiated access to information to different stakeholders.

This is an important issue. In a different but comparable context, disclosure obligations in the field of securities and financial regulation have been criticised for failing to address their excessive rigidity in certain multi-audience scenarios, where investors and competitors can access the same information and, consequently, firms have conflicting incentives to disclose and not to disclose specific bits of commercially sensitive information [for a very interesting discussion, see S Gilotta, 'Disclosure in Securities Markets and the Firm's Need for Confidentiality: Theoretical Framework and Regulatory Analysis' (2012) 13(1) European Business Organization Law Review 45-88].

In that setting, selective disclosure of sensitive information has been considered the adequate tool to strike a balance of interest between the different stakeholders wanting access to the information, and this is becoming a worldwide standard with a significant volume of emerging best practices [eg Brynn Gilbertson and Daniel Wong, 'Selective disclosure by listed issuers: recent “best practice” developments', Lexology, 9 Sept 2014].

Therefore, by analogy (if nothing else), I still think that 
Generally, what is needed is more granularity in the levels of information that are made accessible to different stakeholders. The current full transparency approach whereby all information is made available to everyone falls very short from the desired balance between transparency and competition goals of public procurement. A system based on enabling or targeted transparency, whereby each stakeholder gets access to the information it needs for a specific purpose, is clearly preferable.

Why are public contracts registers problematic?

This past week, I had the pleasure and honour of starting my participation in the European Commission Stakeholder Expert Group on Public Procurement (PPEP). The first batch of discussions  revolved, firstly, around the use of the best price quality ratio (BPQR) award criterion and, secondly, around the use of transparency tools such as public contract registers. 

This second topic is of my particular interest, so I have tried to push the discussion a step forward in a document circulated to the PPEP Members. Given the general nature of the discussion document, I thought it could be interesting to post it here. Any comments will be most welcome and will help enrich the views presented to the European Commission in the next meeting. Thank you for reading and commenting.

Centralised Procurement Registers and their Transparency Implications—Discussion Non-Paper for the European Commission Stakeholder Expert Group on Public Procurement ~ Dr Albert Sanchez-Graells[1]

Background
In its efforts to increase the effectiveness of EU public procurement law in practice and to steer Member States towards the mutual exchange and eventual adoption of best practices,[2] the European Commission has identified the emerging trend of creating public contracts registers as an area of increasing interest.[3] Such registers go beyond the well-known electronic portals of information on public contract opportunities, such as TED[4] at EU level or Contracts Finder in the UK,[5] and aim to publish very detailed tender and contractual information, which in some cases include aspects of the competition generated prior to the award of the contract (such as names of the undertakings that submitted tenders) and the actual contractual documents signed by the parties. Such registers exist at least in Portugal,[6] Italy[7] and Slovakia.[8] The European Commission is interested in assessing the benefits and risks that such public contracts registers generate, particularly in terms of transparency of public tendering and the subsequent management of public contracts. This discussion non-paper aims to assess such benefits and risks and to sketch some proposals for risk mitigation measures.

Why are public contract registries created?
Traditional registers of contract opportunities are fundamentally based on transaction cost theory insights and aim to reduce the search costs that undertakings face in trying to identify opportunities to supply the public sector. By making the information readily available, contracting authorities expect to receive expressions of interest and/or offers from a larger number of undertakings, thus increasing competition for public contracts and reducing the information asymmetries that affect contracting authorities themselves. In the end, that sort of pre-award transparency mechanism aims at enabling the contracting authority to benefit from competition. It also creates the additional benefit of avoiding favouritism and corrupt practices in the selection of public suppliers and, in the context of the EU’s internal market, supports the anti-discrimination agenda embedded in the basic fundamental freedoms of movement of goods, services and capital through pan-European advertisement.

The justification for ‘advanced’ public contracts registers that include post-award transparency mechanisms is more complex and, in short, this type of registers is created for a number of reasons that mainly include objectives at two different levels:

1. At a general level, these registers aim at
  • Reacting to perceived shortcomings in public governance, particularly in the aftermath of corruption scandals, or as part of efforts to strengthen public administration processes
  • Complementing ‘traditional’ public audit and oversight mechanisms through enhanced access to information by stakeholders and civil society organisations, as well as enabling more intense scrutiny by the press, in the hope of ‘private-led’ oversight and audit. The possibilities that digitisation and big data create in this area of public governance are a significant driver or steer to the development of these registers.[9]
2. At a specific level, these registers aim at
  • Facilitating contract management oversight and creating an additional layer of public exposure of contract-related decision-making, thus expanding the scope of procurement transparency beyond the award phase
  • Facilitating private enforcement of public procurement rules by allowing interested parties to prompt administrative and/or judicial review of specific procurement decisions,[10] both pre-award and during the execution phase
Generally, then, these additional transparency mechanisms are not intended to foster competition. Their main goal and justification is to preserve the integrity of public contract administration and to increase the robustness of anticorruption tools by facilitating social or private oversight. They significantly increase the levels of transparency already achieved through pre-award disclosure mechanisms and, in simple terms, they aim at creating full transparency of public procurement and public contract management, basically for the purposes of legitimising public expenditure by means of increased (expected) accountability as a result of such full transparency and tougher oversight.

Why are public contract registries problematic from a competition perspective?
Public contract registries are problematic precisely due to the levels of transparency they create. Economic theory has conclusively demonstrated that the levels of transparency created by public procurement rules and practices (such as these registers) facilitate collusion and anticompetitive behaviour between undertakings, thus eroding (and potentially negating) the benefits contracting authorities can obtain from organising tenders for public contracts.[11] This is an uncontroversial finding that led the OECD to stress that “[t]he formal rules governing public procurement can make communication among rivals easier, promoting collusion among bidders … procurement regulations may facilitate collusive arrangements”.[12]

The specific reasons why and conditions under which increased transparency facilitates collusion are beyond the scope of this discussion non-paper, but suffice it to stress here that transparency will be particularly pernicious when it allows undertakings that are already colluding to identify the detailed conditions under which they did participate in a particular bid or refrained from participating (by, for instance, disclosing the names of participating tenderers and the specific conditions of the winning tender).[13] Moreover, conditions of full transparency are not only problematic in relation to already existing cartels, but they are also troublesome regarding the creation of new cartels because increased transparency alters the incentives to participate in bid rigging arrangements.[14]

Furthermore, full transparency can also damage competition in industries with strong dominant undertakings. In those settings, transparency may not lead to cartelisation, but it can facilitate exclusionary strategies by the dominant undertaking by allowing them to focus exclusionary practices (such as predatory pricing) in markets or segments of the market where it detects entry by new rivals or innovative tenderers. Even in cases where collusion or price competition may not be a prime issue, full transparency can create qualitative distortions of competition, such as technical levelling[15] or reduced participation due to undertakings’ interest in protecting business secrets (as discussed below). Overall, it is beyond doubt that excessive transparency in public procurement is self-defeating because it erodes or nullifies any benefits derived from the organisation of public tenders.

All these economic insights led the OECD to adopt a formal Recommendation to prompt its members to “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”.[16] Thus the impact of increased procurement transparency on the likelihood of collusion and cartelisation in procurement markets, as well as the other potential negative impacts on the intensity or quality of competition, requires closer scrutiny and the competition implications of excessive transparency cannot simply be overseen in the name of anti-corruption goals.[17] Not least, because a large number of cartels discovered and prosecuted by competition authorities involve public procurement markets[18]—which demonstrates that the economic impact of such collusion-facilitative implications of full transparency is not trivial. 

Estimating the economic impact of cartels in public procurement is a difficult task.[19] However, generally accepted estimates always show that the negative economic effect is by no means negligible and that anticompetitive overcharges can easily reach 20% of contract value.[20] Thus, particularly in view of the Europe 2020 goal to ensure ‘the most efficient use of public funds’,[21] issues of excessive transparency in public procurement markets need to be addressed so as to avoid losses of efficiency derived from the abnormal operation of market forces due to procurement rules and practices.

This does not mean that transparency needs to be completely abandoned in the public procurement setting, but a more nuanced approach that accommodates competition concerns is necessary. As has been rightly stressed, “transparency measures should at least be limited to those needed in order to enhance competition and ensure integrity, rather than being promoted as a matter of principle. Transparency should be perceived as a means to an end, rather than a goal in itself”.[22] This is in line with the OECD’s specific recommendation that “[w]hen publishing the results of a tender, [contracting authorities] carefully consider which information is published and avoid disclosing competitively sensitive information as this can facilitate the formation of bid-rigging schemes, going forward”.[23] The final section of this non-paper presents some normative recommendations to that purpose, which highlight much needed restrictions to the promotion of full transparency as a matter of principle.

Are there other reasons why procurement registries can be problematic?
As briefly mentioned above, another source of possible negative impacts derived from public contract registries is their potential chilling effect on undertakings keen to protect their business secrets. It is often stressed that tenders contain sensitive information and that disclosure of that information can damage the commercial interests of bidders if those secrets are at risk of being disclosed through the public contracts registries or otherwise.[24] Thus, undertakings can either decide not to participate in particularly sensitive tenders, or submit offers and documentation in such a way as to keep their secrets concealed, hence diminishing their quality or increasing the information cost/asymmetry that the contracting authority needs to overcome in their assessment. Either way, these business secret protective strategies reduce the intensity and quality of the competition. Moreover, transparency of certain elements of human resources-related information (particularly in view of the increasing importance of work teams in the area of services procurement) not only can trigger data protection concerns,[25] but also facilitate unfair business practices such as the poaching of key employees.

However, despite the clear existence of business secret and commercial interest justifications for the preservation of certain levels of secrecy, there is a tendency to minimise the relevance of these issues by creating a private interest-public interest dichotomy and stressing the relevance of public (anti-corruption) goals. This is problematic. What is often overlooked is that contracting authorities have themselves a commercial interest in keeping business secrets protected. That interest derives immediately from their need to minimise the abovementioned chilling effect (ie not crowding out or scaring away undertakings wary of excessive disclosure), so that competition remains as strong as possible. And such interest in avoiding excessive disclosure also derives, in the mid to long-term, from the need not to thwart innovation by means of technical levelling or de facto standard setting.

These issues were recently well put in the context of UK litigation concerning a freedom of information request that the contracting authority rejected on the basis of relevant business secret and commercial interest protection. As clarified by the First Tier Tribunal,
There is a public interest in maintaining an efficient competitive market for leisure management systems. If the commercial secrets of one market entity were revealed, its competitive position would be eroded and the whole market would be less competitive. As the Court of Appeal put it in Veolia ES Nottinghamshire Ltd v Nottinghamshire County Council and others [2012] P.T.S.R. 185 at [111], a company’s confidential information is often “the life blood of an enterprise”. The [Information Commissioner’s Office] argued that this is particularly so in an industry such as the provision of leisure management systems because such systems are a complex amalgam of technologies, customer support networks, and user interfaces, which involve elements individual to particular companies. Those individual elements drive competition to the benefit of public authorities and consumers.[26]
Thus, the protection of business secrets and commercial interests should not be seen as a limitation of the public (anti-corruption) interest in the benefit of private interests, but as a balancing exercise between two competing public interest goals: efficiency and integrity of procurement. Once this realignment of goals is understood, restrictions of public procurement transparency based on competition considerations should receive support also from a public governance perspective.

A final consideration in terms of potential negative impacts of public contract registries derives from the way they are financed. At least in the case of Italy, economic operators are required to pay fees towards the funding of the relevant public contract registry when they first participate in any given tender. This becomes a financial burden linked to procurement participation that can have clear chilling effects, particularly for SMEs with limited financial resources. It is widely accepted that financial barriers to participation should be suppressed as a matter of best practice[27]—and, in certain occasions, as a matter of compliance with internal market regulation as well. Thus, the creation of any sort of public contract registry which funding requires upfront payments from interested undertakings should not be favoured.

How could competition and confidentiality concerns be embedded in the design of public contract registries, so that their risks are minimised?

The discussion above supports a nuanced approach to the level of transparency actually created by public contract registries, which needs to fall short of the full transparency paradigm in which they have been conceived and started to be implemented. As a functional criterion, only the information that is necessary to ensure proper oversight and the effectiveness of anti-corruption measures should be disclosed, whereas the information that can be most damaging for competition should be withheld. 

Generally, what is needed is more granularity in the levels of information that are made accessible to different stakeholders. The current full transparency approach whereby all information is made available to everyone falls very short from the desired balance between transparency and competition goals of public procurement. A system based on enabling or targeted transparency, whereby each stakeholder gets access to the information it needs for a specific purpose, is clearly preferable.

In more specific terms, the following normative recommendations are subjected to further discussion. They are by no means exhaustive and simply aim to specify the sort of nuanced approach to disclosure of public procurement information that is hereby advocated.

  • Public contract registers should not be fully available to the public. Access to the full registry should be restricted to public sector officials under a strong duty of confidentiality protected by appropriate sanctions in cases of illegitimate disclosure.
  • Even within the public sector, access to the full register should be made available on a need to know basis. Oversight entities, such as the audit court or the competition authority, should have full access. However, other entities or specific civil servants should only access the information they require to carry out their functions.
  • Limited versions of the public contract registry that are made accessible to the public should aggregate information by contracting authority and avoid disclosing any particulars that could be traced back to specific tenders or specific undertakings.
  • Representative institutions, such as third sector organisations, or academics should have the opportunity of seeking access to the full registry on a case by case basis where they can justify a legitimate or research-related interest. In case of access, ethical approval shall be obtained, anonymization of data attempted, and specific confidentiality requirements duly imposed.
  • Delayed access to the full public registry could also be allowed for, provided there are sufficient safeguards to ensure that historic information does not remain relevant for the purposes of protecting market competition, business secrets and commercial interests.
  • Tenderers should have access to their own records, even if they are not publicly-available, so as to enable them to check their accuracy. This is particularly relevant if public contract registries are used for the purposes of assessing past performance under the new rules.
  • Big data should be published on an anonymised basis, so that general trends can be analysed without enabling ‘reverse engineering’ of information that can be traced to specific bidders.
  • The entity in charge of the public contracts registry should regularly publish aggregated statistics by type of procurement procedure, object of contract, or any other items deemed relevant for the purposes of public accountability of public buyers (such as percentages of expenditure in green procurement, etc).
  • The entity in charge of the public contracts registry should develop a system of red flag indicators and monitor them with a view to reporting instances of potential collusion to the relevant competition authority.


[1] Senior Lecturer in Law, University of Bristol Law School and Member of the European Commission Stakeholder Expert Group on Public Procurement (E02807) (2015-2018). This paper has been prepared for discussion within the Expert Group, following an initial exchange of ideas in the meeting held in Brussels on 14 September 2015. The views presented on this paper are my own and in no way bind any of the abovementioned institutions. Comments and suggestions welcome: a.sanchez-graells@bristol.ac.uk.
[2] For discussion of this regulatory and governance approach in the area of public procurement, see C Harlow and R Rawlings, Process and Procedure in EU Administration (Oxford, Hart, 2014) 142-169.
[3] Point 2 ‘’contract registers to enhance full transparency of data related to public procurement”, included in the agenda for the Stakeholder Expert Group on Public Procurement of 14 September 2015, available at http://ec.europa.eu/internal_market/publicprocurement/docs/expert-group/150914-agenda_en.pdf.
[4] Tenders Electronic Daily (TED) http://ted.europa.eu/TED/main/HomePage.do.
[6] Base: Contratos Publicos Online, http://www.base.gov.pt/Base/pt/Homepage.
[7] Banca Dati Nazionale dei Contratti pubblici, http://portaletrasparenza.avcp.it/microstrategy/html/index.htm.
[8] A case study based on the Slovakian Online Central Register of Contracts is available at https://joinup.ec.europa.eu/community/epractice/case/slovakian-online-central-register-contracts.
[9] See eg the efforts of the Sunlight Foundation by means of its Procurement Open Data Guidelines http://sunlightfoundation.com/procurement/opendataguidelines. See also the Open Contracting Data Standard project http://standard.open-contracting.org/.
[10] For discussion, see A Sanchez-Graells, “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), http://ssrn.com/abstract=2353005.
[11] A Sanchez-Graells, Public Procurement and the EU Competition Rules, 2nd edn (Oxford, Hart, 2015) 73-75.
[12] OECD, Public Procurement: Role of Competition Authorities (2007) 7, available at http://www.oecd.org/competition/cartels/39891049.pdf. For discussion, see A Sanchez-Graells, “Prevention and Deterrence of Bid Rigging: A Look from the New EU Directive on Public Procurement”, in G Racca & C Yukins (eds), Integrity and Efficiency in Sustainable Public Contracts (Brussels, Bruylant, 2014) 171-198, available at http://ssrn.com/abstract=2053414.
[13] For discussion, see A Heimler, “Cartels in Public Procurement” (2012) 8(4) Journal of Competition Law & Economics 849-862 and SE Weishaar, Cartels, Competition and Public Procurement. Law and Economics Approaches to Bid Rigging (Cheltenham, Edward Elgar, 2013) 28-36.
[14] P Gugler, “Transparency and Competition Policy in an Imperfectly Competitive World”, in J Forssbaeck & L Oxelheim (eds), Oxford Handbook of Economic and Institutional Transparency (Oxford, OUP, 2014) 144, 150.
[15] Sanchez-Graells, Public Procurement and the EU Competition Rules (n 11) 76.
[16] OECD, Recommendation on Fighting Bid Rigging in Public Procurement (2012), available at http://www.oecd.org/daf/competition/RecommendationOnFightingBidRigging2012.pdf. For discussion, see A Sanchez-Graells, “Public Procurement and Competition: Some Challenges Arising from Recent Developments in EU Public Procurement Law”, in C Bovis (ed), Research Handbook on European Public Procurement (Cheltenham, Elgar, 2016). Available at http://ssrn.com/abstract=2206502.
[17] For discussion, see RD Anderson, WE Kovacic and AC Muller, ‘Ensuring integrity and competition in public procurement markets: a dual challenge for good governance’ in S Arrowsmith & RD Anderson (eds), The WTO Regime on Government Procurement: Challenge and Reform (CUP, 2011) 681-718.
[18] This is true in all jurisdictions. See KL Haberbush, “Limiting the Government’s Exposure to Bid Rigging Schemes: A Critical Look at the Sealed Bidding Regime” (2000–2001) 30 Public Contract Law Journal 97, 98; and RD Anderson & WE Kovacic, ‘Competition Policy and International Trade Liberalisation: Essential Complements to Ensure Good Performance in Public Procurement Markets’ (2009) 18 Public Procurement Law Review 67. See also A Sanchez-Graells, “Public Procurement: A 2014 Updated Overview of EU and National Case Law” (2014). e-Competitions: National Competition Laws Bulletin, No. 40647. Available at http://ssrn.com/abstract=1968371.
[19] See the debate around the proposal to create a rebuttable presumption of overcharge at 20% in the Directive on actions for breach of the EU antitrust rules; Commission Staff Working Document SWD(2013) 203 final para 88, http://ec.europa.eu/competition/antitrust/actionsdamages/impact_assessment_en.pdf. However, given the controversy on specific figures, the final version of Art 17 of Directive 2014/104 includes an unquantified presumption. Directive 2014/104/EU of the European Parliament and of the Council of 26 November 2014 on certain rules governing actions for damages under national law for infringements of the competition law provisions of the Member States and of the European Union [2014] OJ L 349/1.
[20] For a very modest estimation of cartel overcharges in the environment of 17%, see M Boyer & R Kotchoni, “How Much Do Cartels Overcharge?” (2014) Toulouse School of Economics Working Paper TSE‐462, available at http://www.tse-fr.eu/sites/default/files/medias/doc/wp/etrie/wp_tse_462_v2.pdf.
[21] Communication from the Commission of 3 March 2010, Europe 2020 A strategy for smart, sustainable and inclusive growth, COM (2010) 2020 final para 4.3, p. 24, available at http://ec.europa.eu/eu2020/pdf/COMPLET%20EN%20BARROSO%20%20%20007%20-%20Europe%202020%20-%20EN%20version.pdf. For discussion, see A Sanchez-Graells, “Truly competitive public procurement as a Europe 2020 lever: what role for the principle of competition in moderating horizontal policies?” (2016) 22(2) European Public Law Journal, available at http://ssrn.com/abstract=2638466.
[22] RD Anderson and AC Muller, “Promoting Competition and Deterring Corruption in Public Procurement markets: Synergies with Trade Liberalization”, draft paper to be published in the "E15 Expert Group on Competition Policy" (a joint initiative/facility of the World Economic Forum and the International Centre for Trade and Sustainable Development) 13 (on file with author).
[23] OECD, Guidelines for Fighting Bid Rigging in Public Procurement (2009) 7, available at http://www.oecd.org/competition/cartels/42851044.pdf.
[24] For discussion, see C Ginter, N Parrest & M-A Simovart, “Requirement to Protect Business Secrets and Disclose Procurement Contracts under Procurement Law” (2013) IX Juridica 658-665.
[25] These are beyond the scope of this discussion non-paper.
[26] Sally Ballan v Information Commissioner EA/2015/0021 (28 July 2015) para [25(c)], available at http://www.informationtribunal.gov.uk/DBFiles/Decision/i1609/Ballan,%20Sally%20EA.2015.0021%20%2828.07.15%29.pdf.
[27] Sanchez-Graells, Public Procurement and the EU Competition Rules (n 11) 280-281.

Más paños calientes desde el CGPJ: ¿para cuándo un sistema judicial serio, donde las incompatibilidades se hagan respetar?

En los últimos días se ha destapado otro de los ya innumerables escándalos en el incorrecto funcionamiento de nuestro sistema judicial y el incumplimiento (aparentemente generalizado o, cuanto menos, no excepcional) de la normativa deontológica (y penal) reguladora de la conducta de jueces y magistrados. No me refiero al escándalo de los gastos del Presidente del Tribunal Supremo--que ya es de por sí especialmente preocupante, sobre todo porque aún no ha dimitido pese a dar a entender que efectivamente sufragó gastos excesivos y de carácter personal con fondos públicos (por más que, en su opinión, se trate de una "miseria": http://tinyurl.com/miseriadedivar). 

Sino que me quiero centrar en un escándalo que parece crecer como un cáncer (aunque está en fases incipientes y, por tanto, se puede atajar), que es el de la organización o participación de magistrados en cursos de formación de abogados--a los que algunos aún se permiten el lujo de beneficiar posteriormente, por ejemplo, nombrándoles administradores concursales (véase, un caso quizá un poco extremo, en http://tinyurl.com/magistradoincompatible, en el que "este magistrado organizaba cursos sobre derecho concursal sin solicitar permiso para ello y llegó a nombrar como administradores concursales en asuntos pendientes de su juzgado a algunos de sus alumnos").

Se trata de una práctica relativamente extendida--la de participación de magistrados en cursos por los que perciben importantes remuneraciones (por encima de las percibidas por académicos y otros profesionales de la formación jurídica de postgrado) y en los que interactúan con abogados con los que pueden tener asuntos en común en ese momento o poco después--que, desgraciadamente, no está recibiendo una respuesta efectiva por el Consejo General del Poder Judicial, ni siquiera en casos de claro abuso.

En el caso concreto del magistrado que nombró administradores concursales a los alumnos del curso que había organizado, el CGPJ se ha limitado a trasladarle a un nuevo puesto a más de 100 kilómetros de su actual puesto, "adjudic[ando] a este magistrado la vacante existente en el Juzgado de Primera Instancia e Instrucción número 2 de Talavera de la Reina sin posibilidad de obtener otro destino mediante concurso en el plazo de un año a contar desde la fecha en que tome posesión de esta plaza".

Honestamente, me parece una sanción absolutamente ridícula para la gravedad de la conducta de conflicto de interés en que ha actuado este magistrado, que "acudió durante varias sesiones a unas jornadas [de formación] durante su horario de permanencia en el juzgado, sin pedir ni obtener licencia para ello". De la remuneración adicional y de posibles implicaciones (de potencial prevaricación) en el nombramiento de administradores concursales o en los casos en que actuaba el magistrado, ni una palabra por el CGPJ. 

Una vez más, o presionamos por tener un sistema judicial realmente limpio (extirpando lo que sea necesario para que el cáncer no se lo coma vivo, o lo que queda de él--para salvar a la mayor parte de las manzanas, que no están podridas, pero sí rodeadas de podredumbre), o seguiremos siendo el país de pandereta por el que merecemos que nos tomen.