Commission issues first salvo to tardy Member States: what next for transposition of public procurement reform?

The European Commission has formally reacted to the tardiness of the vast majority of EU Member States in the transposition of the 2014 public procurement package. 21 out of the 28 Member States have been addressed letters of formal notice whereby the Commission reminds them of their overdue obligation to transpose Directives 2014/23/EU, 2014/24/EU, and 2014/25/EU into national law. Logically, if the Member States do not react promptly, the Commission should be opening infringement procedures under Art 258 TFEU (maybe after the summer?), which could eventually lead to the imposition of fines to Member States that continue to fail in their obligation to transpose.

This first salvo can be seen as an indication of the seriousness with which the Commission may intend to oversee the transposition of this significant reform, which seems justified by its belief that the 'new rules make it easier and cheaper for small and medium enterprises to bid for public contracts and respect the EU’s principles of transparency and competition. Increased transparency improves accountability and helps combat corruption. The rules also allow the authorities to use public procurement to work towards broader policy objectives, such as environmental and social goals and innovation' [an alternative view seems to emerge from a closer analysis of the rules, though, as will soon be apparent in the contributions to GS Ølykke and A Sanchez-Graells (eds), Reformation or Deformation of the EU Public Procurement Rules (Edward Elgar, 2016)].

However, maybe from a more cynical perspective, it also seems like a first indication of the difficulties that lay ahead in terms of the effective transposition of the new procurement rules. Issues such as the transition to full, proper eProcurement, the need to oversee in an effective manner the conduct of an increasing volume of negotiated procedures, the complications derived from aggregation of procurement and cross-border collaboration (if it ever happens), or the need to reform the remedies system to make sure that the new substantive rules have sufficient bite (which the Commission however now seems to have dropped from its regulatory agenda), just to name a few of the relatively obvious issues, are clear points of future friction between the Commission and the Member States.

Also, it seems clear that infringement procedures are unlikely to fix any of these issues in a satisfactory manner, particularly where Member States simply do no have the resources (economic or otherwise, such as an adequately trained workforce) to implement the rules. Thus, all this can lead to is a futile exercise of transposition on paper (passing laws is relatively cheap and can certainly put a lid on the Commission's oversight strategy, unless it is willing to resource it properly on its own end) and maybe hope for private litigation to force its effectiveness--which would be patchy and incomplete in any case.

All in all, I think that the system is close to bursting at the seams (or at least at some of the seams) unless procurement is better resources at Member State level soon, which does not seem to be feasible in the short run. If that does not happen, any illusion of (formal) transposition will be misleading. And the litigation could in any case exist on the basis of the direct and indirect effect of the directives, which already enable a guerrilla strategy for savvy economic operators. Thus, what the Commission aims to achieve with this first salvo is unclear to me. And I am not sure that it has thought its strategy through to its ultimate consequences. Let's see if Member States hurry up to transpose (at least on paper).

Delays in public procurement and liquidated damages (Dosi & Moretto, 2015): a further justification for new rules on modification and termination

In their recent paper, 'Procurement with Unenforceable Contract Time and the Law of Liquidated Damages' [(2015) 31(1) Journal of Law, Economics & Organisation 160-186], Cesare Dosi and Michele Moretto of the University of Padova find an interaction between the rules on liquidated damages for time overruns in public procurement and the (risky) bidding behaviour of tenderers.
More specifically, considering a scenario of insufficient (negative) incentives to meet time commitments due to suboptimal liquidated damages, they demonstrate that "[t]he inability to force sellers to meet their contractual obligations determines their bidding behavior. Conversely, bidding behavior alters the incentive to meet the contract time. In particular, by placing more aggressive bids, all bidders may become potential violators of the contractual agreement, and the more the bidders and/or the higher the expected cost volatility [of relevant inputs], the higher the probability of breach."

In my view, their general findings are interesting in themselves in the design of liquidated damages clauses to be included in procurement contracts. But, more importantly, their findings also stress a key justification for the new rules on contractual modifications and contract termination in Arts 72 and 73 of
Directive 2014/24, which need to serve to actually empower contracting authorities to enforce the terms of the original contract as awarded. In economic terms and from this perspective, these rules deserve both criticism and praise.

In terms of contractual modification, and from the perspective of creating red lines that enforce time commitments, the rules in the new Directive can be criticised because Art 72 does not specifically address the issue of modification of deadlines for the execution of the contract--which is left to the residual clause in Art 72(1)(e) "modifications [that], irrespective of their value, are not substantial", in relation to 72(4)(a) "the modification introduces conditions which, had they been part of the initial procurement procedure, would have allowed for the admission of other candidates than those initially selected or for the acceptance of a tender other than that originally accepted or would have attracted additional participants in the procurement procedure". This sets a very difficult standard when it comes to interpret whether a deadline is essential and its modification is, consequently, "substantial" to the contract overall. This restricts the possibility to limit time-related negotiations between contractors and contracting entities during the term of the contract and perpetuates a problem that ultimately depends on domestic rules in the Member States.

Secondly, in terms of contract termination, that criticism is carried over to the rules in art 73, as one of the main causes for contractual termination is derived from an infringement of Art 72. However, it is also worth stressing that there is the possibility to create  causes for termination other than those expressly established by the Directive, for instance, to strengthen the consequences for contractors to miss contractual deadlines. In that regard, it is interesting that Art 73 is open ended and could create regulatory space for Member States to develop effective time-related termination rules (eg imposing contractual termination for breach of predetermined contractual milestones). 

Moreover, it is also interesting to note that Art 57(4)(g) Dir 2014/24 allows contracting authorities to exclude operators "where the economic operator has shown significant or persistent deficiencies in the performance of a substantive requirement under a prior public contract, a prior contract with a contracting entity or a prior concession contract which led to early termination of that prior contract, damages or other comparable sanctions". This would, again, increase the impact of failing to meet contractual deadlines. And, overall, it would counter one of the issues raised by Dosi & Moretto in their model: "[t]he inability to force sellers to meet their contractual obligations", which in turn would "determin[e] their bidding behavior" in a less risky way, so that they make sure ex ante that they can comply with contractual deadlines and the overall risk of non-compliance is reduced.

Is Altmark not applicable to ambulance services? Or is San Lorenzo & Croce Verde not very clear? (C-113/13)

In view of the Judgment in San Lorenzo and Croce Verde Cogema, C-113/13, EU:C:2014:2440, the rules applicable to the provision of emergency ambulance services is definitely clear as mud. In the case at hand, the applicants challenged an Italian law whereby emergency ambulance services must be awarded on a preferential basis and by direct award, without any advertising, to certain voluntary bodies (such as the Red Cross). This rule has, ultimately, constitutional protection in Italy, as 'the Italian Republic has incorporated into its constitution the principle of voluntary action by its citizens. Thus, the last paragraph of Article 118 thereof provides that citizens, acting individually or in an association, may participate in activities of public interest with the support of the public authorities, on the basis of the principle of subsidiarity' (para 9).

The applicants' argument was not necessarily of a constitutional level, but rather that freedom of establishment is unduly restricted by a preferential scheme that excludes the tendering out of those ambulance services. They brought forward arguments based on general free movement provisions, public procurement rules and competition rules. The latter are not examined because the CJEU considered that the public procurement analysis makes it unnecessary (para 64).

In my view, if read paragraph by paragraph, the reasoning of the CJEU is accurate and technically precise, but the overall Judgment is too timid in spelling out the conditions for the application of the 'public service exception' under art 106(2) TFEU (or otherwise) tot he direct award of emergency ambulance services to voluntary action associations. I will try to summarise my criticism and doubts as succinctly as possible. This is an area where more considered research is definitely needed.

On the bright side, I think that some positions of the CJEU can be clearly spelled out. 

(1) When fully applicable, both Dir 2004/18 and Dir 2014/24, preclude legislation such as that at issue in the main proceedings which provides that the local authorities are to entrust the provision of urgent and emergency ambulance services on a preferential basis and by direct award, without any advertising, to the voluntary bodies mentioned in the agreement (para 44). However, Dir 2004/18 does not automatically apply to ambulance services (see 2 below) and art 10(h) Dir 2014/24 clearly excludes these contracts from its scope of application (para 8). Hence, this clear position is not that useful in practice.

(2) Where the Directives are not fully applicable (ie where contracts can be tendered under part B services rules under dir 2004/18, or under the special regime for social services under arts 74-77 dir 2014/24), the general principles of transparency and equal treatment flowing from articles 49 TFEU and 56 TFEU would be applicable (para 45) if the contract is of cross-border interest (paras 46-50). In that case, it is also clear that such a preferential scheme would run contrary to the Directives, which are: 'intended to ensure the free movement of services and the opening-up to competition in the Member States which is undistorted and as wide as possible' (para 51). 

(3) Implicitly, then, where the Directives do not apply at all but the contract is still of cross-border interest (ie the new likely situation under art 10(h) dir 2014/24), the award of the contract is 'merely' subjected to the (residual/general) requirements of articles 49 TFEU and 56 TFEU. In that case (not expressly assessed in the San Lorenzo & Croce Verde Judgment), the contracting authority still would need to go through the applicable assessment under the market access test generally applicable to restrictions of freedom of establishment [for two thought provoking attempts to rationalise this test, see E Christodoulidis, 'The European Court of Justice and Total Market Thinking' (2013) 14 German Law Journal 2005; and MS Jansson & H Kalimo, 'De minimis meets “market access”: Transformations in the substance – and the syntax – of EU free movement law?' (2014) 51(2) Common Market Law Review 523].

Hence, there are always concerns and constraints derived from EU law (either general, or the specific rules of public procurement) if the contract is of cross-border interest. Nonetheless, they are of varying degrees of intensity and it looks as if upon the entry into force of Directive 2014/24, the award of service contracts for emergency ambulance services  (either exclusively, or for most of their value if the contracts include other sorts of ambulance services) will exclusively be governed by the general rules on freedom of establishment.

On the shady side, though, once the potential incompatibility with EU public procurement or general free movement law is established (and, really, there seems to be no escape to 1-3 above except if the contract has no cross-border interest whatsoever--and, on that, see the  Ancona issue here), the CJEU will apply a Sodemare-like test because the provision of ambulance services falls within the (very broad) remit of the organisation of healthcare and social security systems (paras 55-59). In that case, then, it will particularly important that "EU law does not detract from the power of the Member States to organise their public health and social security systems" (para 55), but that "it is for the Member States, which have a discretion in the matter, to decide on the degree of protection which they wish to afford to public health and on the way in which that degree of protection is to be achieved" (para 56). So far, so good.

On the dark side, however, and significantly departing from the more developed approach in Altmark for SGEIs (is the CJEU implicitly recognising--without analysis--that ambulance services are per se SSGIs?), the CJEU has created an economically oriented safeguard that leaves too much room for maneuver by ruling that
Having regard to the general principle of EU law on the prohibition of abuse of rights (see, by analogy, judgment in 3M Italia, C‑417/10, EU:C:2012:184, paragraph 33), the application of that legislation cannot be extended to cover the wrongful practices of voluntary associations or their members. Thus, the activities of voluntary associations may be carried out by the workforce only within the limits necessary for their proper functioning. As regards the reimbursement of costs, it must be ensured that profit making, even indirect, cannot be pursued under the cover of a voluntary activity and that volunteers may be reimbursed only for expenditure actually incurred for the activity performed, within the limits laid down in advance by the associations themselves (C-113/13, para 62, emphasis added).
In my view, this is way too timid. Indeed, the CJEU constructs a rather weak safeguard by not focussing at all in the economic efficiency of the voluntary activities (which, even on a non-profit, reimbursement basis can be extremely inefficient) and imposes a sort of 'anti-fraud' test that, in my view, misses the point. In order to ensure compatibility with State aid provisions (which should not have been set aside so quickly in para 64), an efficiency based test like the one existing in the fourth condition of Altmark should have been imposed [for discussion, see A Sanchez Graells, “The Commission’s Modernization Agenda for Procurement and SGEI”, in E Szyszczak & J van de Gronden (eds) Financing SGEIs: State Aid. Reform and Modernisation, Legal Issues of Services of General Interest Series (The Hague, TMC Asser Press / Springer, 2012) 161-181]. 

Indeed, the analysis of the applicability of Art 106(2) TFEU to the case is totally missing and this is strange. It looks like the difference between SGEIs and SSGIs will haunt all of us also under the 2014 Directives and revised guidance from the European Commission is becoming urgently needed, given the implicit vacuum that can exist if Member States maximise the possibilities of direct award under art 10(h) dir 2014/24, but equally under its arts 74-77 (and particularly, the latter).

As briefly mentioned, this is an area where more research is needed. I hope I can convince some colleagues to put together a research project on this soon. Interested contributors, please feel free to contact me at

CJEU rejects avoidance of litigation as a valid 'overriding reason in the public interest' justifying a direct award of a concession contract (C-212/12)

In its Judgment of 14 November 2013 in case C-221/12 Belgacom, the CJEU has rejected that the avoidance of litigation can be considered a valid 'overriding reason in the public interest' justifying a direct award of a concession contract. In other terms, the fact that the award of the services concession forms part of a settlement agreement is irrelevant for the purposes of determining compliance with the EU primary law requirements applicable to the award of such contracts.
In very clear terms, the CJEU has indicated that
37 [...] since such a concession is of certain cross-border interest, its award, in the absence of any transparency, to an undertaking located in the Member State to which the contracting authority belongs, amounts to a difference in treatment to the detriment of undertakings which might be interested in that concession but which are located in other Member States. In excluding those undertakings, that difference in treatment works primarily to their detriment and therefore amounts to indirect discrimination on grounds of nationality, which is, in principle, prohibited by Articles 49 TFEU and 56 TFEU (see, to that effect, ASM Brescia, paragraphs 59 and 60 and the case-law cited).

38 Such a measure might, exceptionally, be allowed on one of the grounds set out in Article 52 TFEU or justified by overriding reasons in the public interest, in accordance with the Court’s case-law (see, by analogy, Engelmann, paragraphs 51 and 57 and the case-law cited, and Joined Cases C‑357/10 to C‑359/10 Duomo Gpa and Others [2012] ECR I-0000, paragraph 39 and the case-law cited). On this last point, it is clear from a combined reading of paragraphs 51 and 57 of Engelmann that no distinction need be drawn between objective circumstances and overriding reasons in the public interest. Objective circumstances must, ultimately, be accepted as overriding reasons in the public interest.

39 The grounds put forward in the application in the present case, whether considered separately or together, cannot be regarded as being overriding reasons in the public interest.

40 The principle of legal certainty, which is a general principle of European Union law, provides ample justification for observance of the legal effects of an agreement, including – in so far as that principle requires – in the case of an agreement concluded before the Court has ruled on the implications of the primary law on agreements of that kind and which, after the fact, turn out to be contrary to those implications (see, to that effect, ASM Brescia, paragraphs 69 and 70). However, that principle may not be relied on to give an agreement an extended scope which is contrary to the principles of equal treatment and non-discrimination and the obligation of transparency deriving therefrom. It is of no import in that regard that that extended scope may offer a suitable solution for putting an end to a dispute which has arisen between the parties concerned, for reasons outside their control, as to the scope of the agreement by which they are bound
(Case C-221/12 at paras 37-40, emphasis added).
This is a very important finding, as it comes to limit the discretion of contracting authorities to (re)negotiate contract awards and to extend the scope of contracts in order to settle arising legal disputes. It may be seen as a significant restriction of sensible contract and dispute management strategies in the altar of transparency, but the CJEU seems to have opted to err on the cautious side of the balance--which I consider appropriate, given that renegotiations are an area prone to massive manipulation and rule avoidance in public procurement in many Member States.
However, the practical effects of the Belgacom Judgment may be relatively limited once the future procurement Directives are adopted, as they will expressly regulate contract modification and set clear limits that will trigger the obligation to retender the contract (see art 72 of the new public sector procurement Directive and art 42 of the new Concessions Directive).

CJEU kicks new #concessions Directive in the shins (C-388/12)

In its Judgment of 14 November 2013 in case C-388/12 Comune di Ancona, the CJEU has put forward an argument for the existence of cross-border interest in the award of (public service) concession contracts that openly challenges the quantitative rationale followed by the planned new Directive on Concessions.

The new Directive on Concessions is premised on the basis that cross-border interest will (only?) exist where the value of the contract is above €5 million, calculated as the estimated total turnover of the concessionaire generated over the duration of the contract, net of VAT (art 6). This is clearly indicated in its Recital (10):
This Directive should only apply to concession contracts whose value is equal to or greater than a certain threshold, which should reflect the clear cross-border interest of concessions to economic operators located in other Member States (emphasis added).
Such a quantitative approach to determining the existence of a cross-border interest may be difficult to reconcile with the qualitative approach followed by the CJEU in Comune de Ancona.

In the case at hand, a concession for the management of a European Regional Development Fund (ERDF)-supported portuary infrastructure (a slipway) was directly awarded by the Comune di Ancona to the local fishermen cooperative. The justification provided for the direct award was, rather simply, that 'it was not necessary, for the purposes of granting a concession for management of the slipway, to publish a call for tenders, in so far as no operators apart from the Pescatori cooperative were interested in that concession' (C-388/12 at para 16). In part, one of the reasons to consider that there would be no other bidder for the concession was that the concession was awarded
subject to a number of conditions. These included the obligation to pay the Comune di Ancona an annual charge calculated in such a way as to avoid substantial net revenue being generated for either the concession-granting authority or the concessionaire; a prohibition on modifying the implementation conditions of the operation eligible for funding; a prohibition on engaging in profit-making activity; the obligation to comply with all the applicable EU directives and standards; and the obligation to maintain the public-service function and intended use of the structure at issue. It was also stated that the slipway was to remain, in any event, the property of the Comune di Ancona (C-388/12 at para 12).
In a thoughtful and market-realistic approach to the existence of potential (corporate) interest in being awarded a non-revenue generating concession as a first step into a new market, the CJEU has clearly indicated that
50 [...] the Comune di Ancona has not invoked any objective facts capable of explaining the lack of any transparency in the award of the concession. On the contrary, it maintained that the concession was not liable to interest undertakings located in other Member States, in so far as the concession granted to the Pescatori cooperative was designed so as not to be capable of generating substantial net revenue for its beneficiary or an undue advantage for the latter or for the municipality.

51 However, the fact that a concession is not capable of generating substantial net revenue or an undue advantage for an undertaking or for a public body does not, in itself, support the inference that the concession is of no economic interest for undertakings located in Member States other than that of the contracting authority. In the context of an economic strategy to extend part of its activities to another Member State, an undertaking may take the tactical decision to seek the award in that State of a concession despite the fact that that concession is incapable as such of generating sufficient profit, since that opportunity could nevertheless enable the undertaking to establish itself on the market of that State and to make itself known there with a view to preparing its future expansion.

[...] in circumstances such as those of the case before the referring court, EU law does not preclude the award, without a call for tenders, of a public service concession relating to works, provided that that award is consistent with the principle of transparency, observance of which, without necessarily entailing an obligation to call for tenders, must make it possible for an undertaking located in the territory of a Member State other than that of the contracting authority to have access to appropriate information regarding that concession before it is awarded, so that, if that undertaking so wishes, it would be in a position to express its interest in obtaining that concession (C-388/12 at paras 50-52, emphasis added).
In my view, the argument used by the CJEU in para 51 of Comune di Ancona is sound in terms of business strategy and makes perfect sense. However, even if it focusses on 'net revenue' and the threshold of Art 6 of the future Concessions Directive only refers to 'total turnover' (hence, they are not in stark conflict, as the threshold may catch concessions with a high turnover but very low operational or commercial margins), the qualitative approach followed by the CJEU should trigger some red flags.
I find that this shows that the quantitative approach adopted by the future Directive on Concessions will not mark the end of the story in the ongoing discussion regarding the rules and requirements applicable to contracts not covered by the procurement Directives--and, more specifically, to services concessions. It seems to me that a dual legal regime will persist between 'Directive concessions' and 'Ancona concessions', where the CJEU will continue pointing out to the potential existence of cross-border interest for concessions with a value below €5mn (or in the excluded and preferential sectors, such as water or social services).
If that is so, the passing of the new Directive on Concessions will only have increased legal complexity in this area and should not be seen as a necessarily positive development [as discussed in A Sánchez Graells, 'What Need and Logic for a New Directive on Concessions, Particularly Regarding the Issue of Their Economic Balance?' (2012) European Public Private Partnerships Law Review 2: 94-104]. I guess that, once more, we will need to keep an eye on further developments of the CJEU case law.

Planning for US DOD pharmaceutical benefits procurement: A need to think outside the box and a lesson for the EU

The US Department of Defense (DOD) offers health care coverage through its TRICARE program. DOD contracts with managed care support contractors to provide medical services, and separately with a pharmacy benefit manager to provide pharmacy services that include the TRICARE mail-order pharmacy and access to a retail pharmacy network. Its current contract for the management of pharmaceutical benefits expires in the fall of 2014 and DOD has already started planning the next stage of procurement.
According to the US Government Accountability Office (GAO) report of 30 September 2013,
During acquisition planning for the upcoming TRICARE pharmacy services contract, DOD solicited feedback from industry through its market research process to align the contract requirements with industry best practices and promote competition. For example, DOD issued requests for information (RFI) in which DOD asked questions about specific market trends, such as ensuring that certain categories of drugs are distributed through the most cost-effective mechanism. DOD also issued an RFI to obtain information on promoting competition, asking industry for opinions on the length of the contract period. DOD officials told [GAO] that responses indicated that potential offerors would prefer a longer contract period because it would allow a new contractor more time to recover any capital investment made in implementing the contract. The request for proposals for the upcoming contract, issued in June 2013, included a contract period of 1 base year and 7 option years. DOD also identified changes to contract requirements in response to legislative changes to the TRICARE pharmacy benefit. For example, the National Defense Authorization Act (NDAA) for fiscal year 2013 required DOD to implement a mail-order pilot for maintenance drugs for beneficiaries who are also enrolled in Medicare Part B. DOD officials incorporated this change in the requirements for the upcoming pharmacy services contract.
At first sight, this looks like a proper exercise of procurement planning and one that is specifically concerned with promoting effective competition in the next stage of pharmaceutical benefits management procurement. However, GAO has very high standards and considers that the exercise carried out by DOD is insufficient and that the Department needs to think outside of the box (of the current structure of benefit management contracts) to see if an even better scenario is achievable. In that regard, GAO considers that
DOD has not conducted an assessment of the appropriateness of its current pharmacy services contract structure that includes an evaluation of the costs and benefits of alternative structures. Alternative structures can include incorporating all pharmacy services into the managed care support contracts—a carve-in structure—or a structure that incorporates certain components of DOD’s pharmacy services, such as the mail-order pharmacy, into the managed care support contracts while maintaining a separate contract for other components. DOD officials told GAO they believe that DOD’s current carve-out contract structure continues to be appropriate, as it affords more control over pharmacy data that allows for detailed data analyses and cost transparency, meets program goals, and has high beneficiary satisfaction. However, there have been significant changes in the pharmacy benefit management market in the past decade, including mergers and companies offering new services that may change the services and options available to DOD. GAO has previously reported that sound acquisition planning includes an assessment of lessons learned to identify improvements. Additionally, GAO has reported that a comparative evaluation of the costs and benefits of alternatives can provide an evidence-based rationale for why an agency has chosen a particular alternative. Without this type of evaluation, DOD cannot effectively demonstrate that it has chosen the most appropriate contract structure in terms of costs to the government and services for beneficiaries.
DOD is now required to conduct an evaluation of the potential costs and benefits of alternative structures for the TRICARE pharmacy services contract, and incorporate such an evaluation into acquisition planning. GAO will report again once this additional exercise is completed.
In my view, this case shows how important it is to develop effective and demanding standards of market investigation and procurement planning in order for contracting authorities to reap all the benefits of effective market competition. It may well be that the result of the enquiry shows that current structures are the most efficient. But, even in that case, the additional market research would not have been an sterile exercise. By avoiding path dependency and seeking for alternative modes of provision (ie by actually knowing the markets where they contract from), contracting authorities can obtain true value for money.
Hence, this type of mandatory market intelligence should be seen as best practice and, in my opinion, imported into the procurement systems of many European countries (and, definitely, Spain). Only in that way will public procurement really contribute to smart growth and be truly aligned with the Europe 2020 strategy. Hopefully the revision of the domestic procurement systems as a part of the process for the transposition of the soon to be adopted new EU rules on procurement will offer Member States an opportunity to also reflect on these issues and to strengthen their market intelligence requirements and infrastructures.