Interesting paper on effects of open procurement data on outcomes: Duguay, Rauter & Samuels (2019)

A recently published working paper has assessed the impact of increased availability of procurement data on competition for public contracts and on procurement outcomes in the EU context: R Duguay, T Rauter & D Samuels, ‘The Impact of Open Data on Public Procurement’ (November 22, 2019).

Duguay, Rauter & Samuels concentrate on the increased availability of TED data in a (more) user-friendly format in July 2015 (when the data started being available for a bulk download on CSV format) to assess the effects that easier access to procurement data has on the functioning of procurement markets and on procurement outcomes. The paper is very interesting and their results are quite striking.

However, it is important to stress the important caveat that their analysis is still based on TED data and, thus, potentially affected by the quality shortcomings of that data. As mentioned in other occasions, the TED database has problems because it is constructed as a result of the self-declaration of data by the contracting authorities of the Member States, which makes its content very inhomogeneous and difficult to analyse, including significant problems of under-inclusiveness, definitional fuzziness and the lack of filtering of errors—as recognised, repeatedly, in the methodology underpinning the SMSPP itself (see here and here).

With that in mind, however, it is interesting to look closely at their findings.

A seemingly striking insight derived from the paper is that ‘the new European government contracting provisions have anti-competitive effects‘ (at 17). This is in the context of an analysis of the ‘likelihood that government agencies allocate public contracts through an open procedure‘ and should thus not be surprising, given the flexibilisation in the use of procedures involving negotiations. However, even with this regulatory effect, the authors find that more open data triggers more use of open procedures, in particular in EU countries with weaker institutional frameworks (at 18-19, and see below). This could be symptomatic of the fact that more complexity in procurement subjected to higher levels of transparency pushes for a risk-averse approach to procurement compliance. The same would be supported by their finding of higher levels of award of contracts on the basis of price-only award criteria (at 25, and see below).

This tension between procurement complexity and transparency is generally strongly evidenced in the paper.

On the one hand, and in line with claims of the pro-competitive nature of more openness in procurement data (note, not of more openness or transparency of contract opportunities), the authors find that

• the likelihood of competitive bidding increases sharply for TED contracts around July 2015 and that this increase persists through the end of our sample period [ie to the end of 2018] (at 18);

• open procurement data leads government officials to implement more competitive bidding processes [ie open procedures], and that this increase in competitive bidding is driven by countries that do not have the institutions to effectively monitor public officials (at 19);

• the number of bids increases sharply for TED contracts soon after the open data initiative, and this increase persists throughout our sample period (at 20);

• public officials are 8.7 percentage points more likely to award government contracts to new vendors after the open data initiative (at 21);

• contract values fall by approximately 8% ... after the open data initiative (at 23).

On the other hand, and also in line with theoretical expectations of a degradation of procurement decisions subjected to higher levels of transparency (and the fact that this transparency does not concern contract opportunities, but more general open procurement data), the authors also find that

• [the results] are inconsistent with the idea that easier access to procurement data fosters cross-border competition throughout the European Union … open procurement data fosters local competition among vendors by reducing barriers to entry but does not promote cross-border competition across the European single market (at 22);

• after the open data initiative, the likelihood of a contract modification increases by 2.9 percentage points for contracts above TED publication thresholds (at 24);

• after the open data initiative, public officials are 38% ... more likely to award contracts above TED publication thresholds exclusively based on price (at 25);

• the performance ... is significantly worse if price was the only award criterion in the allocation decision (at 26);

• the increase in modifications is driven by contracts awarded to new government suppliers, consistent with information asymmetries contributing to the observed deterioration in contract performance. Moreover, this evidence suggests that procurement relationships before the open data initiative were not necessarily corrupt or otherwise inefficient (at 26);

• the decline in contract performance is stronger for complex procurements, consistent with project complexity exacerbating the potential allocative distortions of open procurement data (at 27).

Their overall conclusion is that

Comparing government contracts above and below EU publication thresholds, we find that increasing the public accessibility of procurement data raises the likelihood of having competitive bidding processes, increases the number of bids per contract, and facilitates market entry by new vendors. After the open data initiative, procurement prices decrease and EU government agencies are more likely to award contracts to the lowest bidder. However, the increased competition comes at the expense of lower contract performance, particularly if suppliers are new, procurement projects are complex, and contracts are awarded solely based on price.

Overall, our results suggest that open data on procurement awards facilitates competition and lowers ex-ante procurement prices, but does not necessarily increase allocative efficiency in government contracting (at 27-28, emphases added).

I find these results striking and difficult to assess from the perspective of evidence-based policy-making. There are two issues of particular concern/interest to me.

One, the finding that more availability of data does not generate more cross-border procurement, and that the push for more competitive (ie open) procedures is mostly appreciable in countries with weaker institutional frameworks. This could support the position that institutional robustness is an alternative to data transparency, which would significantly alter the prioritisation of systemic procurement reforms and take the sides of systems that favour strong institutional oversight in a context of relative opacity.

Second, that transparency exacerbates problems at execution phase, in particular in complex projects and/or projects with new suppliers. This would take the wind out of the sails of reform and policy-making approaches concentrating on perceived or apparent competition for the contract at award stage, and rather force a refocus on an analysis of procurement outcomes at the end of the relevant project. This would also side with approaches that would advocate for more robust institutional approaches to contract design and performance management, rather than relying on transparency to correct contract execution problems.

The mixed results of the paper are also interesting in the context of the long-term effect of more open procurement data on competition, as well as on cartelisation and bid rigging risks, which are not assessed in the paper.

On the round, I think that the paper offers some interesting evidence to back up that there is a need to reconsider the level of transparency given to procurement data. I do not think this should stop the development of an improved procurement data architecture in the EU. To the contrary. I think this should reignite and prioritise discussions concerning the level of disclosure or public access to that information (ie its openness), which cannot be simply assumed to be positive in what, in my view, is currently an excessively simplistic approach in leading policy-making and think tank proposals. For more (but not new) discussion, see here and here.

GC gets it totally wrong and pushes once more for excessive price transparency in public procurement (T-667/11)

The General Court (GC) recently issued Judgment in Veloss and Attimedia v Parliament, T-667/11, EU:T:2015:5, and annulled an award decision (actually, a ranking of tenderers decision) on the basis of the European Parliament's resistance to disclose the price of the highest ranking bid to the disappointed tenderer that was ranked second. 

In the GC's view, such deliberate omission of the price information requested during the debriefing phase amounts to a breach of Art 100(2) of the applicable Financial Regulation, which established that: "The contracting authority shall notify all candidates or tenderers whose applications or tenders are rejected of the grounds on which the decision was taken, and all tenderers whose tenders are admissible and who make a request in writing of the characteristics and relative advantages of the successful tender and the name of the tenderer to whom the contract is awarded" (emphasis added). 

Following its previous case law on this topic (criticised here, here, here and here), the GC shows no flexibility whatsoever and determines that

the Parliament was required to inform them of the price offered by the successful tenderer, which was one of the characteristics and one of the key advantages of the successful tender, especially since, in the circumstances of the present case, that criterion counted for 40% in the evaluation of tenders and the applicants’ tender was the first on the list of tenderers following the evaluation of the qualitative criteria.

That finding is not called into question by the argument put forward by the Parliament at the hearing that the applicants could have established the minimum price offered by one of the tenderers and the price offered by the tenderer ranked first on the basis of the information available to them and deducing it through working backwards on the basis of the [award] formula

suffice it to note that it is clear from settled case-law that, in order to comply with the obligation to state reasons enshrined in Article 296 TFEU, the reasoning of the author of the act must be shown clearly and unequivocally (see, to that effect, judgments in Koyo Seiko v Council, paragraph 42 above, EU:T:1995:140, paragraph 103, and Evropaïki Dynamiki v Commission, paragraph 42 above, EU:T:2010:101, paragraph 134). The Parliament’s argument that the applicants could, through working backwards, have deduced the minimum price offered by one of the tenderers and, therefore, the price offered by the tenderer ranked first cannot be accepted. It must be considered that, even if the applicants had made such a deduction, they would have had no certainty regarding the correct application of that formula and the accuracy of the result obtained. That finding is corroborated by the Parliament’s attitude, which raised the possibility of such a deduction being carried out only at the hearing and not during the written procedure. (T-667/11, paras 60, 64 & 65, emphasis added).

It is worth stressing, however, that the requirement to disclose the (exact) price of the highest ranking tender is not explicit in Art 100(2) of the Financial Regulation and, as argued repeatedly, it is not a desirable feature of any debriefing process because it creates excessive transparency [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 (Nov 2013). University of Leicester School of Law Research Paper No. 13-11]. 

Hence, the fact that the GC reads an obligation to explicitly disclose the price offered by the successful tenderer and rejects an argument based on the fact that the disappointed tenderer could ascertain the relative advantage (in terms of price) on the basis of indirect information disclosed by the contracting authority (which, again, reinforces the obligation to disclose the price explicitly) is a very unwelcome development in the interpretation of Article 100(2) of the Financial Regulation (which can have a clear impact on the interpretation of Art 55 of Directive 2014/24, with further reaching consequences).

Moreover, it is shocking that there is no discussion at all about the second paragraph of Art 100(2) of the Financial Regulation, which expressly indicates that, notwithstanding the general obligation discussed above, "certain details need not be disclosed where disclosure would hinder application of the law, would be contrary to the public interest or would harm the legitimate business interests of public or private undertakings or could distort fair competition between those undertakings". This safeguard clause makes a lot of sense and their ineffective use (or its total disregard) must be lamented.

It is not clear whether the European Parliament expressly relied on this exception (from reading the Judgment, it would seem not), but it is unacceptable that the GC completely excluded such considerations in its Veloss and Attimedia Judgment. Disclosure of explicit prices can have clear negative impacts on competition and should be covered (always, or at least in the vast majority of cases, by the safeguard clause in Art 100(2) of the Financial Regulation, as well as by Art 55(3) Dir 2014/24]. 

Indeed, the problem of excessive pricing transparency and its negative effects for competition in public procurement markets is very important and the scholarly consensus is that transparency needs to be reduced, particularly when it comes to price signals in procurement settings [for a recent discussion, see C Estevan de Quesada, ‘Competition and transparency in public procurement markets’ (2014) 23 Public Procurement Law Review 229-244]. Consequently, the Veloss and Attimedia Judgment is a step in the wrong direction and it starts to be hard to believe that the case law on transparency can make a turn towards economic wisdom.

On a more positive note, another important point to stress focuses on the possibilistic approach adopted by the GC when it comes to deciding what sorts of procurement decisions are amenable to judicial review. In that regard, it bears some stress that the GC found that

according to settled case-law and having regard to the objective of effective and rapid judicial protection, in particular by interlocutory measures, the possibility of review cannot be subject to the fact that the public procurement procedure in question has formally reached a particular stage. On the basis of the consideration that compliance with the procurement rules must be ensured in particular at a stage at which infringements can still be corrected, it must be concluded that an expression of the will of the contracting authority in connection with a contract, which comes in any way whatever to the knowledge of the persons interested, is amenable to review, provided that that expression has passed the stage of acts which constitute a mere preliminary study of the market or are purely preparatory and form part of the internal reflections of the contracting authority with a view to a public award procedure and is capable of producing legal effects (see, to that effect and by analogy, judgment of 11 January 2005 in Stadt Halle and RPL Lochau, C‑26/03, ECR, EU:C:2005:5, paragraphs 38 and 39) (T-667/11, para 47, emphasis added).

This, the GC got right.

#publicprocurement in price regulated markets: you cannot have your cake and eat it too, Mme. Spanish Minister of Health

The Spanish press has just reported that the Ministry of Health, Social Services and Equality has mandated some pharmaceutical companies to lower the prices of certain common use drugs. This would not be in the news but for the important detail that the Ministry has adopted this decision in retaliation for the low bids submitted by those pharmaceutical companies in a centralized procurement process run by the Andalusian Health Department in 2012 (which re-run is currently taking place). 

The Spanish Health Minister was upset to see that, as a result of the centralized purchase of drugs, the Andalusian regional authorities were receiving better offers than the Ministry and other (regional) Health Authorities had managed to secure from the same pharmaceutical companies. Moreover, the prices offered in the Andalusian tender were significantly lower than those charged in the 'private' market to users whose medication is not covered by Social Security.

Instead of learning the proper lessons and exploring the potential benefits of more efficient procurement techniques (which remain to be seen in the long run, particularly in terms of sustainability of low prices, rate of innovation, protection of effective competition, etc--of which I am personally highly skeptical), the Ministry adopted a rather childish and short-sighted strategy whereby it has sought to punish the drug manufacturers by damaging their revenue stream.

In today's reported decision, the Ministry is forcing the unruly pharma companies to lower their prices for the affected drugs to levels even lower than those offered in Andalusia.  The Ministry can impose such a price reduction as part of its general regulatory powers. In my opinion, this is an enormous mistake. The use of price regulation powers as a poison pill against pharma companies that bid aggressively in public tenders is simply nonsensical.

The only message that pharma companies should take home is the following: never, ever again, compete on prices. Surely, in the immediate future, the safest position for pharmaceutical companies will be to always bid the maximum authorized price, in order to avoid a downward revision every time they offer a discount in a public procurement procedure. And, in order to protect their revenue stream, to then lobby the Ministry to protect (or raise) the level of authorized prices. 

Could one think of a worse outcome in terms of effective market competition and efficiency of public procurement? I can't. But I am sure that the Spanish Ministry of Health may surprise me in the future...

Again on the protection of confidentiality in procurement evaluation: A step forward? (T-339/10 and T-532/10)

In its Judgment of 29 January 2013 in Joined Cases T‑339/10 and T‑532/10 Cosepuri Soc. Coop. pA v European Food Safety Authority (EFSA), the General Court has ruled again on the topical issue of the protection of confidentiality and business secrets in tender evaluation--and, in principle, has shown a more balanced approach than in previous Judgments concerned with transparency at debriefing stage. 

However, in my opinion, the case law in this area still falls short from guaranteeing a proper balance between transparency and protection of business secrets and continues to promote excessive disclosure.

In the case at hand, Cosepuri challenged the EFSA's evaluation procedure on the basis of the confidential treatment of financial assessment. The GC has taken no issue with the degree of confidentiality imposed by EFSA, but on a series of grounds that still seem (partially) inadequate:

32 First, the applicant calls into question the fact that Part II.8.2 of the tender specifications provided that the tender evaluation procedure was to be confidential. It should be noted in that regard that the applicant has the right to challenge, as an incidental plea, the lawfulness of the specifications in the present action (see, to that effect, Case T‑495/04 Belfass v Council [2008] ECR II‑781, paragraph 44). […]

33 Article 89(1) of the Financial Regulation provides that all public contracts financed in whole or in part by the budget are to comply, inter alia, with the principle of transparency. In the present case, it must be noted that Part II.8.2 of the specifications, which provides that the procedure for the evaluation of the tenders is to be conducted in secret, satisfies the requirement of preserving the confidentiality of the tenders and the need to avoid, in principle, contact between the contracting authority and the tenderers (see, on this point, Article 99 of the Financial Regulation and Article 148 of the Implementing Rules). The principle of transparency, referred to in Article 89(1) of the Financial Regulation, which is invoked by the applicant, must be reconciled with those requirements. Accordingly, there is no basis on which it can be concluded that Part II.8 of the specifications is vitiated by unlawfulness.

34 Second, the applicant challenges the fact that it was not able to ascertain the price proposed by the successful tenderer. In particular, the applicant states that EFSA ensured that it would not be possible for any subsequent verification to be carried out by redacting from the evaluation report the price offered by the successful tenderer. In that regard, without there being any need to rule in the present case on whether the price proposed by the successful tenderer formed part of the information which the contracting authority should have communicated to the unsuccessful tenderers (sic), it is clear from the evidence submitted that the applicant was in a position to ascertain the price in question. It is apparent from Section 2.4 of the evaluation committee report that the applicant and the successful tenderer offered the same price in respect of points 2 to 7 of the financial bid, both obtaining the maximum score of 15 points. The price offered by the successful tenderer in respect of points 2 to 7 of the financial bid is therefore abundantly clear from the evaluation committee report. Moreover, with regard to point 1 of the financial bid, the evaluation committee report indicated the price offered by the applicant and the mark obtained. Although it does not expressly refer to the price offered by the successful tenderer, that report specifies the mark obtained by it. Taking account of those factors, it was possible to calculate, without any difficulty, the price proposed by the successful tenderer in respect of point 1 of the financial bid, as submitted by EFSA in connection with the second plea. Furthermore, the Court has been able to verify, by way of the measure of inquiry adopted at the hearing (see paragraph 16 above), that the price mentioned by EFSA in its written pleadings was in fact the price proposed by the successful tenderer. In view of all the foregoing considerations, the Court considers that, even if EFSA had erred by failing to indicate expressly to the applicant the price proposed by the successful tenderer, such an error would have had no effect on the lawfulness of EFSA’s decision to reject the applicant’s tender and award the contract at issue to another tenderer whose bid was considered to be better, since the applicant was in a position to ascertain that price. The applicant’s arguments in that regard must therefore be rejected.

35 Third, with regard to the principle of sound administration relied on by the applicant, according to case‑law, guarantees afforded by the European Union legal order in administrative proceedings include, in particular, the principle of sound administration, which entails the duty on the part of the competent institution to examine carefully and impartially all the relevant aspects of the individual case (see the judgment of 15 September 2011 in Case T‑407/07 CMB and Christof v Commission, not published in the ECR, paragraph 182 and the case‑law cited). In the present case, the arguments put forward by the applicant in the first plea, which essentially consist in criticising the fact that it was not granted access to the financial bid of the successful tenderer, do not demonstrate that EFSA failed to examine carefully and impartially all the relevant aspects of the case. In the absence of more detailed evidence, the applicant’s arguments in that regard must be rejected. (T-339/10 and 532/10 at paras. 32 to 35, emphasis added).

In my view, paragraphs 33 and 35 of the Cosepuri Judgment must be welcome, as they set a more balanced framework for the assessment of the obligation to disclose confidential information and business secrets under the principles of transparency and good administration.

On the contrary, paragraph 34 deserves a clear rejection, given that the GC keeps a very formalistic approach to the protection of confidential information and takes no issue with the fact that such sensitive information as price can be disclosed indirectly, and considers that that does not infringe either the rights of the 'disclosed' undertaking to protection of its business secrets, nor the procedural rights of the disappointed bidder that is granted indirect access to that information.

I think that the GC should have taken a stronger position and clearly confirmed that both direct and indirect disclosure of price elements and financial evaluations can be restricted or excluded on grounds of protection of confidentiality. Otherwise, the incentives continue to push contracting authorities for an excessive degree of transparency in public procurement settings--which creates significant risks of collusion [Sánchez Graells, "Public Procurement and Competition: Some Challenges Arising from Recent Developments in EU Public Procurement Law" in Bovis (ed) Research Handbook on European Public Procurement  (forthcoming), http://ssrn.com/abstract=2206502].