Competition and public procurement: a mind map

I have been asked to teach a workshop on competition and public procurement for an audience of postgraduate students and practitioners in this week’s session of the Competition Specialist Advanced Degree convened by Prof Antonio Robles Martin-Laborda at Universidad Carlos III of Madrid.

It has been some time since I last taught the topic, so I had to reconstruct my mind map in preparation for the workshop. This is a sketch of what I have come up with (not mind-blowing graphics…). Some additional bullet-points of the key issues in each of the areas of interaction and cross-references to papers where I have developed my ideas regarding each of the topics are below.

Mind map.png

Bid rigging

  • In principle, this is the least controversial area of competition and procurement interaction; bid rigging being an instance of anticompetitive conduct ‘by object’ (under Art 101(1) TFEU) (see here for discussion)

  • Fighting bid rigging in procurement is high on competition authority’s enforcement agendas

  • Procurement structurally increases likelihood of collusion; which is partially compensated by the counter-incentive created by the rules on exclusion of competition infringers (Art 57(4)(c) and (d) Dir 2014/24/EU), provided leniency does not negate its effects

Joint tendering

  • Analytical difficulties to establish a boundary between bid rigging (object-based analysis) and anticompetitive collaboration for the submission of joint tenders

  • Emerging approach to the treatment of joint bidding as a restriction of competition by object (cf EFTA Court Ski Taxi, 2018 Danish guidelines, see also here for analysis of their draft)

  • Particular complications concern the analysis of potential competition under Art 101(1) and 101(3) TFEU, in particular in cases where this is both used to subsume the practice under prohibition in Art 101(1) and also to assess whether the restriction is indispensable to the generation of efficiencies (or whether there were less restrictive forms to achieve them) under Art 101(3) TFEU (see here and here).

Exclusion & self-cleaning

  • Conceptual difficulties with boundary between Art 57(4)(c) and (d) of Directive 2014/24/EU, as well as applicable tests (see here)

  • Application complicated in leniency cases (see eg Vossloh Laeis, C-124/17, EU:C:2018:855, as well as due to different approaches to judicial and administrative finality (see eg Meca, C-41/18, EU:C:2019:507, not available in English)

  • These difficulties are particularly complex once the rules are implemented at the national level, as evidenced by the on-going Spanish sainete in the railroad electrification works cartel (see here and here)

Public buyer power

  • Inapplicability of EU antitrust rules (ie Art 101 and 102 TFEU) directly to the public buyer, given the FENIN-Selex case law (see here)

  • However, potential clawback under EasyPay’s strictest approach to separation test (see here)

CPBs

  • Difficult exemption from EU antitrust rules even under FENIN, given exclusive activity (see here and here)

  • Very minimal regulation and oversight, especially in the context of their cross-border activities (see here, here and here)

SGEI & In-house

  • Interaction complicated in these settings, both in terms of State aid rules (see here), as well as in potential accumulation of conflicting rules under Articles 102 and 106(2) TFEU (ie publicly-mandated or generated abuses of a dominant position)

  • Increasingly complicated tests to assess SGEI entrustment (Altmark, Spezzino, German slaughterhouses)

  • Move towards declaration of some types of procurement (eProcurement, centralised procurement) as an SGEI themselves

State aid (more generally)

  • Difficulties remain after the 2016 Commission notice on the notion of aid (see here)

Abnormally low tenders

  • Difficulties also remain after Art 69 Directive 2014/24/EU, in particular concerning those tainted by State aid (see here)

  • Mechanism hardly used to monitor ‘adequate competition’ or to prevent predatory pricing

Contract changes

  • Difficult analogical application of notice on notion of aid and almost impossible market benchmark in most cases

  • Similarly complicated interaction between merger control and public procurement rules on change of contractor, although these are partially alleviated by Art 72(1)(d)(ii) Dir 2014/24/EU (but cfr ‘economic operator that fulfils the criteria for qualitative selection initially established provided that this does not entail other substantial modifications to the contract and is not aimed at circumventing the application of this Directive’)

Principle of competition

  • Established in Art 18(1)II Dir 2014/24/EU, has the potential to be the gangway between competition and procurement spheres of EU economic law

  • Difficulties in its interpretation (see here), as well as in its application (see here)





AI & sustainable procurement: the public sector should first learn what it already owns

ⓒ Christophe Benoit ( Flickr ).

ⓒ Christophe Benoit (Flickr).

[This post was first published at the University of Bristol Law School Blog on 14 October 2019].

While carrying out research on the impact of digital technologies for public procurement governance, I have realised that the deployment of artificial intelligence to promote sustainability through public procurement holds some promise. There are many ways in which machine learning can contribute to enhance procurement sustainability.

For example, new analytics applied to open transport data can significantly improve procurement planning to support more sustainable urban mobility strategies, as well as the emergence of new models for the procurement of mobility as a service (MaaS). Machine learning can also be used to improve the logistics of public sector supply chains, as well as unlock new models of public ownership of eg cars. It can also support public buyers in identifying the green or sustainable public procurement criteria that will deliver the biggest improvements measured against any chosen key performance indicator, such as CO2 footprint, as well as support the development of robust methodologies for life-cycle costing.

However, it is also evident that artificial intelligence can only be effectively deployed where the public sector has an adequate data architecture. While advances in electronic procurement and digital contract registers are capable of generating that data architecture for the future, there is a significant problem concerning the digitalisation of information on the outcomes of past procurement exercises and the current stock of assets owned and used by the public sector. In this blog, I want to raise awareness about this gap in public sector information and to advocate for the public sector to invest in learning what it already owns as a potential major contribution to sustainability in procurement, in particular given the catalyst effect this could have for a more circular procurement economy.

Backward-looking data as a necessary evidence base

It is notorious that the public sector’s management of procurement-related information is lacking. It is difficult enough to have access to information on ‘live’ tender procedures. Accessing information on contract execution and any contractual modifications has been nigh impossible until the very recent implementation of the increased transparency requirements imposed by the EU’s 2014 Public Procurement Package. Moreover, even where that information can be identified, there are significant constraints on the disclosure of competition-sensitive information or business secrets, which can also restrict access. This can be compounded in the case of procurement of assets subject to outsourced maintenance contracts, or in assets procured under mechanisms that do not transfer property to the public sector.

Accessing information on the outcomes of past procurement exercises is thus a major challenge. Where the information is recorded, it is siloed and compartmentalised. And, in any case, this is not public information and it is oftentimes only held by the private firms that supplied the goods or provided the services—with information on public works more likely to be, at least partially, under public sector control. This raises complex issues of business to government (B2G) data sharing, which is only a nascent area of practice and where the guidance provided by the European Commission in 2018 leaves many questions unanswered.

I will not argue here that all that information should be automatically and unrestrictedly publicly disclosed, as that would require some careful considerations of the implications of such disclosures. However, I submit that the public sector should invest in tracing back information on procurement outcomes for all its existing stock of assets (either owned, or used under other contractual forms)—or, at least, in the main categories of buildings and real estate, transport systems and IT and communications hardware. Such database should then be made available to data scientists tasked with seeking all possible ways of optimising the value of that information for the design of sustainable procurement strategies.

In other words, in my opinion, if the public sector is to take procurement sustainability seriously, it should invest in creating a single, centralised database of the durable assets it owns as the necessary evidence base on which to seek to build more sustainable procurement policies. And it should then put that evidence base to good use.

More circular procurement economy based on existing stocks

In my view, some of the main advantages of creating such a database in the short-, medium- and long-term would be as follows.

In the short term, having comprehensive data on existing public sector assets would allow for the deployment of different machine learning solutions to seek, for example, to identify redundant or obsolete assets that could be reassigned or disposed of, or to reassess the efficiency of the existing investments eg in terms of levels of use and potential for increased sharing of assets, or in terms of the energy (in)efficiency derived from their use. It would also allow for a better understanding of potential additional improvements in eg maintenance strategies, as services could be designed having the entirety of the relevant stock into consideration.

In the medium term, this would also provide better insights on the whole life cycle of the assets used by the public sector, including the possibility of deploying machine learning to plan for timely maintenance and replacement, as well as to improve life cycle costing methodologies based on public-sector specific conditions. It would also facilitate the creation of a ‘public sector second-hand market’, where entities with lower levels of performance requirements could acquire assets no longer fit for their original purpose, eg computers previously used in more advanced tasks that still have sufficient capacity could be repurposed for routine administrative tasks. It would also allow for the planning and design of recycling facilities in ways that minimised the carbon footprint of the disposal.

In the long run, in particular post-disposal, the existence of the database of assets could unlock a more circular procurement economy, as the materials of disposed assets could be reused for the building of other assets. In that regard, there seem to be some quick wins to be had in the construction sector, but having access to more and better information would probably also serve as a catalyst for similar approaches in other sectors.

Conclusion

Building a database on existing public sector-used assets as the outcome of earlier procurement exercises is not an easy or cheap task. However, in my view, it would have transformative potential and could generate sustainability gains not only aimed at reducing the carbon footprint of future public expenditure but, more importantly, at correcting or somehow compensating for the current environmental impacts of the way the public sector operates. This could make a major difference in accelerating emissions reductions and should consequently be a matter of sufficient priority for the public sector to engage in this exercise. In my view, it should be a matter of high priority.

A quick, non-comprehensive update on circular economy and public procurement

Circular-Economy.jpg

A friend and I have been discussing sustainability and property regulation for a while. In particular, he has been quizzing me on the potential for public procurement to promote a (more) circular economy for a few years now. We last touched upon this in mid-2015. In a recent email exchange, he asked me to look at what had happened since at EU level. This is what I came up with. I thought I would share it in case someone is interested in a quick, non-comprehensive update on circular economy and public procurement. Here it is. Please feel free to add to this in the comments section!

In June 2017, the European Parliament published a report it had commissioned on 'Green Public Procurement and the EU Action Plan for the Circular Economy'. In October 2017, the Directorate General for the Environment of the European Commission published this brochure of best practices (of which I was rather critical in my blog). There have been additional best practice guides put together by entities receiving EU funding, eg ICLEI or CircularPP.

This is still a weak policy intervention in the form of best practice dissemination (ie even weaker than soft law guidelines), which is supported with some additional initiatives, such as the Circular Europe Network. However, in their own words 'the integration between PP and circular economy is still at its early stage at the EU level.' (Factsheet on Public Procurement and Circular Economy, tab 2.3).

Some countries are taking the use of procurement to push for a more circular economy to reduce the environmental impact of public sector activities more seriously than others, and the construction sector seems to be ahead of others (see eg this recent report). Denmark is perhaps at the forefront of trying to use procurement for a circular economy (see eg this case study), together with the other Nordic countries and The Netherlands (see eg this 2017 report, or the 10 case studies included in the construction sector report above). There is not much going on in the UK at all (I could only find a 2016 4-pager on general aspects of circular economy that mentions procurement in passing).

There are a couple of interesting-looking academic papers: Witjes & Lozano (2016) and Alhola et al (2018), the latter being the same authors of the report on the Nordic countries above.

** Postscript (11/10/2019 11.20am) - Thanks to Dr Lela Mélon for highlighting the March 2019 Report on ‘Accelerating the transition to a circular economy‘ and for pointing out that this is ‘an overarching policy example that omits the amount of private capital needed for a transition to occur at a noteworthy scale (e.g. mentioning the EU public funds to be employed to that effect but omitting the size of the whole funding needed for the transition)‘.

The Norwegian Supreme Court Gives its Final Word in the Fosen-Linjen Saga [guest post by Dag Sørlie Lund]

The Fosen-Linjen Saga has finally come to a close with the Norwegian Supreme Court’s Judgment. Dag Sørlie Lund* kindly provides a sharp summary of the case while we await for any official translations. His fuller critical assessment of the Judgment will be included in the EPPPL special issue we are working on.

The Norwegian Supreme Court Gives its
Final Word in the Fosen-Linjen Saga

The so-called Fosen-Linjen Saga has finally come to its long-awaited end by the judgment of the Norwegian Supreme Court of 27 September 2019, more than 6 years after the company AtB tendered for the procurement of ferry services between Brekstad and Valset in the County of Trøndelag.

The contract was initially awarded to the company Norled. The competitor, Fosen-Linjen, which was ranked as the runner-up, claimed Norled had been awarded the contract unlawfully, and managed to stop the signing of the contract through interim measures. In the interim measures procedure two errors were identified by the courts:

  1. AtB had not required the necessary documentation for the award criteria “environment”; and

  2. AtB had not verified the viability in Norled’s offer regarding fuel consumption (which was part of the criteria “environment”).

As a result of this, AtB decided to cancel the tender procedure, and restart the whole process.

Fosen-Linjen did not submit a new tender, but instead filed a law suit against AtB claiming damages for the positive interest, or, in the alternative, the negative contract interest. The negative contract interests essentially amounts to the costs of tendering (damnum emergens), while the positive contract interest essentially amounts to the loss of profit (lucrum cessans).

The Supreme Court’s judgment clarifies several key questions about public procurement law related to the threshold for damages, and for the requirement of causality between the breach and the damages. Furthermore, the ruling contains interesting assessments of legitimate grounds to cancel a tender procedure, and the significance of the fact that a tenderer submits an offer despite being aware of errors in the procurement documents for the possibility to receive damages. The judgment is unanimous for all but the question of causality for damages for the negative contract interest, where one justice had a concurring opinion with a slightly different approach. For the purposes of this summary, I will not go further into the differences in the concurring opinion.

The Principle of State liability for breaches of EEA Law

The Supreme Court starts out by grounding the liability for damages in the general principle of State liability for breaches of EEA law. According to this principle an EEA State may be held liable for breaches of its obligations where the following three conditions are met:

  1. The breached provision of EEA law must be intended to confer rights on individuals and economic operators;

  2. The breach must be considered as sufficiently serious; and

  3. There must be a direct causal link between the breach of the obligation in question and the damage suffered by the aggrieved party.

The first condition was clearly met, and the case before the Supreme Court thus mainly concerned the question of the threshold for receiving damages and what it takes to establish a direct causal link for damages for negative costs. A particularly disputed question in the Fosen-Linjen Saga, has been whether the threshold for damages for the negative and the positive contract interests is different. Under Norwegian law, it has traditionally been easier to receive compensation for the negative costs than for the positive costs.

The Positive Contract Interest

The Supreme Court rejected Fosen-Linjen’s claim for damages for the positive interest since there were sufficient grounds to cancel the tender procedure. In fact, there were two grounds for cancelling the procedure.

First, the Supreme Court considered that the identification of the two errors in the interim measures proceedings raised serious doubts about the lawfulness of the procedure. These doubts were considered as sufficient grounds to cancel the tender procedure.

Second, it was also considered that the fact that AtB did not require the necessary documentation for the award criteria “environment”, also constituted sufficient grounds to cancel.

Consequently, the Supreme Court concluded that since the cancellation was lawful, Fosen-Linjen could not receive damages for the positive contract interest. This part of the judgment is somewhat confusing, since it appears to consider the question of causality rather than the question of whether the breach was sufficiently serious: since the tender procedure was lawfully cancelled, no one could ever be awarded the contract, and thus no one would ever have a claim for the loss of profit.

This is particularly confusing since the Appeals Selection Committee of the Supreme Court had explicitly rejected the question of causality for the positive contract interest from being heard by the Supreme Court. This is all the more puzzling since the Supreme Court appears to have been aware of this distinction, noting that the cancellation did not exclude the possibility for damages for the negative contract interest, which shows that the question of liability was not conceptually excluded by the fact of the cancellation.

The Negative Contract Interest

As mentioned, the traditional approach in Norwegian torts law is that the threshold is lower when it comes to damages for the negative costs.

Based on its reading of case law from the CJEU and the EFTA Court, the Supreme Court held, however, that the test for receiving damages, regardless of the categorization of the damages as negative or positive costs, is whether the breach in question may be considered “sufficiently serious”. The Supreme Court outright rejected the suggestion that the threshold might be lower under Norwegian tort law.

In the assessment of whether a breach is sufficiently serious, the Supreme Court noted that it may not be required to demonstrate fault or fraud, although both subjective and objective factors included in the traditional assessment of liability under national tort law, may be relevant to take into account.

Same same, but different

Despite this description of the test for receiving damages, the Supreme Court emphasized that the norm could not be characterized as more or less strict than would otherwise follow from Norwegian tort law, but that the assessment may be somewhat different.

The Supreme Court identified the norm as a sliding scale where the crucial point appears to be the level of discretion enjoyed by the contracting authority – from wide to none at all.

The rule that was breached in the tender procedure – namely the obligation to require necessary documentation for an award criterion – was found to be clear and precise. Accordingly, the Supreme Court found that AtB was liable for the negative costs. In that regard, it was pointed out that AtB twice received questions that raised doubts as to the lawfulness of the award criteria, which combined with the consequences caused by the breach, led to the conclusion that the threshold of “sufficiently serious” was passed.

It’s worth noting that despite the fact that the Supreme Court rejected that a contracting authority might escape liability by claiming not to possess the necessary powers, knowledge, means or resources, it still considered the complexity of the public procurement rules indicated a certain restraint or caution in establishing liability.

Direct Causal Link

Concerning the question of a direct causal link between the breach and the damage, the Supreme Court asked whether the tenderer would have submitted an offer if they had known about the error committed.

Even though the fact that AtB had not required the necessary documentation for the award criteria “environment” was clearly visible for Fosen-Linjen, the Supreme Court considered that this criterion was met since AtB had considered the procurement documents to be lawful despite the fact that the error had been pointed out twice during the tendering procedure. This part of the judgment is also confusing, as it is not entirely clear why the subjective view of the contract authority is relevant when assessing the question of causality.

Unanswered questions

The Supreme Court thus disentangled many key questions about liability for breaches of procurement rules, but some issues remain unanswered. For example, the Supreme Court did not rule on the question of whether liability is conceptually possible where the tendering process should have been cancelled, but this doesn’t happen. Furthermore, as mentioned above, the question regarding direct causal link for damages for the positive interest was not accepted to be heard by the Supreme Court, so the particularities of that assessment was not further clarified. Considering the attention these questions have received through the Fosen-Linjen Saga, it is probably only a matter of time before these will materialize themselves in future cases, with new sagas in national courts and in Luxembourg.

Dag_Sørlie_Lund_color.jpg

Dag Sørlie Lund

Dag Sørlie Lund is part of our European and Competition law team. He has previously worked at the Department of Legal Affairs in the Ministry of Foreign Affairs, the EFTA Court, the EFTA Surveillance Authority (ESA), and as an attorney. He has experience in advising clients in EU/EEA and competition law, including state aid and public procurement law.

Dag has handled a number of cases concerning the EFTA Surveillance Authority, and has pleaded several cases before the Court of Justice for the European Union and the EFTA Court. Dag has lived in Spain, Belgium and Luxembourg, and speaks Spanish and English fluently.

'Experimental' WEF/UK Guidelines for AI Procurement: some comments

ⓒ Scott Richard, Liquid painting (2015).

ⓒ Scott Richard, Liquid painting (2015).

On 20 September 2019, and as part of its ‘Unlocking Public Sector Artificial Intelligence’ project, the World Economic Forum (WEF) published the White Paper Guidelines for AI Procurement (see also press release), with which it seeks to help governments accelerate efficiencies through responsible use of artificial intelligence and prepare for future risks. WEF indicated that over the next six months, governments around the world will test and pilot these guidelines (for now, there are indications of adoption in the UK, the United Arab Emirates and Colombia), and that further iterations will be published based on feedback learned on the ground.

Building on previous work on the Data Ethics Framework and the Guide to using AI in the Public Sector, the UK’s Office for Artificial Intelligence has decided to adopt its own draft version of the Guidelines for AI Procurement with substantially the same content, but with modified language and a narrower scope of some principles, in order to link them to the UK’s legislative and regulatory framework (and, in particular, the Data Ethics Framework). The UK will be the first country to trial the guidelines in pilot projects across several departments. The UK Government hopes that the new Guidelines for AI Procurement will help inform and empower buyers in the public sector, helping them to evaluate suppliers, then confidently and responsibly procure AI technologies for the benefit of citizens.

In this post, I offer some first thoughts about the Guidelines for AI Procurement, based on the WEF’s version, which is helpfully summarised in the table below.

Source: WEF, White Paper: ‘Guidelines for AI Procurement’ at 6.

Source: WEF, White Paper: ‘Guidelines for AI Procurement’ at 6.

Some Comments

Generally, it is worth being mindful that the ‘guidelines provide fundamental considerations that a government should address before acquiring and deploying AI solutions and services. They apply once it has been determined that the solution needed for a problem could be AI-driven’ (emphasis in original). As the UK’s version usefully stresses, many of the important decisions take place at the preparation and planning stages, before publishing a contract notice. Therefore, more than guidance for AI procurement, this is guidance on the design of a framework for the governance of innovative digital technologies procurement, including AI (but easily extendable to eg blockchain-based solutions), which will still require a second tier of (future/additional) guidance on the implementation of procurement procedures for the acquisition of AI-based solutions.

It is also worth stressing from the outset that the guidelines assume both the availability and a deep understanding by the contracting authority of the data that can be used to train and deploy the AI solutions, which is perhaps not fully reflective of the existing difficulties concerning the availability and quality of procurement data, and public sector data more generally [for discussion, see A Sanchez-Graells, 'Data-Driven and Digital Procurement Governance: Revisiting Two Well-Known Elephant Tales' (2019) Communications Law, forthcoming]. Where such knowledge is not readily available, it seems likely that the contracting authority may require the prior engagement of data consultants that could carry out an assessment of the data that is or could be available and its potential uses. This creates the need to roll-back some of the considerations included in the guidelines to that earlier stage, much along the lines of the issues concerning preliminary market consultations and the neutralisation of any advantages or conflicts of interest of undertakings involved in pre-tender discussions, which are also common issues with non-AI procurement of innovation. This can be rather tricky, in particular if there is a significant imbalance in expertise around data science and/or a shortfall in those skills in the contracting authority. Therefore, perhaps as a prior recommendation (or an expansion of guideline 7), it may be worth bearing in mind that the public sector needs to invest significant resources in hiring and retaining the necessary in-house capacities before engaging in the acquisition of complex (digital) technologies.

1. Use procurement processes that focus not on prescribing a specific solution, but rather on outlining problems and opportunities and allow room for iteration.

The fit of this recommendation with the existing regulation of procurement procedures seems to point towards either innovation partnerships (for new solutions) or dynamic purchasing systems (for existing or relatively off-the-shelf solutions). The reference to dynamic purchasing systems is slightly odd here, as solutions are unlikely to be susceptible of automatic deployment in any given context.

Moreover, this may not necessarily be the only possible approach under EU law and there seems to be significant scope to channel technology contests under the rules for design contests (Arts 78 and ff of Directive 2014/24/EU). The limited appetite of innovative start-ups for procurement systems that do not provide them with ‘market exposure’ (such as large framework agreements, but likely also dynamic purchasing systems) may be relevant, depending on market conditions (see eg PUBLIC, Buying into the Future. How to Deliver Innovation through Public Procurement (2019) 23). This could create opportunities for broader calls for technological innovation, perhaps as a phase prior to conducting a more structured (and expensive) procurement procedure for an innovation partnership.

All in all, it would seem like—at least at UK level, or in any other jurisdictions seeking to pilot the guidance—it could be advisable to design a standard procurement procedure for AI-related market engagement, in order to avoid having each willing contracting authority having to reinvent the wheel.

2. Define the public benefit of using AI while assessing risks.

Like with many other aspects of the guidelines, one of the difficulties here is to try to establish actionable measures to deal with ‘unknown unknowns’ that may emerge only in the implementation phase, or well into the deployment of the solution. It would be naive to assume that the contracting authority—or the potential tenderers—can anticipate all possible risks and design adequate mitigating strategies. It would thus perhaps be wise to recommend the use of AI solutions for public sector / public service use cases that have a limited impact on individual rights, as a way to gain much necessary expertise and know-how before proceeding to deployment in more sensitive areas.

Moreover, this is perhaps the recommendation that is more difficult to instrument in procurement terms (under the EU rules), as the consideration of ‘public benefit’ seems to be a matter for the contracting authority’s sole assessment, which could eventually lead to a cancellation—with or without retendering—of the procurement. It is difficult to see how to design evaluation tools (in terms of both technical specifications and award criteria) capable of capturing the insight that ‘public benefit extends beyond value for money and also includes considerations about transparency of the decision-making process and other factors that are included in these guidelines’. This should thus likely be built into the procurement process through opportunities for the contracting authority to discontinue the project (with no or limited compensation), which also points towards the structure of the innovation partnership as the regulated procedure most likely to fit.

3. Aim to include your procurement within a strategy for AI adoption across government and learn from others.

This is mainly aimed at ensuring cross-sharing of experiences and at concentrating the need for specific AI-based solutions, which makes sense. The difficulty will be in the practical implementation of this in a quickly-changing setting, which could be facilitated by the creation of a mandatory (not necessarily public) centralised register of AI-based projects, as well as the consideration of the creation and mandatory involvement of a specialised administrative unit. This would be linked to the general comment on the need to invest in skills, but could alleviate the financial impact by making the resources available across Government rather than having each contracting authority create its own expert team.

4. Ensure that legislation and codes of practice are incorporated in the RFP.

Both aspects of this guideline are problematic to a lawyer’s eyes. It is not a matter of legal imperialism to simply consider that there have to be more general mechanisms to ensure that procurement procedures (not only for digital technologies) are fully legally compliant.

The recommendation to carry out a comprehensive review of the legal system to identify all applicable rules and then ‘Incorporate those rules and norms into the RFP by referring to the originating laws and regulations’ does not make a lot of sense, since the inclusion or not in the RFP does not affect the enforceability of those rules, and given the practical impossibility for a contracting authority to assess the entirety of rules applicable to different tenderers, in particular if they are based in other jurisdictions. It would also create all sorts of problems in terms of potential claims of legitimate expectations by tenderers. Moreover, under EU law, there is case law (such as Pizzo and Connexxion Taxi Services) that creates conflicting incentives for the inclusion of specific references to rules and their interpretation in tender documents.

The recommendation on balancing trade secret protection and public interest, including data privacy compliance, is just insufficient and falls well short of the challenge of addressing these complex issues. The tension between general duties of administrative law and the opacity of algorithms (in particular where they are protected by IP or trade secrets protections) is one of the most heated ongoing debates in legal and governance scholarship. It also obviates the need to distinguish between the different rules applicable to the data and to the algorithms, as well as the paramount relevance of the General Data Protection Regulation in this context (at least where EU data is concerned).

5. Articulate the technical feasibility and governance considerations of obtaining relevant data.

This is, in my view, the strongest part of the guidelines. The stress on the need to ensure access to data as a pre-requisite for any AI project and the emphasis and detail put in the design of the relevant data governance structure ahead of the procurement could not be clearer. The difficulty, however, will be in getting most contracting authorities to this level of data-readiness. As mentioned above, the guidelines assume a level of competence that seems too advanced for most contracting authorities potentially interested in carrying out AI-based projects, or that could benefit from them.

6. Highlight the technical and ethical limitations of using the data to avoid issues such as bias.

This guideline is also premised on advanced knowledge and understanding of the data by the contracting authority, and thus creates the same challenges (as further discussed below).

7. Work with a diverse, multidisciplinary team.

Once again, this will be expensive and create some organisational challenges (as also discussed below).

8. Focus throughout the procurement process on mechanisms of accountability and transparency norms.

This is another rather naive and limited aspect of the guidelines, in particular the final point that ‘If an algorithm will be making decisions that affect people’s rights and public benefits, describe how the administrative process would preserve due process by enabling the contestability of automated decision-making in those circumstances.' This is another of the hotly-debated issues surrounding the deployment of AI in the public sector and it seems unlikely that a contracting authority will be able to provide the necessary answers to issues that are yet to be determined—eg the difficult interpretive issues surrounding solely automated processing of personal data under the General Data Protection Regulation, as discussed in eg M Finck, ‘Automated Decision-Making and Administrative Law’ (2019) Max Planck Institute for Innovation and Competition Research Paper No. 19-10.

9. Implement a process for the continued engagement of the AI provider with the acquiring entity for knowledge transfer and long-term risk assessment.

This is another area of general strength in the guidelines, which under EU procurement law should be channeled through stringent contract performance conditions (Art 70 Directive 2014/24/EU) or, perhaps even better, by creating secondary regulation on mandatory on-going support and knowledge transfer for all AI-based implementations in the public sector.

The only aspect of this guideline that is problematic concerns the mention that, in relation to ethical considerations, ‘Bidders should be able not only to describe their approach to the above, but also to provide examples of projects, complete with client references, where these considerations have been followed.’ This would clearly be a problem for new entrants, as well as generate rather significant first-mover advantages for undertakings with prior experience (likely in the private sector). In my view, this should be removed from the guidelines.

10. Create the conditions for a level and fair playing field among AI solution providers.

This section includes significant challenges concerning issues related to the ownership of IP on AI-based solutions. Most of the recommendations seem rather complicated to implement in practice, such as the reference to the need to ‘Consider strategies to avoid vendor lock-in, particularly in relation to black-box algorithms. These practices could involve the use of open standards, royalty-free licensing and public domain publication terms’, or to ‘'consider whether [the] department should own that IP and how it would control it [in particular in the context of evolution or new design of the algorithms]. The arrangements should be mutually beneficial and fair, and require royalty-free licensing when adopting a system that includes IP controlled by a vendor’. These are also extremely complex and debated issues and, once again, it seems unlikely that a contracting authority will be able to provide all relevant answers.

Overall assessment

The main strength of the guidelines lies in its recommendations concerning the evaluation of data availability and quality, as well as the need to create robust data governance frameworks and the need to have a deep insight into data limitations and biases (guidelines 5 and 6). There are also some useful, although rather self-explanatory reminders of basic planning issues concerning the need to ensure the relevant skillset and the unavoidable multidisciplinarity of teams working in AI (guidelines 3 and 7). Similarly, the guidelines provide some very high-level indications on how to structure the procurement process (guidelines 1, 2 and 9), which will however require much more detailed (future/additional) guidance before they can be implemented by a contracting authority.

However, in all other aspects, the guidelines work as an issue-spotting instrument rather than as a guidance tool. This is clearly the case concerning the tensions between data privacy, good administration and proprietary protection of the IP and trade secrets underlying AI-based solutions (guidelines 4, 8 and 10). In my view, rather than taking the naive—and potentially misleading—approach of indicating the issues that contracting authorities need to address (in the RFP, or elsewhere) as if they were currently (easily, or at all) addressable at that level of administrative practice, the guidelines should provide sufficiently precise and goal-oriented recommendations on how to do so if they are to be useful. This is not an easy task and much more work seems necessary before the document can provide useful support to contracting authorities seeking to implement procedures for the procurement of AI-based solutions. I thus wonder how much learning can the guidelines generate in the pilots to be conducted in the UK and elsewhere. For now, I would recommend other governments to wait and see before ‘adopting’ the guidelines or treating them as a useful policy tool, in particular if that discouraged them from carrying out their own efforts in developing actionable guidance on how to procure AI-based solutions.

Finally, it does not take much reading between the lines to realise that the challenges of developing an enabling data architecture and upskilling the public sector (not solely the procurement workforce, and perhaps through specialised units, as a first step) so that it is able to identify the potential for AI-based solutions and to adequately govern their design and implementation remain as very likely stumbling blocks in the road towards deployment of public sector AI. In that regard, general initiatives concerning the availability of quality procurement data and the necessary reform of public procurement teams to fill the data science and programming gaps that currently exist should remain the priority—at least in the EU, as discussed in A Sanchez-Graells, EU Public Procurement Policy and the Fourth Industrial Revolution: Pushing and Pulling as One? (2019) SSRN working paper, and in idem, 'Some public procurement challenges in supporting and delivering smart urban mobility: procurement data, discretion and expertise', in M Finck, M Lamping, V Moscon & H Richter (eds), Smart Urban Mobility – Law, Regulation, and Policy, MPI Studies on Intellectual Property and Competition Law (Berlin, Springer, 2020) forthcoming.

Litigation in Spanish railroad electrification cartel highlights further inadequacies of regulation of bid rigger exclusion

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In a new episode of the Spanish sainete of the railroad electrification cartel (see here for an overview), it has now emerged that one of the companies affected by the exclusion ground (prohibición de contratar) declared in the resolution of the Spanish National Commission on Markets and Competition (CNMC) of 14 March 2019 subsequently secured interim measures suspending its effectiveness on 19 July 2019.

The freezing order prevents (Spanish) contracting authorities from relying on the exclusion ground and thus shortens the maximum period of (future) exclusion of the colluding companies, unless the CJEU revises its case law on the time-limit calculation for such grounds established in Vossloh-Laeis (24 October 2018, C-124/17, EU:C:2018:855). The decision also highlights issues concerning the cross-border effects of litigation on exclusion grounds. In this follow-up post, I discuss these two issues.

The interim measures decision

Quick recap: it should be stressed that the Spanish transposition of Article 57(4)(d) has resulted in a system whereby the exclusion of economic operators on the basis of previous infringements of competition law is mandatory under Article 71 of Law 9/2017 on Public Sector Procurement (LCSP). However, the scope and duration of such exclusion generates some difficulties, in particular when they are not established in the original decision declaring the infraction and imposing the measure—which is precisely the case of the railroad electrification cartel. In such cases, a further administrative procedure needs to be completed and the scope and duration of the mandatory exclusion (prohibición de contratar) are to be established by decision of the competent Minister.

The effectiveness of the mandatory exclusion ground in the period running from the initial infringement decision and the further Ministerial decision is contested. Two opposing schools of thought exist. One that gives automatic effect to the exclusion ground despite the future specification of its scope and duration, and the opposing view that considers that the measure is incomplete and cannot generate (negative) effects against the sanctioned undertaking until the Ministerial decision is adopted.

The CNMC expressed the first view in its railroad electrification decision, when it stated that ‘regardless of the time limits within which the duration and scope [of the prohibition] must be set [by the Minister of Finance] ... it is possible to identify an automatism in the prohibition of contracting derived from competition law infringements, which derives ope legis or as a mere consequence of the adoption of a decision that declares said infraction, as established in the mentioned Article 71.1.b) of [Law 9/2017]‘ (page 319, own translation full decision available in Spanish).

The Spanish High Court (Audiencia Nacional), in a Judgment of 19 July 2019 (ES:AN:2019:1673A, hat tip to Alfonso Rincón García-Loygorri for posting it on LinkedIn) adopted the same view and recognised that the measure was bound to immediately restrict the affected undertakings’ ability to participate in public tenders. Considering that it is likely that the final decision on the main appeal of the cartel decision arrives after the expiry of the three year maximum duration foreseen for the exclusion ground and that (should the appellant prevail) the effects of such exclusion would be very difficult, if not impossible to correct at that stage, the High Court decided to suspend the effectiveness of the mandatory exclusion ground.

Implications in terms of maximum duration of the exclusion

Quick recap: the CJEU has established that ‘where an economic operator has been engaged in conduct falling within the ground for exclusion referred to in Article 57(4)(d) of that directive, which has been penalised by a competent authority, the maximum period of exclusion is calculated from the date of the decision of that authority‘ (Vossloh Laeis, above, para 42).

I criticised the CNMC for creating legal uncertainty by not establishing the scope and duration of the exclusion ground in its initial decision. I argued that the CNMC knew or should have known that, as a matter of directly applicable EU law, de facto the maximum exclusion period can run for three years, up to 14 March 2022. Therefore, by referring the file to the Minister and creating legal uncertainty as to the interim effects of the prohibition to contract with a yet to be specified scope and duration, the CNMC actually bought the competition infringers time and created a situation where any finally imposed prohibition to contract is likely to last for much less than the maximum three years.

The High Court’s Judgment raises the same criticisms. While the High Court explicitly took into account the fact that the undertakings could find themselves in a position of not being easily compensated for the undue exclusion from public tenders in case of prevailing in their appeal of the CNMC decision, the High Court ignored that its freezing order will create the reverse effect in case the appeal is dismissed. By preventing (Spanish) contracting authorities from excluding the competition infringers from tenders for an indefinite period starting on 19 July 2019, the High Court has created the risk that the undertakings are never excluded from public tenders because such exclusion is time barred by the time the CNMC decision becomes final—which does not solely depend on the outcome of the High Court’s proceedings, but is subject to a potential further appeal to the Supreme Court.

This highlights once again the inadequacy—or, at least, partiality—of the CJEU Vossloh criterion that the maximum period of exclusion starts running at the time of adoption of the initial infringement decision. It seems clear that, where that decision is contested and, in particular, where interim measures are obtained to freeze its effects—the maximum period of exclusion needs to be calculated taking that into account. Otherwise, the simple fact of litigating buys competition infringers immunity from the debarment system foreseen in Directive 2014/24/EU and thus excludes its effet utile. That cannot be right.

Territoriality of effects

The new episode of the Spanish sainete also raises questions concerning the cross-border effects of the CNMC decision. While Spanish contracting authorities are effectively enjoined from giving effect to the mandatory exclusion ground, the situation is by no means necessarily the same in other EU/EEA jurisdictions. Non-Spanish contracting authorities could (justifiably) be tempted to apply domestic mandatory or discretionary exclusion grounds based on the fact that the relevant undertakings were sanctioned for bid rigging by the CNMC. This could be the case whether they are aware or not of the High Court Judgment, in particular where they have discretion in this matter.

Should any such decision be challenged, the issue should make its way to the CJEU, which would have a hard time finding ways of squaring this practical difficulty with the differentiated treatment that Art 57 of Directive gives to grounds based on a ‘conviction by final judgment‘ (Art 57(1)) and those based on decisions and judgments not subjected to that finality requirement (notably, Art 57(4)), as well as with the self-imposed constraint of the way the maximum time-limit is calculated as per Vossloh.

Once again, we are yet to see the final act of this sainete…

Two related comments on the Fosen-Linjen saga

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**This post is only for enthusiasts of the regulation of procurement damages out there**

You may have missed it (though being an enthusiast, you probably didn’t) but, in the middle of the summer, the EFTA Court U-turned in its Fosen-Linjen II Judgment by stressing that ‘Article 2(1)(c) of the Remedies Directive does not require that any breach of the rules governing public procurement in itself is sufficient to award damages’ (see here).

Notoriously, this was a 180° move away from its earlier Fosen-Linjen I Judgment, where it had controversially stated that ‘A simple breach of public procurement law is in itself sufficient to trigger the liability of the contracting authority … pursuant to Article 2(1)(c) of Directive 89/665/EEC‘ (see here and here and, for extended discussion, A Sanchez-Graells, ‘You Can’t Be Serious: Critical Reflections on the Liability Threshold for Damages Claims for Breach of EU Public Procurement Law after the EFTA Court’s Fosen-Linjen Opinion’ (2018) 1(1) Nordic Journal of European Law 1-23).

The Fosen-Linjen saga deserves careful analysis and we are putting together a special issue of the European Procurement & Public Private Partnership Law Review that will provide complementary perspectives from EEA, Norwegian, EU, comparative and fundamental rights law. I have also prepared a longer case note for another law review. In case they are of interest, I have made drafts of both of those available on SSRN. Some overlap was unavoidable, so please read selectively!

  • Sanchez-Graells, Albert, Liability threshold for damages in public procurement: The EFTA Court’s Fosen-Linjen Saga (September 17, 2019). Available at SSRN: https://ssrn.com/abstract=3455222.

  • Sanchez-Graells, Albert, The EFTA Court’s Fosen-Linjen saga on the liability threshold for damages claims for breach of EU public procurement law: a there and back again walk (September 16, 2019). To be published in a forthcoming special issue of the European Procurement & Public Private Partnership Law Review. Available at SSRN: https://ssrn.com/abstract=3455213.

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

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

Digitalisation of procurement - background and goals

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

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

Directive 2014/24/EU and procurement digitalisation

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

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

State of the art at Member State level

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

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

Concerns and opportunities in the digitalisation of procurement

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

Corruption

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

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

SME participation

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

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

Blockchain-based and algorithmic tools

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

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

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

Competition

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

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

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

Conclusions

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

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

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Guest blogger

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

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

The Emergence of Trans-EU Collaborative Procurement: A 'Living Lab' for European Public Law

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I have uploaded a new working paper on SSRN: ‘The Emergence of Trans-EU Collaborative Procurement: A “Living Lab” for European Public Law’ (March 14, 2019) https://ssrn.com/abstract=3392228. Its abstract is as follows:

Trans-EU collaborative procurement is a fertile ‘living lab’ for the observation, theorisation and critical assessment of developments in European public law. This paper maps the emergence of this novel type of cross-border administrative collaboration and scrutinises the new rules of Directive 2014/24/EU, which evidence the tension between promoting economic co-operation across borders within the internal market and the concern to respect the Member States’ administrative autonomy. The paper critically assesses the EU legislative competence in this area, extracts consequences for balancing trans-EU collaboration with ‘mandatory public law requirements’ at Member State level and proposes minimum functional guarantees to be expected in the implementation of trans-EU collaborative procurement.

Reflecting on data-driven and digital procurement governance through two elephant tales

Elephants in a 13th century manuscript.  THE BRITISH LIBRARY/ROYAL 12 F XIII

Elephants in a 13th century manuscript. THE BRITISH LIBRARY/ROYAL 12 F XIII

I have uploaded to SSRN the new paper ‘Data-driven and digital procurement governance: Revisiting two well-known elephant tales‘ (21 Aug 2019), which I will present at the Annual Conference of the IALS Information Law & Policy Centre on 22 November 2019.

The paper condenses my current thoughts about the obstacles for the deployment of data-driven digital procurement governance due to a lack of reliable quality procurement data sources, as well as my skepticism about the potential for blockchain-based solutions, including smart contracts, to have a significant impact in public procurement setting where the public buyer is extremely unlikely to give up centralised control of the procurement function. The abstract of the paper is as follows:

This paper takes the dearth of quality procurement data as an empirical point of departure to assess emerging regulatory trends in data-driven and digital public procurement governance and, in particular, the European Commission’s ambition for the single digital procurement market. It resorts to two well-known elephant tales to send a message of caution. It first appeals to the image of medieval bestiary elephants to stress the need to develop a better data architecture that reveals the real state of the procurement landscape, and for the European Commission to stop relying on bad data in the Single Market Scoreboard. The paper then assesses the promises of blockchain and smart contracts for procurement governance and raises the prospect that these may be new white elephants that do not offer significant advantages over existing sophisticated databases, or beyond narrow back-office applications—which leaves a number of unanswered questions regarding the desirability of their implementation. The paper concludes by advocating for EU policymakers to concentrate on developing an adequate data architecture to enable digital procurement governance.

If nothing else, I hope the two elephant tales are convincing.

New working paper on EU Public Procurement Policy and the Fourth Industrial Revolution

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I have submitted a paper to the call for papers of the Annual EU Law and Policy Conference ‘EU Law in the era of the Fourth Industrial Revolution’ that will take place in January 2020 (the CfP is still open until 8 September 2019, in case you are interested too).

The theme of the conference invites a reflection on the dual role of the EU as a Regulatory and Industrial ‘State’, so I have put together some thoughts on recent trends in EU procurement policy from that perspective in a new SSRN working paper: ‘EU Public Procurement Policy and the Fourth Industrial Revolution: Pushing and Pulling as One?‘ (6 Aug 2019). The abstract of the paper is as follows:

Innovation in digital technologies is triggering a variety of regulatory and policy responses by the EU. Fostering innovation is at the core of the EU’s industrial strategy and public procurement is becoming one of its main tools. The EU has reactivated its efforts to promote (digital) innovation procurement and is harnessing procurement market access as a trade defence for its innovation industry. The EU is clearly trying to use its buying power as an innovation pull to increase the readiness of the EU’s economy for the fourth industrial revolution. However, this effort is somehow constrained by the Member States’ diverging approaches and levels of engagement.

At the same time, innovative digital technologies hold the promise of a significant impact in the governance and practice of public procurement, and the EU is pushing for digitalisation as a lever to improve public services and to facilitate data analysis experimentation. However, a much-delayed and patchy implementation of eProcurement in most Member States and an inconsistent and timid approach to the regulation of public procurement data stand in the way of a true revolution and can prevent the public sector from leading by example.

In this paper, I reflect on the tensions inherent to this dual use of public procurement as an innovation pull through market power and trade leverage, and as a push for the digitalisation of procurement in the EU, as well as on the tensions between EU and Member State responses.

This is still very much an exploratory draft, so I would welcome comments and feedback, as I plan to revise the paper if it is accepted for the conference.

Bid rigging conspiracy in railroad electrification works: A very Spanish 'sainete'

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A case of bid rigging in works contracts for high-speed and conventional railroad electrification in Spain evidences a number of shortcomings in the domestic transposition of the 2014 rules on discretionary exclusion of competition law offenders from public procurement tenders, as well as some dysfunctionalities of their interpretation by the Court of Justice of the European Union (CJEU) in its Judgment of 24 October 2018 in Vossloh Laeis, C-124/17, EU:C:2018:855. The unilateral price adjustment of live contracts sought by the main victim of the cartel, the Spanish rail network administrator ADIF comes to raise very significant issues on the limits to the ‘self-protection’ (or private justice) for contracting authorities that are victims of bid rigging. In this post, I point to the main issues that puzzle me in this very Spanish sainete. I am sure there will be plenty debate in Spanish legal circles after the holidays…

Legal background: EU level: Art 57(4)(c) and (d) of Directive 2014/24/EU

As is well known, Article 57(4) of Directive 2014/24/EU establishes discretionary grounds for the exclusion of economic operators from public procurement tenders. In relation to economic operators that have breached competition law, there are two relevant grounds.

First, Art 57(4)(c) foresees the possibility of exclusion ‘where the contracting authority can demonstrate by appropriate means that the economic operator is guilty of grave professional misconduct, which renders its integrity questionable‘. This was interpreted by the CJEU as covering entities that had been sanctioned for breaches of competition law in relation to the earlier rules of Directive 2004/18/EC (Art 45(2)(d)) as an instance of their being ‘guilty of grave professional misconduct proven by any means which the contracting authorities can demonstrate’. The CJEU established in unambiguous terms that ‘the commission of an infringement of the competition rules, in particular where that infringement was penalised by a fine, constitutes a cause for exclusion under Article 45(2)(d) of Directive 2004/18’ in its Judgment of 18 December 2014 in Generali-Providencia Biztosító, C-470/13, EU:C:2014:2469 (para 35).

Second, Art 57(4)(d) allows for the exclusion ‘where the contracting authority has sufficiently plausible indications to conclude that the economic operator has entered into agreements with other economic operators aimed at distorting competition‘. The relationship between both exclusion grounds relating to competition law infringements is somewhat debated. I have argued elsewhere that Art 57(4)(c) should still be used as the legal basis for the exclusion of economic operators that have already been sanctioned for previous bid rigging offences, whereas Art 57(4)(d) creates an additional ground for exclusion based on indicia of contemporary collusion. For details, see A Sanchez-Graells, Public Procurement and the EU Competition Rules (2nd ed, Hart, 2015) 296-301.

Of course, discretionary exclusion on grounds of infringements of competition law can be modulated by the rules on self-cleaning in Art 57(6) Directive 2014/24/EU. It is also important to add that these discretionary exclusion grounds can be applied for a period not exceeding three years from the date of the relevant event, as per Art 57(7) Directive 2014/24/EU. The CJEU has interpreted the ‘relevant event’ in this context, and clarified that ‘where an economic operator has been engaged in conduct falling within the ground for exclusion referred to in Article 57(4)(d) of that directive, which has been penalised by a competent authority, the maximum period of exclusion is calculated from the date of the decision of that authority‘ (Vossloh Laeis, above, para 42)

Legal background: domestic level: the transposition by Law 9/2017

The transposition into Spanish law of these provisions has introduced some important modifications.

First, these exclusion grounds have been made mandatory under Article 71 of Law 9/2017 on Public Sector Procurement, as discussed by P Valcarcel, ‘Transposition of Directive 2014/24/EU in Spain: between EU demands and national peculiarities‘ in S Treumer & M Comba (eds), Modernising Public Procurement: The Member States Approach, vol. 8 European Procurement Law Series (Edward Elgar, 2018) 236-237. For a broader description of the Spanish system of mandatory exclusion (ie through ‘prohibiciones de contratar,’ or prohibitions on contracting), see A Sanchez-Graells, 'Qualification, Selection and Exclusion of Economic Operators under Spanish Public Procurement Law' in M Burgi, S Treumer & M Trybus (eds), Qualification, Selection and Exclusion in EU Procurement, vol. 7 European Procurement Law Series (Copenhagen, DJØF, 2016) 159-188.

Second, the grounds in Art 57(4)(c) and (d) of Directive 2014/24/EU have been transposed in a seemingly defective manner. Art 57(4)(d) has been omitted and Art 57(4)(c) is reflected in Art 71(1)(b) of Law 9/2017, according to which there is a prohibition to enter into a contract with an ‘economic operator … guilty of grave professional misconduct, which renders its integrity questionable, in matters such as market discipline, distortion of competition … in accordance with current regulations’ (own translation from Spanish).

Thirdly, Art 72(2) of Law 9/2017 foresees two ways in which the mandatory exclusion ground based on a prior firm sanction for competition infringements can operate. On the one hand, the prohibition to enter into a contract with competition law infringers ‘will be directly appreciated by the contracting bodies when the judgment or administrative resolution [imposing the sanction] had expressly established its scope and duration, and will be in force during the term indicated therein’ (own translation from Spanish). On the other hand—and logically, as a subsidiary rule—it is also foreseen that ‘In the event that the judgment or administrative resolution does not contain a ruling on the scope or duration of the prohibition to contract … the scope and duration of the prohibition shall be determined by means of a procedure instructed for this purpose, in accordance with the provisions of this article’ (own translation from Spanish). Such procedure is rather convoluted and involves a decision of the Minister of Finance on the advice of the State Consultative Board on Public Procurement.

Fourthly, and in an extreme pro-leniency fashion, Art 72(5)II of Law 9/2017 has established that the prohibition to enter into contracts will not apply to economic operators that have self-cleaned and, in particular, to those that have obtained leniency in the context of competition enforcement procedures. That is, there is an exemption from the otherwise applicable exclusion ground based on infringements of competition law for undertakings that demonstrate the ‘adoption of appropriate technical, organisational and personnel measures to avoid the commission of future administrative infractions, which include participating in the clemency program in the field of competition law‘ (own translation from Spanish).

It is also odd that the provision does not require economic operators to have ‘clarified the facts and circumstances in a comprehensive manner by actively collaborating with the investigating authorities‘, which was the main issue at stake in the Vossloh Laeis litigation.

A controversial decision by the Spanish National Commission on Markets and Competition (CNMC)

On 14 March 2019, the CNMC adopted a decision against 15 construction companies finding them responsible for a long-lasting bid rigging scheme to manipulate the tenders for public contracts works relating to different aspects of high-speed and conventional railroad electrification (full decision available in Spanish). One of the novel aspects of the decision is that the CNMC explicitly activated the prohibition to enter into contracts against the competition infringers. However, the CNMC did so in very peculiar manner.

The oddity of the decision mainly lies on the fact that CNMC decided not to establish the scope and duration of the prohibition to contract, but simply to refer the case to the State Consultative Board on Public Procurement (see pages 317-320). This was the object of criticism in a dissenting vote by Councillor María Pilar Canedo, who stressed that the CNMC should have set the scope and duration of the prohibition to contract in its decision (pages 366-370). The position of the CNMC is certainly difficult to understand.

On the one hand, the CNMC stressed that ‘regardless of the time limits within which the duration and scope [of the prohibition] must be set [by the Minister of Finance] ... it is possible to identify an automatism in the prohibition of contracting derived from competition law infringements, which derives ope legis or as a mere consequence of the adoption of a decision that declares said infraction, as established in the mentioned Article 71.1.b) of [Law 9/2017]‘ (page 319). On the other hand, however, the CNMC decided to (potentially) kick the effectiveness of such prohibition into the long grass by not establishing its scope and duration in its decision—and explicitly saying so (unnecessarily…). No wonder, contracting authorities will have some difficulty applying the automaticity of a prohibition which time and scope are yet to be determined.

Moreover, the CNMC was aware of the CJEU decision in Vossloh Laeis (above), to which it referred to in its own decision (in a strange manner, though). In that regard, the CNMC knew or should have known that, as a matter of directly applicable EU law, de facto the maximum exclusion period can run for three years, up to 14 March 2022. Therefore, by referring the file to the Minister of Finance via the State Consultative Board on Public Procurement and creating legal uncertainty as to the interim effects of a seemingly prohibition to contract with a yet to be specified scope and duration, the CNMC actually bought the competition infringers time and created a situation where any fianlly imposed prohibition to contract is likely to last for much less than the maximum three years.

The (for now) final twist: ADIF takes justice in its own hands

As if this was not enough, according to the Spanish press (see the main story in El Pais), the main victim of the cartel—the Spanish rail network administrator, ADIF—has now decided to take justice in its own hands.

According to the report, ADIF has written to the relevant companies announcing claims for damages—which is the ordinary reaction that could be expected. However, it has also taken the decision of demanding an anticipation of the compensation from those companies with which it has ‘live’ contracts, to which it has demanded a 10% price reduction. What is more, ADIF has decided to withhold 10% of the contractual price and to deposit in an escrow account before a notary, as a sort of sui generis self-created interim measure to ensure some compensation for the damages suffered from the cartel. The legal issues that this unilateral act generates are too many to list here. And these will surely be the object of future litigation.

What I find particularly difficult to understand is that, in contrast with this decisively aggressive approach to withholding payment, ADIF has awarded contracts to some of the competition infringers after the publication of the CNMC decision. And not a small number of contracts or for little amounts. In fact, ADIF has awarded over 280 contracts for a total value close to €300 million.

Thus, ADIF has largely carried out its business as usual in the award of public works contracts, both ignoring the rather straightforward argument of automaticity of the prohibition to contract hinted at by the CNMC— though based on a convoluted and rather strained interpretation of domestic law (Art 72(2) Law 9/2017)—and, more importantly, the discretionary ground for exclusion in Art 57(4)(d) of Directive 2014/24/EU.

There will certainly be some more scenes in this sainete…


Some resources on procurement debarment from a global perspective can help clarify issues with eu law

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There is no question that one of the key aspects in seeking to ensure the integrity of public procurement procedures and the legitimacy of the corresponding expenditure of public funds requires contracting authorities to exclude (suspend or debar, depending on terminology) unreliable companies whose professional integrity prevents them from doing business with the public sector.

The topic of exclusion (and self-cleaning) of unreliable contractors continues to cause some difficulties after the implementation of the 2014 EU Public Procurement Package, where it featured as an area of significant legal reform—as discussed at length in A Sanchez-Graells, 'Exclusion, Qualitative Selection and Short-listing', in F Lichère, R Caranta & S Treumer (eds), Modernising Public Procurement. The New Directive, vol. 6 European Procurement Law Series (Copenhagen, DJØF, 2014) 97-129; and in A Sanchez-Graells, L Butler and P Telles, 'Exclusion and Qualitative Selection of Economic Operators under Public Procurement Procedures: A Comparative View on Selected Jurisdictions', in M Burgi, S Treumer & M Trybus (eds), Qualification, Selection and Exclusion in EU Procurement, vol. 7 European Procurement Law Series (Copenhagen, DJØF, 2016) 245-274.

For example, in Spain, and amidst doubts as to the fitness for purpose of the 2017 implementation of the 2014 EU rules, the National Competition and Markets Commission has sent waves of concern after two recent decisions, where it adopted a debarment decision (prohibición de contratar) against companies that had engaged in bid rigging but refused to determine the duration of the debarment, thus passing the hot potato on to the central national register of public contractors. Given the recent clarification by the CJEU that the exclusion period for infringements of competition law starts to run at the time of the adoption of the relevant administrative decision (see Vossloh Laeis, C-124/17, EU:C:2018:855), the situation is resulting in a (potential) implicit reduction of the maximum debarment period due to difficult to understand competence and procedural issues that are, let’s say it, rather parochial.

No doubt, this is just an example of many more complicated situations derived from the limited experience with the rules in the new Directive, which understanding is not always as full as would be desirable. In this context, there are two recent contributions to global literature that can help us reflect on the (mal)functioning of the proto-systems developed in some Member States after the implementation of the EU rules and (why not?) rethink them and improve them.

One of these contributions is the recent World Bank report on the pilot project ‘A Global View of Debarment: Understanding Exclusion Systems Around the World‘ (April 2019), which provides useful comparative information on 11 jurisdictions (including the EU and some of the Member States, such as Germany, Italy, Spain or the UK).

Another, more substantive contribution can be found in the recent paper by Christopher R Yukins and Michal Kania, 'Suspension and Debarment in the U.S. Government: Comparative Lessons for the EU’s Next Steps in Procurement' (2019) 19(2) UrT 47-73. In this paper, Yukins and Kania rely on the US’ extensive experience in suspension and debarment of government contractors to propose three very specific areas of improvement for European systems: ‘a broader reliance on corporate compliance among contractors, centralizing authority over the exclusion of contractors, and the use of administrative agreements and independent monitors as an alternative to debarment’.

As they stress, the two first proposals are already broadly aligned with (best) practice in some Member States. Their proposal to use administrative agreements and independent monitors is certainly worth pondering, although its fit with some administrative law traditions may be slightly difficult to square.

EFTA Court reverses position on liability threshold for procurement damages (Fosen-Linjen II, E-7/18)

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In its Judgment of 1 August 2019 in Fosen-Linjen AS, supported by Næringslivets Hovedorganisasjon (NHO) v AtB AS (E-7/18, Fosen-Linjen II), the EFTA Court has remarkably reversed its earlier position on the liability threshold for procurement damages claims, which it had previously established in its Judgment of 31 October 2017 in (E-16/16, Fosen-Linjen I ).

I had strongly criticised the original Fosen-Linjen I Judgment in this blog (here and here), at a seminar at the University of Bergen and, in extended detail, in A Sanchez-Graells, ‘You Can’t Be Serious: Critical Reflections on the Liability Threshold for Damages Claims for Breach of EU Public Procurement Law After the EFTA Court’s Fosen-Linjen Opinion' (2018) 1(1) Nordic Journal of European Law 1-23.

Therefore, I am truly glad to see this outcome of the Norwegian Supreme Court’s (creative) referral of the case to the EFTA Court for a second opinion.

It will be recalled that, in Fosen-Linjen I, the EFTA Court controversially found that

A simple breach of public procurement law is in itself sufficient to trigger the liability of the contracting authority to compensate the person harmed for the damage incurred, pursuant to Article 2(1)(c) of Directive 89/665/EEC, provided that the other conditions for the award of damages are met, including, in particular, the condition of a causal link (E-16/16, para 82).

In a 180-degree U-turn, in Fosen-Linjen II, the EFTA Court has now rather established that

... Article 2(1)(c) of the Remedies Directive does not require that any breach of the rules governing public procurement in itself is sufficient to award damages for the loss of profit to persons harmed by an infringement of EEA public procurement rules (E-7/18, para 121).

To be sure, this reversal is likely to generate further commentary (we are thinking of a special issue to collect some different views, so stay tuned) but my hot take is that with the Fosen-Linjen II Judgment, the EFTA Court has corrected the excesses of the earlier Fosen-Linjen I approach and (re)aligned EEA with EU law in the area of liability in damages for breaches of public procurement law.

Some quick thoughts on blockchain use cases in procurement

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Interest in the use of blockchain in the context of public procurement keeps rising by the day. It is hard to find a country where this is not a topic of discussion, although there seems to be a wide spectrum from enthusiastic and proactive approaches (eg in the UK, with the promotion of procurement-centred blockchain use cases by the All-Party Parliamentary Group on Blockchain) to more skeptical and wait-and-see approaches (in Scandinavian countries, eg Denmark or Sweden).

At the same time as some theoretical work starts to emerge—see eg Sope Williams-Elegbe’s exploratory inaugural lecture and Raquel Carvalho’s (not always very clear or accurate) recent paper—the need to get some practical insights in order to support theoretical speculation becomes all-important. However, accessing this information can be a little tricky, in particular if local or regional projects are only publicised in languages other than English.

So we organised a couple of webinars on the topic and asked participants to pool together any use cases they know of (and thanks to all of them for their contributions). In rough terms (and with apologies for any over-simplification), it looks like there are three main areas of experimentation:

  1. Development of proof-of-concept / pilot projects seeking to tackle some parts of the procurement process, such as (a) initiatives on exclusion/selection of tenderers in Costa Rica and the Basque Country (Spain) and (b) initiatives on tender submission and evaluation by smart contracts in Aragon (Spain)

  2. Development of proof-of-concept / pilot projects seeking to carry out the entire procurement process on the blockchain, such as in Mexico (federal level) and Cape Town (South Africa)

  3. Development of ‘blockchain-like’ database approaches that seek to replicate some of the main features of a blockchain (in terms of data de-centralisation and tamper-evidence features), such as some projects run by the EBRD

We also learnt about other Govtech / Regtech applications of blockchain, such as the Finnish initiatives to provide bank cards to refugees and to centralise the exchange of information on mandatory motor vehicle insurance. There are also other well-known projects around property registers (eg for land and IP).

On the whole, though, it seems like the most promising potential applications of blockchain are those linked to information management/storage and the transfer of digital assets, and that there is more potential in those cases where there is no existing (working) database for their management. The difficulties of implementing blockchain-based solutions for not-super-simple procurement and off-chain aspects of procurement seem too high to overcome any time soon.

It also seems like that there is a certain tension between the promise of transparency associated with blockchain infrastructure and the other attributes of the technology (mainly, tamper-evidence qualities), at least where the design of the blockchain is heavily permissioned and centralised. Perhaps as a very European issue (but also more broadly), compliance with data protection rules also comes up as a legal hurdle in every other project.

If you know of any other blockchain use cases in procurement, or if you have any other views on the potential of this technology for procurement governance, please comment on this post or get in touch: a.sanchez-graells@bristol.ac.uk

New paper: ‘Screening for Cartels’ in Public Procurement: Cheating at Solitaire to Sell Fool’s Gold?

I have uploaded a new paper on SSRN, where I critically assess the bid rigging screening tool published by the UK’s Competition and Markets Authority in 2017. I will be presenting it in a few weeks at the V Annual meeting of the Spanish Academic Network for Competition Law. The abstract is as follows:

Despite growing global interest in the use of algorithmic behavioural screens, big data and machine learning to detect bid rigging in procurement markets, the UK’s Competition and Markets Authority (CMA) was under no obligation to undertake a project in this area, much less to publish a bid-rigging algorithmic screening tool and make it generally available. Yet, in 2017 and under self-imposed pressure, the CMA released ‘Screening for Cartels’ (SfC) as ‘a tool to help procurers screen their tender data for signs of illegal bid-rigging activity’ and has since been trying to raise its profile internationally. There is thus a possibility that the SfC tool is not only used by UK public buyers, but also disseminated and replicated in other jurisdictions seeking to implement ‘tried and tested’ solutions to screen for cartels. This paper argues that such a legal transplant would be undesirable.

In order to substantiate this main claim, and after critically assessing the tool, the paper tracks the origins of the indicators included in the SfC tool to show that its functionality is rather limited as compared with alternative models that were put to the CMA. The paper engages with the SfC tool’s creation process to show how it is the result of poor policy-making based on the material dismissal of the recommendations of the consultants involved in its development, and that this has resulted in the mere illusion that big data and algorithmic screens are being used to detect bid rigging in the UK. The paper also shows that, as a result of the ‘distributed model’ used by the CMA, the algorithms underlying the SfC tool cannot improved through training, the publication of the SfC tool lowers the likelihood of some types of ‘easy to spot cases’ by signalling areas of ‘cartel sophistication’ that can bypass its tests and that, on the whole, the tool is simply not fit for purpose. This situation is detrimental to the public interest because reliance in a defective screening tool can create a false perception of competition for public contracts, and because it leads to immobilism that delays (or prevents) a much-needed engagement with the extant difficulties in developing a suitable algorithmic screen based on proper big data analytics. The paper concludes that competition or procurement authorities willing to adopt the SfC tool would be buying fool’s gold and that the CMA was wrong to cheat at solitaire to expedite the deployment of a faulty tool.

The full citation of the paper is: Sanchez-Graells, Albert, ‘Screening for Cartels’ in Public Procurement: Cheating at Solitaire to Sell Fool’s Gold? (May 3, 2019). Available at SSRN: https://ssrn.com/abstract=3382270

Response to UK Cabinet Office consultation on 'Social Value in Government Contracts'

The UK Cabinet Office is currently consulting on its draft policy on ‘Social Value in Government Contracts’ and will be receiving submissions until 10 June 2019. Below is my contribution to the public consultation, which will probably make more sense if read after the consultation paper. Comments and feedback most welcome.

Further thoughts on data and policy indicators a-propos two recent papers on procurement regulation & competition: comments re (Tas: 2019a&b)

The EUI Robert Schuman Centre for Advanced Studies’ working papers series has two interesting recent additions on the economic analysis of procurement regulation and its effects on competition, efficiency and value for money. Both papers are by BKO Tas.

The first paper: ‘Bunching Below Thresholds to Manipulate Public Procurement’ explores the effects of a contracting authority’s ‘bunching strategy’ to seek to exercise more discretion by artificially estimating the value of future contracts just below the thresholds that would trigger compliance with EU procurement rules. This paper is relevant to the broader discussion on the usefulness and adequacy of current EU (and WTO GPA) value thresholds (see eg the work of Telles, here and here), as well as on the regulatory decisions that EU Member States face on whether to extend the EU rules to ‘below-threshold’ contracts.

The second paper: ‘Effect of Public Procurement Regulation on Competition and Cost-Effectiveness’ uses the World Bank’s ‘Benchmarking Public Procurement’ quality scores to empirically test the positive effects of improved regulation quality on competition and value for money, measured as increases in the number of bidders and the probability that procurement price is lower than estimated cost. This paper is relevant in the context of recent discussions about the usefulness or not of procurement benchmarks, and regarding the increasing concern about reduced number of bids in EU-regulated public tenders.

In this blog post, I reflect on the methodology and insights of both papers, paying particular attention to the fact that both papers build on datasets and/or indexes (TED, the WB benchmark) that I find rather imperfect and unsuitable for this type of analysis (regarding TED, in the context of the Single Market Scoreboard for Public Procurement (SMPP) that builds upon it, see here; regarding the WB benchmark, see here). Therefore, not all criticisms below are to the papers themselves, but rather to the distortions that skewed, incomplete or misleading data and indicators can have on more refined analysis that builds upon them.

Bunching Below Thresholds to Manipulate Procurement (Tas: 2019a)

It is well-known that the EU procurement rules are based on a series of jurisdictional triggers and that one of them concerns value thresholds—currently regulated in Arts 4 & 5 of Directive 2014/24/EU. Contracts with an estimated value above those thresholds are subjected to the entire EU procurement regulation, whereas contracts of a lower value are solely subjected to principles-based requirements where they are of ‘cross-border interest’. Given the obvious temptation/interest in keeping procurement shielded from EU requirements, the EU Directives have included an anti-circumvention rule aimed at preventing Member States from artificially splitting contracts in order to keep their award below the relevant jurisdictional thresholds (Art 5(3) Dir 2014/24). This rule has been interpreted expansively by the Court of Justice of the European Union (see eg here).

‘Bunching Below Thresholds to Manipulate Public Procurement’ examines the effects of a practice that would likely infringe the anti-circumvention rule, as it assesses a strategy of ‘bunching estimated costs just below thresholds’ ‘to exercise more discretion in public procurement’. The paper develops a methodology to identify contracting authorities ‘that have higher probabilities of bunching estimated values below EU thresholds’ (ie manipulative authorities) and finds that ‘[m]anipulative authorities have significantly lower probabilities of employing competitive procurement procedure. The bunching manipulation scheme significantly diminishes cost-effectiveness of public procurement. On average, prices of below threshold contracts are 18-28% higher when the authority has an elevated probability of bunching.’ These are quite striking (but perhaps not surprising) results.

The paper employs a regression discontinuity approach to determine the likelihood of bunching. In order to do that, the paper relies on the TED database. The paper is certainly difficult to read and hardly intelligible for a lawyer, but there are some issues that raise important questions. One concerns the authors’ (mis)understanding of how the WTO GPA and the EU procurement rules operate, in particular when the paper states that ‘Contracts covered by the WTO GPA are subject to additional scrutiny by international organizations and authorities (sic). Accordingly, contracts covered by the WTO GPA are less likely to be manipulated by EU authorities’ (p. 12).  This is simply an acritical transplant of considerations made by the authors of a paper that examined procurement in the Czech Republic, where the relevant threshold between EU covered and non-EU covered procurement would make sense. Here, the distinction between WTO GPA and EU-covered procurement simply makes no sense, given that WTO GPA and EU thresholds are coordinated. This alone raises some issues concerning the tests designed by the author to check the robustness of the hypothesis that bunching leads to inefficiency in procurement expenditure.

Another issue concerns the way in which the author equates open procedures to a ‘first price auction mechanism’ (which they are not exactly) and dismisses other procedures (notably, the restricted procedure) as incapable of ensuring value for money or, more likely, as representative of a higher degree of discretion for the contracting authority—which is a highly questionable assumption.

More importantly, I am not sure that the author understood what is in the TED database and, crucially, what is not there (see section 2 of Tas (2019a) for methodology and data description). Albeit not very clearly, the author presents TED as a comprehensive database of procurement notices—ie, as if 100% of procurement expenditure by Member States was recorded there. However, in the specific context of bunching below thresholds, the TED database is very likely to be incomplete.

Contracting authorities tendering contracts below EU thresholds are under no obligation to publish a contract notice (Art 49 Dir 2014/24). They could publish voluntarily, in particular in the form of a voluntary ex ante transparency (VEAT) notice, but that would make no sense from the perspective of a contracting authority that seeks to avoid compliance with EU rules by bunching (ie manipulating) the estimated contract value, as that would expose it to potential litigation. Most authorities that are bunching their procurement needs (or, in simple terms) avoiding compliance with the EU rules will not be reflected in the TED database at all, or will not be identified by the methodology used by Tas (2019a), as they will not have filed any notices for contracts below thresholds.

How is it possible that TED includes notices regarding contracts below the EU thresholds, then? Well, this is anybody’s guess, but mine is that a large proportion of those notices will be linked to either countries with a tradition of full transparency (over-reporting), to contracts where there are any doubts about the potential cross-border interest (sometimes assessed over-cautiously), or will be notices with mistakes, where the estimated value of the contract is erroneously indicated as below thresholds.

Even if my guess was incorrect and all notices for contracts with a value below thresholds were accurate and justified by the existence of a potential cross-border interest, the database cannot be considered complete. One of the issues raised (imperfectly) by the Single Market Scoreboard (indicator [3] publication rate) is the relatively low level of procurement that is advertised in TED compared to the (putative/presumptive) total volume of procurement expenditure by the Member States. Without information on the conditions of the vast majority of contract awards (below thresholds, unreported, etc), any analysis of potential losses of competitiveness / efficiency in public expenditure (due to bunching or otherwise) is bound to be misleading.

Moreover, Tas (2019a) is premised on the hypothesis that procurement below EU thresholds allows for significantly more discretion than procurement above those thresholds. However, this hypothesis fails to recognise the variety of transposition strategies at Member State level. While some countries have opted for less stringent below EU threshold regimes, others have extended the EU rules to the entirety of their procurement (or, perhaps, to contracts up to and including much lower values than the EU thresholds, to the exception of some class of ‘micropurchases’). This would require the introduction of a control that could refine Tas’ analysis and distinguish those cases of bunching that do lead to more discretion and those that do not (at least formally)—which could perhaps distinguish between price effects derived from national-only transparency from those of more legally-dubious maneuvering.

In my view, regardless of the methodology and the math underpinning the paper (which I am in no position to assess in detail), once these data issues are taken into account, the story the paper tries to tell breaks down and there are important shortcomings in its empirical strategy that, in my view, raise significant issues around the strength of its findings—assessed not against the information in TED, but against the (largely unknown, unrecorded) reality of procurement in the EU.

I have no doubt that there is bunching in practice, and that the intuition that it raises procurement costs must be right, but I have serious doubts about the possibility to reliably identify bunching or estimate its effects on the basis of the information in TED, as most culprits will not be included and the effects of below threshold (national) competition only will mostly not be accounted for.

(Good) Regulation, Competition & Cost-Effectiveness (Tas: 2019b)

It is also a very intuitive hypothesis that better regulation should lead to better procurement outcomes and, consequently, that more open and robust procurement rules should lead to more efficiency in the expenditure of public funds. As mentioned above, Tas (2019b) explores this hypothesis and seeks to empirically test it using the TED database and the World Bank’s Benchmarking Public Procurement (in its 2017 iteration, see here). I will not repeat my misgivings about the use of the TED database as a reliable source of information. In this second part, I will solely comment on the use of the WB’s benchmark.

The paper relies on four of the WB’s benchmark indicators (one further constructed by Djankov et al (2017)): the ‘bid preparation score, bid and contract management score, payment of suppliers score and PP overall index’. The paper includes a useful table with these values (see Tas (2019b: Table 4)), which allows the author to rank the countries according to the quality of their procurement regulation. The findings of Tas (2019b) are thus entirely dependent on the quality of the WB’s benchmark and its ability to capture (and distinguish) good procurement regulation.

In order to test the extent to which the WB’s benchmark is a good input for this sort of analysis, I have compared it to the indicator that results from the European Commission’s Single Market Scoreboard for Public Procurement (SMSPP, in its 2018 iteration). The comparison is rather striking …

Source: own elaboration.

Source: own elaboration.

Clearly, both sets of indicators are based on different methodologies and measure relatively different things. However, they are both intended to express relevant regulators’ views on what constitutes ‘good procurement regulation’. In my view, both of them fail to do so for reasons already given (see here and here).

The implications for work such as Tas (2019b) is that the reliability of the findings—regardless of the math underpinning them—is as weak as the indicators they are based on. Likely, plugging the same methods to the SMSPP instead of the WB’s index would yield very different results—perhaps, that countries with very low quality of procurement regulation (as per the SMSPP index) achieve better economic results, which would not be a popular story with policy-makers…  and the results with either index would also be different if the algorithms were not fed by TED, but by a more comprehensive and reliable database.

So, the most that can be said is that attempts to empirically show effects of good (or poor) procurement regulation remain doomed to fail or , in perhaps less harsh terms, doomed to tell a story based on a very skewed, narrow and anecdotal understanding of procurement and an incomplete recording of procurement activity. Believe those stories at your own peril…