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)(d) 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…

Data and procurement policy: some thoughts on the Single Market Scoreboard for public procurement

There is a growing interest in the use of big data to improve public procurement performance and to strengthen procurement governance. This is a worthy endeavour and, like many others, I am concentrating my research efforts in this area. I have not been doing this for too long. However, soon after one starts researching the topic, a preliminary conclusion clearly emerges: without good data, there is not much that can be done. No data, no fun. So far so good.

It is thus a little discouraging to confirm that, as is widely accepted, there is no good data architecture underpinning public procurement practice and policy in the EU (and elsewhere). Consequently, there is a rather limited prospect of any real implementation of big data-based solutions, unless and until there is a significant investment in the creation of a proper data foundation that can enable advanced analysis and policy-making. Adopting the Open Contracting Data Standard for the European Union would be a good place to start. We could then discuss to what extent the data needs to be fully open (hint: it should not be, see here and here), but let’s save that discussion for another day.

What a recent twitter threat has reminded me is that there is a bigger downside to the existence of poor data than being unable to apply advanced big data analytics: the formulation of procurement policy on the basis of poor data and poor(er) statistical analysis.

This reflection emerged on the basis of the 2018 iteration of the Single Market Scoreboard for Public Procurement (the SMSPP), which is the closest the European Commission is getting to data-driven policy analysis, as far as I can see. The SMSPP is still work in progress. As such, it requires some close scrutiny and, in my view, strong criticism. As I will develop in the rest of this post, the SMSPP is problematic not solely in the way it presents information—which is clearly laden by implicit policy judgements of the European Commission—but, more importantly, due to its inability to inform either cross-sectional (ie comparative) or time series (ie trend) analysis of public procurement policy in the single market. Before developing these criticisms, I will provide a short description of the SMSPP (as I understand it).

The Single Market Scoreboard for Public Procurement: what is it?

The European Commission has developed the broader Single Market Scoreboard (SMS) as an instrument to support its effort of monitoring compliance with internal market law. The Commission itself explains that the “scoreboard aims to give an overview of the practical management of the Single Market. The scoreboard covers all those areas of the Single Market where sufficient reliable data are available. Certain areas of the Single Market such as financial services, transport, energy, digital economy and others are closely monitored separately by the responsible Commission services“ (emphasis added). The SMS organises information in different ways, such as by stage in the governance cycle; by performance per Member State; by governance tool; by policy area or by state of trade integration and market openness (the latter two are still work in progress).

The SMS for public procurement (SMSPP) is an instance of SMS by policy area. It thus represents the Commission’s view that the SMSPP is (a) based on sufficiently reliable data, as it is fed from the database resulting from the mandatory publications of procurement notices in the Tenders Electronic Daily (TED), and (b) a useful tool to provide an overview of the functioning of the single market for public procurement or, in other words of the ‘performance’ of public procurement, defined as a measure of ‘whether purchasers get good value for money‘.

The SMSPP determines the overall performance of a given Member States by aggregating a number of indicators. Currently, the SMSPP is based on 12 indicators (it used to be based on a smaller number, as discussed below): [1] Single bidder; [2] No calls for bids; [3] Publication rate; [4] Cooperative procurement; [5] Award criteria; [6] Decision speed; [7] SME contractors; [8] SME bids; [9] Procedures divided into lots; [10] Missing calls for bids; [11] Missing seller registration numbers; [12] Missing buyer registration numbers. As the SMSPP explains, the addition of these indicators results in the measure of ‘overall performance’, which

is a sum of scores for all 12 individual indicators (by default, a satisfactory performance in an individual indicator increases the overall score by one point while an unsatisfactory performance reduces it by one point). The 3 most important are triple-weighted (Single bidder, No calls for bids and Publication rate). This is because they are linked with competition, transparency and market access–the core principles of good public procurement. Indicators 7-12 receive a one-third weighting. This is because they measure the same concepts from different perspectives: participation by small firms (indicators 7-9) and data quality (indicators 10-12).

The most recent snapshot of overall procurement performance is represented in the map below, which would indicate that procurement policy is rather disfunctional—as most EEA countries do not seem to be doing very well.

Source: European Commission, 2018 Single Market Scorecard for Public Procurement (based on 2017 data).

Source: European Commission, 2018 Single Market Scorecard for Public Procurement (based on 2017 data).

In my view, this use of the available information is very problematic: (a) to begin with, because the data in TED can hardly be considered ‘sufficiently reliable‘. The database in TED has problems of various sorts because it is a database that is constructed as a result of the self-declaration of data by the contracting authorities of the Member States, which makes its content very dishomogeneous and difficult to analyse, including significant problems of under-inclusiveness, definitional fuzziness and the lack of filtering of errors—as recognised, repeatedly, in the methodology underpinning the SMSPP itself. This should make one take the results of the SMSPP with more than a pinch of salt. However, these are not all the problems implicit in the SMSPP.

More importantly: (b) the definition of procurement performance and the ways in which the SMSPP seeks to assess it are far from universally accepted. They are rather judgement-laden and reflect the policy biases of the European Commission without making this sufficiently explicit. This issue requires further elaboration.

The SMSPP as an expression of policy-making: more than dubious judgements

I already criticised the Single Market Scoreboard for public procurement three years ago, mainly on the basis that some of the thresholds adopted by the European Commission to establish whether countries performed well or poorly in relation to a given indicator were not properly justified or backed by empirical evidence. Unfortunately, this remains the case and the Commission is yet to make a persuasive case for its decision that eg, in relation to indicator [4] Cooperative procurement, countries that aggregate 10% or more of their procurement achieve good procurement performance, while countries that aggregate less than 10% do not.

Similar issues arise with other indicators, such as [3] Publication rate, which measures the value of procurement advertised on TED as a proportion of national Gross Domestic Product (GDP). It is given threshold values of more than 5% for good performance and less than 2.5% for poor performance. The Commission considers that this indicator is useful because ‘A higher score is better, as it allows more companiesto bid, bringing better value for money. It also means greater transparency, as more information is available to the public.’ However, this is inconsistent with the fact that the SMSPP methodology stresses that it is affected by the ‘main shortcoming … that it does not reflect the different weight that government spending has in the economy of a particular’ Member State (p. 13). It also fails to account for different economic models where some Member States can retain a much larger in-house capability than others, as well as failing to reflect other issues such as fiscal policies, etc. Moreover, the SMSPP includes a note that says that ‘Due to delays in data availability, these results are based on 2015 data (also used in the 2016 scoreboard). However, given the slow changes to this indicator, 2015 results are still relevant.‘ I wonder how is it possible to establishes that there are ‘slow changes’ to the indicator where there is no more current information. On the whole, this is clearly an indicator that should be dropped, rather than included with such a phenomenal number of (partially hidden) caveats.

On the whole, then, the SMSPP and a number of the indicators on which it is based is reflective of the implicit policy biases of the European Commission. In my view, it is disingenuous to try to save this by simply stressing that the SMSPP and its indicators

Like all indicators, however, they simplify reality. They are affected by country-specific factors such as what is actually being bought, the structure of the economies concerned, and the relationships between different tendering options, none of which are taken into account. Also, some aspects of public procurement have been omitted entirely or covered only indirectly, e.g. corruption, the administrative burden and professionalism. So, although the Scoreboard provides useful information, it gives only a partial view of EU countries' public procurement performance.

I would rather argue that, in these conditions, the SMSPP is not really useful. In particular, because it fails to enable analysis that could offer some valuable insights even despite the shortcomings of the underlying indicators: first, a cross-sectional analysis by comparing different countries under a single indicator; second, a trend analysis of evolution of procurement “performance” in the single market and/or in a given country.

The SMSPP and cross-sectional analysis: not fit for purpose

This criticism is largely implicit in the previous discussion, as the creation of indicators that are not reflective of ‘country-specific factors such as what is actually being bought, the structure of the economies concerned, and the relationships between different tendering options’ by itself prevents meaningful comparisons across the single market. Moreover, a closer look at the SMSPP methodology reveals that there are further issues that make such cross-sectional analysis difficult. To continue the discussion concerning indicator [4] Cooperative procurement, it is remarkable that the SMSPP methodology indicates that

[In previous versions] the only information on cooperative procurement was a tick box indicating that "The contracting authority is purchasing on behalf of other contracting authorities". This was intended to mean procurement in one of two cases: "The contract is awarded by a central purchasing body" and "The contract involves joint procurement". This has been made explicit in the [current methodology], where these two options are listed instead of the option on joint procurement. However, as always, there are exceptions to how uniformly this definition has been accepted across the EU. Anecdotally, in Belgium, this field has been interpreted as meaning that the management of the procurement procedure has been outsource[d] (e.g. to a legal company) -which explains the high values of this indicator for Belgium.

In simple terms, what this means is that the data point for Belgium (and any other country?) should have been excluded from analysis. In contrast, the SMSPP presents Belgium as achieving a good performance under this indicator—which, in turn, skews the overall performance of the country (which is, by the way, one of the few achieving positive overall performance… perhaps due to these data issues?).

This should give us some pause before we decide to give any meaning to cross-country comparisons at all. Additionally, as discussed below, we cannot (simply) rely on year-on-year comparisons of the overall performance of any given country.

The SMSPP and time series analysis: not fit for purpose

Below is a comparison of the ‘overall performance’ maps published in the last five iterations of the SMSPP.

Source: own elaboration, based on the European Commission’s Single Market Scoreboard for Public Procurement for the years 2014-2018 (please note that this refers to publication years, whereas the data on which each of the reports is based corresponds to the previous year).

Source: own elaboration, based on the European Commission’s Single Market Scoreboard for Public Procurement for the years 2014-2018 (please note that this refers to publication years, whereas the data on which each of the reports is based corresponds to the previous year).

One would be tempted to read these maps as representing a time series and thus as allowing for trend analysis. However, that is not the case, for various reasons. First, the overall performance indicator has been constructed on the basis of different (sub)indicators in different iterations of the SMSPP:

  • the 2014 iteration was based on three indicators: bidder participation; accessibility and efficiency.

  • the 2015 SMSPP included six indicators: single bidder; no calls for bids; publication rate; cooperative procurement; award criteria and decision speed.

  • the 2016 SMSPP also included six indicators. However, compared to 2015, the 2016 SMSPP omitted ‘publication rate’ and instead added an indicator on ‘reporting problems’.

  • the 2017 SMSPP expanded to 9 indicators. Compared to 2016, the 2017 SMSPP reintroduced ‘publication rate’ and replaced ‘reporting problems’ for indicators on ‘missing values’, ‘missing calls for bids’ and ‘missing registration numbers’.

  • the 2018 SMSPP, as mentioned above, is based on 12 indicators. Compared to 2017, the 2018 SMSPP has added indicators on ‘SME contractors’, ‘SME bids’ and ‘procedures divided into lots’. It has also deleted the indicator ‘missing values’ and disaggregated the ‘missing registration numbers’ into ‘missing seller registration numbers’ and ‘missing buyer registration numbers’.

It is plain that there are no two consecutive iterations of the SMSPP based on comparable indicators. Moreover, the way that the overall performance is determined has also changed. While the SMSPP for 2014 to 2017 established the overall performance as a ‘deviation from the average’ of sorts, whereby countries were given ‘green’ for overall marks above 90% of the average mark, ‘yellow’ for overall marks between 80 and 90% of the average mark, and ‘red’ for marks below 80% of the average mark; in the 2018 SMSPP, ‘green’ indicates a score above 3, ‘yellow’ indicates a score below 3 and above -3, and ‘red’ indicates a score below -3. In other words, the colour coding for the maps has changed from a measure of relative performance to a measure of absolute performance—which, in fairness, could be more meaningful.

As a result of these (and, potentially, other) issues, the SMSPP is clearly unable to support trend analysis, either at single market or country level. However, despite the disclaimers in the published documents, this remains a risk (to the extent that anyone really engages with the SMSPP).

Overall conclusion

The example of the SMSPP does not augur very well for the adoption of data analytics-based policy-making. This is a case where, despite acknowledging shortcomings in the methodology and the data, the Commission has pressed on, seemingly on the premise that ‘some data (analysis) is better than none’. However, in my view, this is the wrong approach. To put it plainly, the SMSPP is rather useless. However, it may create the impression that procurement data is being used to design policy and support its implementation. It would be better for the Commission to stop publishing the SMSPP until the underlying data issues are corrected and the methodology is streamlined. Otherwise, the Commission is simply creating noise around data-based analysis of procurement policy, and this can only erode its reputation as a policy-making body and the guardian of the single market.


Governance, blockchain and transaction costs

Bitcoin Traces / Martin Nadal (ES)

Bitcoin Traces / Martin Nadal (ES)

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

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

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

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

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

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

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

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

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

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

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

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

Procurement governance and complex technologies: a promising future?

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

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

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

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

Bid rigging, self-cleaning, leniency and claims for damages: A beautiful procurement mess? (C-124/17)

silence_cc_albertoortiz.jpg

In his Opinion of 16 May 2018 in Vossloh Laeis, C-124/17, EU:C:2018:316 (not available in English), Advocate General Campos Sánchez-Bordona has offered an interesting view on the interpretation of the grounds for discretionary exclusion of economic operators engaged in bid rigging. In particular, his proposed interpretation concerns the limitations of the contracting authority's ability to demand full and unrestricted cooperation from undertakings seeking to reassure them that they have self-cleaned after participating in collusive practices in public markets. This Opinion and the forthcoming CJEU Judgment in Vossloh Laeis will be relevant for the interpretation of Article 57 of Directive 2014/24/EU, as well as Article 80 of Directive 2014/25/EU, on which the case rests. In my view, the Vossloh Laeis Opinion raises difficult questions about the coordination of enforcement of mechanisms to prevent bid rigging in the fields of public procurement and competition law. It also creates some functional tensions with recent cases such as Generali-Providencia Biztosító, C-470/13, EU:C:2014:2469; and Impresa di Costruzioni Ing. E. Mantovani and RTI Mantovani e Guerrato, C-178/16, EU:C:2017:1000. Thus, it deserves some close analysis.

Vossloh Laeis - Background

This case concerns the aftermath of an investigation into bid rigging practices by the German competition authority (Bundeskartellamt), which established that '[d]uring the period from 2001 to 2011 Vossloh Laeis concluded agreements with other companies on the supply of rails and switches to the detriment of local public transport companies, private, regional and industrial railway companies and construction companies. The aim of the agreements was to divide up tenders and projects among the members of the cartel'. This resulted in the imposition of a fine of just under 3.5 million euros on the company Vossloh Laeis in 2016 by the Bundeskartellamt.

In the case that triggered the reference to the CJEU, a contracting entity whose procurement is covered by Directive 2014/25/EU (Stadwerke München) sought to exclude Vossloh Laeis from its qualification system on the basis that it had been fined for its participation in the cartel. It is important to stress that the relevance of the cartel for Stadwerke München was not simply remote or theoretical, but concerned it rather closely because this entity had been a victim of the anticompetitive practices carried out by Vossloh Laeis. This led Stadwerke München to seek damages compensation from Vossloh Laeis in civil litigation, as well as to exclude it from its list of approved contractors.

Vossloh Laeis sought to resist its exclusion from Stadwerke München's qualification system on the basis that it had taken self-cleaning measures and should thus be reinstated in the list of approved contractors on the basis of Article 57(6) of Directive 2014/24, to which the applicable Article 80 of Directive 2014/25 refers. In particular, Vossloh Laeis sought to persuade the contracting entity that it had taken organizational and personnel measures to clarify the facts and prevent their future repetition. It also indicated that it would compensate the damage caused by its illicit behavior. 

Stadwerke München rejected the claims of self-cleaning on the basis that (i) despite the uncovering of the cartel in 2011, Vossloh Laeis had not addressed the contracting entity or undertaken any initiative to clarify the facts as a whole; (ii) only in 2016 had Vossloh Laeis ceased to deny, in front of Stadwerke München, its participation in the relevant collusive practices, and even then it stressed that it had challenged the decision imposing the fine. Most importantly, Stadwerke München took issue with Vossloh Laeis' behaviour because (iii) it had not agreed to furnish a copy of the Bundeskartellamt's decision imposing the fine, so that Stadwerke München could examine it. Neither did Vossloh Laeis agree to cooperate with Stadwerke München in clarifying the infringement committed, since it understood that his cooperation with the competition authority was sufficient.

The Vossloh Laeis Opinion states that '[t]he referring court does not dispute (as it was stated in the sanctioning decision itself) that Vossloh Laeis had collaborated continuously and without restrictions with the German competition authority during the infringement procedure procedure' (para 17, own translation from Spanish). This creates a situation that may seem difficult to understand. Why would an undertaking that has already cooperated unreservedly with the competition authority not take the same approach to cooperation with the contracting entity? Is it a matter of opposition to red tape and duplication of effort? Or is there any secret that the economic operator is seeking to protect? Equally, on the side of the contracting entity, why is it so interested in the nitty-gritty details of the decision imposing the fine? Could it not just accept that the economic operator was sanctioned and is now trying to move on?

The importance of leniency programmes in this context

Even if the Opinion of AG Campos does not mention this at all, the dispute about access to the Bundeskartellamt's decision and Vossloh Laeis' refusal to cooperate with Stadwerke München in a parallel clarification of the facts needs to be placed in the context of the applicable leniency programme run by the Bundeskartellamt, and the civil litigation around the action for damages against Vossloh Laeis. This is important to understand the position of the parties, as well as the shadows that loom over the approach taken by AG Campos (discussed below).

As part of a leniency programme (not only Bundeskartellamt's, but those run by the contracting authorities of other Member States and the European Commission itself), economic operators that have participated in bid rigging offences can seek an exemption or reduction of the fines that would otherwise be applicable if they uncover the cartel and/or cooperate with the competition authority in its investigation (the degree of cooperation and the relevance of the information provided determining the level of 'discount' on the otherwise applicable fine).

In return for their cooperation, cartellists not only benefit from exemption or reduction of the fines, but also from some protection against claims for damages by the victims of their collusive behaviour. Indeed, competition authorities will take measures to ensure that leniency statements are not disclosed to the public, will include minimal parts of them in their final decisions imposing fines, and will redact relevant material from the public version of those decisions. This makes it virtually impossible for 'outsiders' to learn about the detailed ways in which the cartel functioned on the basis of public information resulting from the infringement procedure. Moreover, leniency programmes are specially protected by the Directive on competition damages (2014/104/EU), which requires Member States to ensure that 'for the purpose of actions for damages, national courts cannot at any time order a party or a third party to disclose ... leniency statements' (Art 6(6)(a)) (see also the position of the CJEU here).

This creates significant difficulties in the context of follow-on damages actions, where the previous investigation by the competition authority is of no avail to victims seeking redress. This would explain why Stadwerke München insisted in having access to the confidential version of the decision imposing a fine, and why Vossloh Laeis resisted such disclosure. It also clarifies how, in this specific context, cooperation with the competition authority is of no use to contracting entities and authorities seeking to understand the behaviour of the economic operator, as the opacity surrounding leniency programmes prevents them from benefiting from the investigation and findings of the competition authority. 

The Vossloh Laeis Opinion in its own terms

In own terms, the Opinion of AG Campos seems to be solely based on the conceptual premise that the dispute between Stadwerke München and Vossloh Laeis resulted not from the background discussed above, but rather from the peculiarity of the German rules that transposed Article 57(6) of Directive 2014/24/EU, which required that, for the purposes of self-cleaning, economic operators must demonstrate that they have 'fully clarified the facts and circumstances by actively collaborating with the investigating authorities and the contracting authority' (Art 125(1)(2) Gesetz gegen Wettbewerbsbeschränkungen, as reported in para 10 of the Opinion). This deviates from the literal wording of Article 57(6) of Directive 2014/24/EU, which foresees that 'the economic operator shall prove that it has ... clarified the facts and circumstances in a comprehensive manner by actively collaborating with the investigating authorities'. The analysis in the Opinion, thus, largely rests on the interpretation of the concept of 'investigating authorities' in Article 57(6) with the purpose of establishing whether it covers the contracting authority or entity itself (see para 2). The Opinion offers a good synthesis of the competing arguments in paras 26-36.

In that regard, the Opinion provides some relevant positions. First, that the requirements explicitly listed in Article 57(6) of Directive 2014/24/EU are mandatory and, consequently, contracting authorities and entities cannot accept claims of self-cleaning that do not meet them all (paras 40-41). Therefore, establishing the scope of the duty of collaboration in the clarification of the facts becomes paramount because its breach determines the impossibility of benefiting from any other self-cleaning measures adopted.

Second, on the specific issue of the entities included in the concept of 'investigating authorities', AG Campos takes the view that, despite the fact that Article 57 of Directive 2014/24/EU grants contracting authorities and entities some investigative powers, 'the exercise of these functions does not make the contracting authority one of the "investigating authorities" referred to in Article 57 (6), second paragraph of Directive 2014/24' (para 47, own translation from Spanish). In addition to other functional reasons on the way contracting authorities carry out their limited investigation for the purposes  of establishing the existence of an exclusion ground (paras 48-50), AG Campos concludes that, in general terms, 'the "investigating authorities" referred to in Article 57, paragraph 6, second paragraph, of Directive 2014/24 will not coincide with the contracting authorities. In front of the latter, the tenderer (or the company that aspires to be part of a classification system, as in this case) must prove that it has actively and thoroughly collaborated with the investigating authorities to clarify the facts. But this collaboration must be, by force, with an institution other than the contracting authority itself: otherwise, [the collaboration] would be, for the latter, a notorious fact that does not require any proof' (para 51, own translation from Spanish).

Finally, AG Campos also rejects the possibility for Member States to go beyond the scope of the collaboration foreseen in Article 57(6) of Directive 2014/24/EU in demanding that the economic operator seeking to benefit from its self-cleaning efforts not only collaborates with the 'investigating authorities' but also with the contracting authority or entity (paras 55-61). Interestingly, AG Campos stresses two main issues against this possibility: (i) that it would create a duplication of obligations required against those who, like the investigating authorities and the contracting authorities, perform different functions and (ii) that it 'could place the economic operator in a situation close to defenselessness when, in circumstances such as those in this case, the contracting authority claims to have suffered damages, because of the infringing conduct that led to the exclusion of [the economic operator], for which it requests compensation' (para 60, own translation from Spanish).

It is worth stressing that the case also concerns issues surrounding the maximum period of exclusion of economic operators that cannot benefit from self-cleaning (paras 62-86). However this post concentrates solely on the interpretation of Article 57(6) of Directive 2014/24/EU.

In my view, the Opinion of AG Campos advances a plausible interpretation of Article 57(6) of Directive 2014/24/EU. However, I would disagree with two issues. First, the fact that Member States cannot go beyond the minimum mandatory self-cleaning requirements established in the Directive on the grounds that this would result in a duplication of effort for economic operators does not make sense to me, in particular after the recent CJEU Judgment in Impresa di Costruzioni Ing. E. Mantovani and RTI Mantovani e Guerrato, C-178/16, EU:C:2017:1000 (see comment here), which AG Campos acknowledges but sets aside in his Opinion (para 57). Second, and more importantly, I think that the Opinion of AG in Vossloh Laeis does not work in the context of infringements of competition law covered by leniency programmes, which triggers the second of the arguments against an expansive functional interpretation of Article 57(6) on the grounds of the undertaking's procedural rights.

The Vossloh Laeis Opinion in the broader context of leniency programmes

Indeed, the main difficulty I have with the AG Opinion in Vossloh Laeis is functional. It is worth stressing that the implication of this Opinion is that a contracting entity or authority that knows that it has been the victim of a cartel offence cannot oppose self-cleaning of the competition law violator on the basis of its lack of cooperation, despite being in litigation with that undertaking over damages compensation. From the perspective of the infringer, this also means that participation in a leniency programme not only provides a shield from administrative fines and some protection from actions for damages, but also some protection from exclusion from procurement procedures. These are two negative results from the perspective of ensuring the effectiveness of competition law in public procurement markets and, in my view, runs against the thrust of previous decisions such as Generali-Providencia Biztosító, C-470/13, EU:C:2014:2469 (see comment here).

I also think that the way in which the Vossloh Laeis Opinion frames the issue of defenselessness is artificial. An economic operator that has infringed competition law and received a reduced fine as a result of its leniency application has already obtained a relevant practical advantage. Therefore, I see no problem in making it face a simple choice between either (i) sticking to the secrecy created by the leniency mechanism and thus accepting exclusion from procurement procedures for an adequate period of time, or (ii) waiving that secrecy vis-a-vis the contracting authority (which would implicitly require compensation of the damage resulting from the cartel), so that the contracting authority can form an adequate view of whether the organisational and personnel self-cleaning measures really address the root causes of the past illegal behaviour and, if appropriate, set aside the relevant exclusion ground.

The Vossloh Laeis Opinion allows the economic operator to avoid this simple choice and to have two bites at the cherry. It also makes it difficult for the contracting authority to satisfactorily carry our its limited investigative functions under Art 57(6). Without knowing exactly what happened, it is difficult to judge whether the self-cleaning measures are 'appropriate to prevent further criminal offences or misconduct'. Additionally, it forces the contracting authority to make this decision in a context where it can have other grounds to doubt the economic operators' loss of integrity, such as its resistence to provide damages compensation despite having engaged in illegal behaviour that damaged the contracting authority's interests.

Ultimately, if AG Campos was worried about the existence of a conflict of interest between the contracting authority that has an outstanding claim for damages and at the same time needs to assess the self-cleaning efforts of the economic operator--which is a fair enough point--it would have been interesting to learn about the ways in which Article 24 of Directive 2014/24/EU needs to be applied and interpreted in situations such as this. It would have also been interesting to explore in more detail the extent to which the discrete requirements for satisfactory self-cleaning in Article 57(6) interact as, in the case of leniency-related situations, the lack of collaboration with the contracting authority or entity has a bearing on the extent to which the economic operator can be seen to have 'undertaken to pay compensation in respect of any damage caused by the criminal offence or misconduct'. 

However, by not addressing these issues, the Vossloh Laeis Opinion seems to seek to protect the effectiveness of leniency programmes without even mentioning them, which in my view is an odd position to take.

A Duty to ‘Save’ Seemingly Non-Compliant Tenders for Public Contracts? -- New SSRN paper

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I have published a short paper commenting on the transposition of Article 56(3) of Directive 2014/24/EU  through the 2017 reform version of Article 72 of the Portuguese Code of Public Contracts. I think this is an interesting case study on some of the difficulties that the new provision on the contracting authority's power to seek clarifications can pose in practice--and maybe anticipates some of the future challenges in the development of the Slovensko-Manova-Archus and Gama case law. The abstract of the paper is as follows:

This paper provides a critical assessment of the rules regarding the clarification, supplementation and correction of tenders in procedures for the award of public contracts regulated by the EU 2014 Public Procurement Package. It does so through a detailed assessment of the transposition of Article 56(3) of Directive 2014/24/EU by means of the post-2017 reform version of Article 72 of the Portuguese Code of Public Contracts. The paper concentrates on four main issues: the existence of a mere discretionary power or a positive duty to seek clarifications, corrections or supplementations of tenders and their accompanying documentation; the constraints imposed on such power or duty; the desirability of unilateral tender corrections by the contracting authority; and the transparency given to the correction, supplementation or clarification of tenders. The paper assesses each of these issues against the backdrop of the existing case law of the Court of Justice of the European Union, as well as with a functional approach to the operationalisation of the Portuguese rules on correction, supplementation and clarification of tenders for public contracts.

The paper is freely downloadable from SSRN: A Sanchez-Graells, 'A Duty to "Save" Seemingly Non-Compliant Tenders for Public Contracts? - Comments on Art 72 of the 2017 Portuguese Code of Public Contracts' (2018) 2 Revista de Direito Administrativo 59-68.

'Certain cross-border interest' for a public contract cannot be purely hypothetical (C-486/17)

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I am currently-re-reading all CJEU procurement decisions of 2015, 2016 and 2017 for a new book that will consolidate and revise the comments published in this blog and in other papers (more details on this soon), as well as new comments on those cases I did not manage to cover at the time (there are 10 of those). Doing that, I came upon the Order of 23 November 2017 in Olympus Italia, C-486/17, EU:C:2017:899 (only available in FR and IT), which I find interesting because it reinforces the Tecnoedi approach to the burden of proof of the existence of a 'certain cross-border interest' that engages the CJEU's jurisdiction to provide the relevant interpretation of EU public procurement law (for discussion, see here).

In Olympus Italia, the CJEU was sent a request for interpretation of Directive 2014/24/EU and, in particular, in relation to the regulation of negotiated procedures and the possibility for tenderers to amend their tenders in that context. However, the CJEU rejected the request on the basis that the referring court had provided insufficient information to establish the existence of a certain cross-border interest in a contract for an "all-hazards" technical assistance service for flexible endoscopes and machines used for washing such devices. 

As justification for the rejection of the case, the CJEU stressed that

... the objective criteria which may indicate certain cross-border interest ... may be, in particular, the fact that the contract in question is for a significant amount, in conjunction with the place where the work is to be carried out or the technical characteristics of the contract and the specific characteristics of the products concerned. In that context, it is also possible to take account of the existence of complaints brought by operators situated in other Member States, provided that it is determined that those complaints are real and not fictitious...

...  a conclusion that there is certain cross-border interest cannot be inferred hypothetically from certain factors which, considered in the abstract, could constitute evidence to that effect, but must be the positive outcome of a specific assessment of the circumstances of the contract at issue. More particularly, the referring court may not merely submit to the Court of Justice evidence showing that certain cross-border interest cannot be ruled out but must, on the contrary provide information capable of proving that it exists ...

In the present case, it is common ground, that the amount of the public contract at issue in the main proceedings amounts to EUR 85,000, which is considerably below the thresholds for application laid down in Article 4 of Directive 2014/24 ... On the other hand, in its reference for a preliminary ruling, the referring court has not provided any information enabling the Court to ... demonstrate the existence of a certain cross-border interest ... In those circumstances, the Court finds itself unable to provide a useful answer to the question raised... (C-486/17, paras 17-22, references omitted, own translation from French and emphasis added).

I find the Olympus Italia case interesting (and potentially worrying) if it is indicative of the willingness of the CJEU to avoid answering preliminary references on the basis of the absence of irrefutable proof of the existence of cross-border interest. I think that there have been plenty other cases where the CJEU was unable to establish this and, in any case, it provided an answer on the premise that the referring court would first have to assess whether such cross-border interest existed (for recent examples, see eg the 2015 Judgments in UNIS, C-25/14, EU:C:2015:821; or Enterprise Focused Solutions, C-278/14, EU:C:2015:228). If the CJEU is using the (evidence of the) existence of a certain cross-border interest as a 'docket-management' device, we can only expect further distortions of the case law in an area that is not precisely clear...

No obligation to revise prices payable under public contracts. OK, but for the wrong reasons? (C-152/17)

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In its recent Judgment of 19 April 2018 in Consorzio Italian Management e Catania Multiservizi,
C-152/17, EU:C:2018:264, the Court of Justice of the European Union (CJEU) clarified that EU public procurement law (in this case, the 2004 Utilities Directive) does not create an obligation to review prices after the award of a public services contract. This seems largely uncontroversial, not least due to the lack of concern of the pre-2014 EU procurement rules with contract execution. However, the reasons given by the CJEU to exclude mandatory price revision and, beyond that, the mistrust it places on price review clauses, are dubious. The way in which the CJEU refers back to Finn Frogne (see here) should also set off some alarm bells.

The case at hand (N.B. Defective English version of the Judgment)

In this case, Rete Ferroviaria Italiana (RFI) had awarded a services contract to Consorzio Italian Management and Catania multiservizi (CIMCM) for the cleaning, maintenance and ancillary services at stations, installations, offices and workshops at various sites throughout the region of Cagliari. The contract included a clause limiting price review. Despite that, and as a result of increasing staff costs, CIMCM requested RFI to review the prices payable under the contract (ie the claim seemed to be a statutory claim contra the explicit terms of the public contract). RFI rejected the request for the price revision, which triggered the underlying dispute. Establishing the legal architecture underlying the claim requires some legal funambulism.

The award of the contract had been subject to the rules of the 2004 Utilities Directive, as well as domestic law transposing it. At the relevant time, the Italian procurement code (Legislative Decree No 163/2006) established that in 'the absence of any express provisions' in the procurement rules, the Italian Civil Code (Codice Civile, CC) would provide default rules for contractual arrangements between contracting authorities or entities and their contractors. It is important to clarify that the Italian procurement code had a two-tier approach whereby it established a full regime applicable to general procurement (tier 1) and then specified a sub-set of rules applicable to utilities procurement (tier 2, Art 206 Legislative Decree No 163/2006). Tier 2 set a numerus clausus of provisions applicable to contracts linked to the activities referred to in Articles 3 to 7 of the 2004 Utilities Directive.

Concerning the review of contractual prices, Art 115 of the Italian procurement code established that '[a]ll contracts for the supply of goods or services on an ongoing basis must include a clause providing for periodic review of the price'. This provision was however inapplicable to public contracts in the utilities sectors [N.B. despite the English version of the Judgment (para 11), where it is indicated that 'Article 115 of that Legislative Decree was one of the provisions which, under Article 206 thereof, were applicable to public contracts', this is contradicted by eg the French ('L’article 115 de ce décret législatif ne figurait pas ...') and Italian ('L’articolo 115 di tale decreto legislativo non era indicato ...') versions of the Judgment, as well as the logic of the decision]. It is thus worth taking into account that, where Art 115 was not applicable, the default rule in the Italian Civil Code would provide for price revision linked to circumstances of 'hardship' (ie cost increases above 10% of the overall price agreed; Article 1664 CC).

The dispute between CIMCM and RFI is fundamentally concerned with a domestic issue of contractual and statutory interpretation. However, given that the scope of application of the domestic rules is pegged to the scope of application of the 2004 Utilities Directive, it acquired EU relevance.

At first instance, the challenge was dismissed by the regional administrative tribunal on the basis that 'the supply of cleaning services at stations, installations, offices and workshops was ancillary to the performance of activities covered by special sectors, in that those services related to elements forming an essential part of the rail transport network' (C-152/17, para 16, emphasis added). This justified the subjection of the contract to the tier 2 procurement regime, and thus excluded the mandatory price review clause of Art 115 of the Italian procurement code. Beyond that, the regional administrative court reached the additional finding that 'price review was not mandatory under Article 1664 of the Civil Code, as the parties to a contract may derogate from that provision by inserting in the contract a contract term limiting price review, which was the case in the main proceedings' (ibid). 

Given the implicit reference to Art 5 of the 2004 Utilities Directive in terms of scoping the applicability of the relevant rules, which was challenged in the appeal of the first instance decision, the dispute required clarification from the CJEU. Moreover, the claimants raised a challenge of validity against the 2004 Utilities Directive by arguing that, should it allow for the award of contracts excluding price revision, it would infringe Articles 3(1) TEU, Articles 26, 56 to 58 and 101 TFEU, and Article 16 of the Charter, ‘in the light of the unfairness, disproportionality and distortion of contractual balance and, therefore, of the rules governing an efficient market’ (C-152/17, para 19). The reasoning of the CJEU on these two matters (scope of application and validity of the 2004 Utilities Directive) is interesting.

Functional scope of application

The issue here seems simply to require an understanding of the functional approach followed b y the CJEU in determining the scope of application of the 2004 Utilities Directive. In that regard, the CJEU stressed that

... as regards the interpretation of Directive 2004/17 and of the underlying general principles, the referring court considers that the contract at issue in the main proceedings falls within the scope of that directive, since it was awarded by a contracting authority within the meaning of that directive, namely RFI, and that it is functionally linked to rail transport operations falling within the scope of that directive.

In that regard, it follows from the Court’s case-law that Directive 2004/17 in fact applies not only to contracts awarded in the sphere of one of the activities expressly listed in Articles 3 to 7 thereof, but also to contracts which, even though they are different in nature and could as such normally fall within the scope of Directive 2004/18/EC ..., are used in the exercise of activities defined in Directive 2004/17. Consequently, where a contract awarded by a contracting entity is connected with an activity which that entity carries out in the sectors listed in Articles 3 to 7 of that directive, that contract is subject to the procedures laid down in that directive (C-152/17, paras 25-26, references omitted and emphasis added).

This creates the functional criterion that ancillary activities are covered by the Utilities procurement regime because, as a matter of determining the scope of the activities listed in Arts 3 to 7 of Dir 2004/17, EU procurement law also comprises ancillary activities.

No 'EU law' obligation to revise prices

Beyond that, the CJEU also stressed that 

... it is not apparent from any provision of that directive that it must be interpreted as precluding rules of national law, such as Article 115, in conjunction with Article 206, of Legislative Decree No 163/2006, which do not provide for periodic review of prices after contracts are awarded in the sectors covered by the directive, since the latter does not impose any specific obligation on Member States to lay down provisions requiring the contracting entity to grant its contractual partner an upwards review of the price after the contract has been awarded (C-152/17, para 29, emphases added)

In my view, this is correct, and there is no question that the 2004 Utilities Directive did not create an 'EU law' obligation to include contract review clauses. However, the reasons given by the CJEU on the basis of the general principles of procurement should raise some eyebrows. Indeed, the CJEU found that

... the general principles underlying Directive 2004/17, in particular the principle of equal treatment and the consequent obligation of transparency enshrined in Article 10 of that directive do not preclude such rules either. On the contrary, it cannot be ruled out that a price review after the contract has been awarded may run counter to that principle and that obligation (see, by analogy, judgment of 7 September 2016, Finn Frogne, C‑549/14, EU:C:2016:634, paragraph 40). Indeed, as the Commission points out in its written observations, the contract price is an element of great importance in the assessment of tenders by a contracting entity, as well as in its decision to award the contract to an operator. This is also clear from the reference to the price in both of the criteria for the award of contracts mentioned in Article 55(1) of Directive 2004/17. In those circumstances, rules of national law which do not provide for periodic price review after the award of contracts in the sectors covered by that directive are, in fact, likely to encourage compliance with those principles.

It follows from those considerations that Directive 2004/17 and the general principles that underlie it are to be interpreted as not precluding national rules, such as those at issue in the main proceedings, which do not provide for periodic price review after a contract has been awarded in the sectors covered by that directive (C-152/17, paras 30-31, emphases added).

Wrong reasons?

The reasoning of the CJEU is certainly hard to share, in particular in view of the precise reasoning of Finn Frogne--unless read in an extreme manner. It is also hard to reconcile with Art 72(1)(a) of Directive 2014/24 and Art 89(1)(a) of Directive 2014/25.

The reasoning of the CJEU is hard to reconcile with the fact that the relevant Italian rules (Art 115) established that price revision clauses had to be included in the relevant contract (but did not prescribe their content) and had to establish that the price 'revision shall be carried out on the basis of an investigation by the managers responsible for the acquisition of goods and services on the basis of the data' regulated in other parts of the Italian procurement code (C-152/17, para 11). How this is incompatible with Finn Frogne is beyond me, as the Court stated there that the position that 'following the award of a public contract, a material amendment cannot be made to that contract without a new tendering procedure ... would be different only if the contract documents provided for the possibility of adjusting certain conditions, even material ones, after the contract had been awarded and fixed the detailed rules for the application of that possibility' (C-549/14, para 40, emphasis added). Two thoughts come to mind here. First, that a review clause compliant with Art 115 of the Italian procurement code would meet precisely the requirements of Finn Frogne. Second, that the issue whether the exclusion or limitation of price review under the specific contract was allowable rested solely on the point of determination of the scope of application of the 2004 Utilities Directive, so why did the CJEU feel the need to include this obiter dictum?

Looking forward, it is difficult to understand what the CJEU has in mind concerning equal treatment, transparency and price revision clauses. While in Finn Frogne --and, incidentally, in Art 72(1)(a) of Directive 2014/24 and Art 89(1)(a) of Directive 2014/25-- the position is that contractual price revision clauses are perfectly compliant with EU procurement rules and the principles of transparency and equal treatment; in Consorzio Italian Management the CJEU seems to be of the opposite view and stress that 'rules of national law which do not provide for periodic price review after the award of contracts ... are, in fact, likely to encourage compliance with those principles' (C-152/17, para 30). Of course, taken in isolation, both approaches make sense, but I would struggle to reconcile them if there was a claim that a contractual price revision clause was discriminatory because it either had different impact on different potential contractors, or because its interpretation could favour some suppliers over others. What is more objective, to have a contractual price review clause or not to have it? In addition, what is the problem with having legislative requirements for those clauses, as was the case in Art 115 of the Italian procurement code?

What about Art 16 of the Charter?

Another point worth mentioning is the CJEU's approach to the analysis of the compatibility of the inexistence of a right to price revision with Art 16 of the Charter, enshrining the freedom to conduct a business. Here, it would seem possible to expect from the CJEU an analysis of whether the inexistence of such a right as a matter of EU law is in compliance with the Charter. However, the CJEU refused to answer that question on the grounds that it was hypothetical (see paras 37-40). However, the CJEU did engage on the analysis of compatibility within the context of the first question, and almost as a matter of jurisdictional rather than substantive analysis. In that regard, the CJEU stressed that

... as regards the interpretation of Article 16 of the Charter, it must be recalled that, under Article 51(1) of the Charter, its provisions are addressed to the Member States only when they are implementing EU law. Under Article 51(2) of the Charter, the Charter does not establish any new power or task for the Union, or modify powers and tasks as defined in the Treaties. Accordingly, the Court is called upon to interpret EU law, in the light of the Charter, within the limits of the powers conferred on it ...

In that regard, it should be borne in mind that the concept of ‘implementing Union law’ within the meaning of Article 51 of the Charter presupposes a degree of connection between the measure of EU law and the national measure at issue. In particular, the Court has ruled that fundamental European Union rights could not be applied in relation to national legislation because the provisions of EU law in the area concerned did not impose any specific obligation on Member States with regard to the situation at issue in the main proceedings ...

In the present case, since it is apparent from paragraphs 29 and 30 above that neither Directive 2004/17 nor its underlying general principles impose on Member States a specific obligation to lay down provisions requiring the contracting entity to grant its contractual partner an upwards price review after the award of a contract, the provisions of Legislative Decree No 163/2006 at issue in the main proceedings, in so far as they do not provide for periodic price review within the sectors covered by that directive, do not have any connection with that directive and cannot, therefore, be regarded as implementing EU law (C-152/17, paras 33-35, references omitted and emphases added).

First, it is worth stressing that it is hard to imagine a legal strategy that will make the CJEU engage with the compatibility of secondary EU legislation with the Charter, in particular in relation to the absence of guarantees, as compared to its review concerning positive obligations for the addressees of the domestic implementing measures. Normatively, this is undesirable for the limited engagement the CJEU shows with substantive Charter-based analysis. And even from a positive perspective, this approach is criticisable. I find the CJEU's logic puzzling.

In a situation (maybe different from the case at hand, where the absence of the price revision guarantee ultimately results from a rule on the delimitation of applicable EU law regimes, rather than the direct implementation of a specific, single regime) where the claim was that the domestic rules implementing EU law failed to create a Charter-compliant (or rather Charter-mandated) guarantee not imposed by the implemented Directive, the CJEU would probably also take this route and argue that the absence of creation of an obligation at domestic level which is not required by EU rules is not connected with the EU rules in a manner that triggers the analysis of compatibility with the Charter. Would this make sense? I would not think so, but I guess we will have to wait for the relevant case to see whether the CJEU sticks to this analysis.

Can Member States prohibit or restrict the use of in-house arrangements? [guest post* by Dr Deividas Soloveičik]

This new guest post by Dr Deividas Soloveičik provides interesting background on another reference for a preliminary ruling to the CJEU by the Supreme Court of Lithuania. On this occasion, the case raises interesting questions around the balance between procurement and competition law, but also about the regulatory and self-organisation space left to Member States in the context of the EU regulation of in-house provision arrangements. It will be interesting to keep an eye on the case, as it brings an opportunity for the CJEU to expand its case law after its recast in eg Art 12 of Directive 2014/24/EU.

NOTHING LEFT TO SAY ABOUT THE IN-HOUSE EXEMPTION? THINK TWICE

On April 13, 2018 the Supreme Court of Lithuania (SCoL) decided to stay proceedings and refer a question for preliminary ruling to the Court of Justice of the European Union (CJEU) in a case that raises new questions related to the in-house exemption (civil case No. e3K-3-120-469/2018). This time, the SCoL wishes to find out if Member States are allowed to limit or even ban the use of the in-house exemption, as is the case in Lithuania. Besides, the SCoL seeks clarification on the balance to be struck between public procurement and competition law. In particular, the SCoL wishes to know whether the in-house exemption may be applicable where the same supply of goods or services can be delivered by the market. In other words, whether the contracting authority can buy in-house when there is available supply in the market. These are challenging issues and the CJEU’s views will be much awaited. Before providing an overview of the facts of the case, it is worth noting the Lithuanian legal background, which influenced the decision of the SCoL to refer the case to the CJEU, as well as the whole legal problem.

Lithuanian legal background

The in-house exemption has been regulated in the public procurement law of Lithuania since 2010. The criteria for its use were those set by the CJEU in Teckal and the subsequent case-law on the subject. Since then, in-house contracts became very common in particular at local level. Many contracting authorities and entities used them with their controlled companies, and in many cases the exemption became the general rule. However, this practice became both a legal problem and a national political scandal when it was noticed that the in-house exception was implemented in order to support a modus operandi whereby contracting authorities used the in-house exemption to award contracts to their subsidiaries, so that the latter did not have to hold themselves as contracting authorities and could thus buy services and supplies from the market like private operators. This created a situation where contracting authorities circumvented the public procurement rules just by using an intermediary (their subsidiaries) that triggered the in-house exemption. This practice even generated the Litspecmet case (C-567/15, EU:C:2017:736), already decided by the CJEU (see a comment here).

As a result of these abuses, the implementation of the 2014 EU Public procurement directives led Lithuania to practically ban the in-house mechanism. The new Lithuanian procurement law states that any governmental authority and / or private companies directly controlled or owned by the State shall have no right to enter into in-house agreements of whatsoever nature. Other contracting authorities, such as municipalities and their controlled companies, have the privilege of the in-house exemption. However, this only applies in cases when there is either (i) no supply from the market, or (ii) there are no possibilities to buy good quality in a way that guarantees the quality, availability or continuity of the services and (iii) if the awardee is a contracting authority itself. Moreover, the Competition Council became very active in tracing each contracting authority that uses the in-house exception and seeking the judicial repeal of such agreements on the basis of the Law on competition, which inter alia states that neither the State, governmental or other official authorities may have any privilege against any other market player (ie sets out a principle of competitive neutrality). Therefore, in fact, on the few occasions where in-house agreements are not forbidden by the Lithuanian Law on public procurement, they will most likely be challenged by the Competition Council on the basis of the Lithuanian Law on competition. Thus, in practice the possibility for the award of public contracts in-house is either excluded or very risky.

The Irgita case

In the case the SCoL has now referred to the CJEU, a Municipality concluded a public contract for the upkeep of green areas with economic operator Irgita. It was specified in the contract that the volume of services was a maximum and that the contracting authority was not obliged to buy all the services. The Municipality was to solely pay for the services actually provided according to the rates specified in the contract. Thus, the final price payable to the service provider depended on the volume of services rendered by the latter. In case the services required by the contracting authority exceeded the maximum amount specified in the contract, a separate procurement would be arranged.

Later on, the contracting authority approached the Public Procurement Office in order to get approval to conclude an in-house contract regarding the same services with another economic operator that (i) is a contracting authority itself, (ii) is controlled by the contracting authority (Municipality) and (iii) receives 90 percent of its income from the contracting authority (Municipality). Such approval was granted, and the contracting authority concluded the in-house contract with its controlled economic operator.

After the in-house contract was concluded, Irgita filed a claim by which it argued that the decision of the Municipality was unlawful, on the basis of the following arguments: (i) the contracting authority was not in a position to enter into the in-house contract because, at the time of its conclusion, the public contract with the claimant was still in force; (ii) the disputed decision and the in-house contract did not meet the requirements set in the Law on public procurement and the Law on competition of Lithuania, as it distorts free and fair competition between economic operators because the contracting authority’s contractual partner is being granted privileges while the other (private) economic operators are being discriminated against.

The court of first instance did not establish a breach of competition, while the Court of Appeals considered that the in-house contract was unlawful, in particular because it reduced the volume of services available for provision by Irgita in the first place. In deciding to refer the case to the CJEU, the SCoL started its reasoning by the stating that this was the first time it had an opportunity to examine the balance between public procurement and competition law in the context of in-house arrangements. The SCoL found that it was very likely that the concept of in-house agreement in the realm of public procurement law was a category of EU law and thus not open to separate interpretation under national legislation. If that was the case, then it would be very dubious that Member States were entitled to limit the right of the contracting authority to engage in this kind of transactions.

The SCoL held that:

  • The CJEU has substantiated the in-house doctrine as an exemption from compliance with otherwise applicable public procurement requirements;
  • The CJEU has repeatedly held that since the concept of a public contract does not refer to the national legal regulation of the Member States, the notion and the whole concept of in-house agreement must be regarded as falling exclusively within the scope of EU law and must be interpreted without regard to national law (Jean Auroux Case, C-220/05). In this matter, the SCoL stated that CJEU case-law implies a possibility of treating the in-house exemption as an independent legal norm of EU law;
  • From the case-law of the CJEU, it is clear that the in-house exemption does not infringe the rights of private economic operators, they are not discriminatory, because the economic operators controlled by the contracting authorities do not enjoy any privileges (Sea, C-573/07; Carbotermo ir Consorzio Alisei, C-340/04; Undis Servizi, C-553/15). In other words, the SCoL emphasized that if it is deemed that the in-house agreements are legitimate, then it hardly can be that they limit and distort the competition in all cases. Otherwise, they would not be allowed pursuant to the long-standing jurisprudence of the CJEU.

On the basis of the above-mentioned considerations, the SCoL considered that there is a need to address the following questions to the CJEU for a preliminary ruling:

1.    In circumstances such as those in the present case, where the procedure for the conclusion of the in-house contract was initiated under Directive 2004/18, but the contract itself was concluded on 19 May 2016, does the in-house contract fall within the scope of Directive 2014/18 or Directive 2014/24 in case of an invalidity?

2.    Assuming that the disputed in-house contract falls within the scope of Directive 2004/18:

(a)  must Article 1(2)(a) of this Directive (but not limited to this provision), in accordance with the judgments of the CJEU in Teckal (C-107/98), Jean Auroux and Others (C-220/05) and ANAV (C-410/04) etc be understood and interpreted in such a way that the concept of in-house falls within the scope of EU law and the content and application of that concept is not affected by the national law of the Member States, inter alia, restrictions on the conclusion of such contracts, such as the condition that public service contracts cannot guarantee the quality, availability or continuity of the services provided?

(b)  If the answer to the preceding question is negative, i.e. the concept of in-house in part or in full falls within the scope of the national law of the Member States, is the abovementioned provision of the Directive 2004/18 to be interpreted as meaning that the Member States have the discretion to impose restrictions or additional conditions for the establishment of the in-house contract (in comparison with EU law and the interpretation of the CJEU case-law), but it can be implemented only by specific and clear rules of the substantive law on public procurement ?

3.    Assuming that the disputed in-house contract falls within the scope of Directive 2014/24:

(a)    must Article 1(4), Article 12 and Article 36 of the Directive, jointly or severally (but not limited to), in accordance with the judgments of the CJEU in Teckal (C-107/98), Jean Auroux and Others (C-220/05) and ANAV (C-410/04) etc be understood and interpreted in such way that the concept of in-house falls within the scope of EU law and that the content and application of this concept are not affected by the national law of the Member States, inter alia, restrictions on the conclusion of such contracts, such as the condition that public service contracts cannot guarantee quality, availability or continuity of the services provided?

(b)    If the answer to the preceding question is negative, i.e. the concept of in-house is partly or fully covered by the national law of the Member States, must the provisions of Article 12 of Directive 2014/24 be interpreted in such way that the Member States have the discretion to impose restrictions or additional conditions for the establishment of in-house contracts (in comparison with EU law and the interpretation of the CJEU case-law), but it can be implemented only by specific and clear rules of the substantive law on public procurement?

4.    Irrespective of which of the directives covers the in-house contracts, must the principles of equality, non-discrimination and transparency (Article 2 of the Directive 2004/18, Article 18 of Directive 2014/24), the general prohibition of discrimination on grounds of nationality (Article 18 TFEU), freedom of establishment (Article 49 TFEU) and freedom to provide services (Article 56 TFEU), the possibility of granting exclusive rights to undertakings (Article 106 TFEU), and the case-law of the CJEU (Teckal, ANAV, Sea, Undis Servizi etc) be understood and interpreted as meaning that an in-house contract concluded by a contracting authority and another distinct legal entity which is controlled by the contracting authority in a manner similar to its own departments and where part of such legal entity’s activities is in the interest of the contracting authority, is per se lawful, and that it does not infringe the rights of the other economic operators to fair competition, to not being discriminated against and for no privileges to be provided to the controlled legal entity that has concluded the in-house contract?

The enquiry made by the SCoL shows that it basically wishes to clarify a few very interesting and important legal points, which will influence the development of the in-house exception. Firstly, the SCoL tries to understand whether the in-house exemption is an autonomous concept of EU law or not. Because if it really is, then naturally there will be less discretion left to the Member States in terms of in-house procurement regulation. In other words, Member States would not be allowed to limit the in-house agreement possibility and only the case-law would be the source of the in-house legality in each particular case. Secondly, the SCoL tries to understand, at least indirectly, what are the dynamics between competition law and the law on public procurement.

The situation where, on the one hand, public procurement law allows for in-house arrangements but, on the other hand, the Competition Council and its application of the rules of the Law on competition will be waiting around the corner, is not acceptable. The SCoL correctly noted that such situations jeopardise the legitimate expectations of economic operators and contracting authorities and make the whole legal ecosystem related to this issue very blurry. Without a doubt, the now much anticipated answers from the CJEU will have a strong impact on the application of the in-house exception. In Lithuania it might even mean, in case of positive answers given by the CJEU to most of the questions, that half of Art. 10 of the Law on public procurement, which regulates the “remainders” of in-house exemption, will be inapplicable due to the supremacy of the EU law and will have to be amended by the legislator.

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Dr. Deividas Soloveičik, LL.M

Dr Deividas Soloveičik is a Partner and Head of Public Procurement practice at COBALT Lithuania. He represents clients before national courts at all instances and arbitral institutions in civil and administrative cases, provides legal advice to Lithuanian and foreign private clients and contracting authorities, including the European Commission , on the legal aspects of public procurement and pre-commercial procurement.

Dr Soloveičik is an Associate Professor and researcher in commercial law at Vilnius University and a contributor to legal publications. He also closely cooperates with globally recognized academic members of the legal profession. Since 2011, MCIArb. Dr Soloveičik is a member of the Chartered Institute of Arbitrators; since 2016, he is a member of the European Assistance for Innovation Procurement – EAFIP initiative promoted by the European Commission and a recommended arbitrator at Vilnius Court of Commercial Arbitration.

Guest blogging at HTCAN: If you would like to contribute a blog post for How to Crack a Nut, please feel free to get in touch at a.sanchez-graells@bristol.ac.uk. Your proposals and contributions will be most warmly welcomed!

Why call it essential national interest when you mean control? Thoughts on the converging exceptions to the EU procurement rules a propos the Austrian passports case (C-187/16)

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In its Judgment of 20 March 2018 in Commission v Austria (Imprimerie d'État), C-187/16, EU:C:2018:194, the Court of Justice of the European Union (CJEU) assessed the extent to which Austria could rely on claims of national security interest and/or essential national interest to justify the direct award of several contracts for the printing of passports and other secure documents to the former Austrian national printing office (ÖS). In rejecting this possibility, the CJEU followed AG Kokott’s strict approach to the interpretation of derogations of the EU public procurement rules (as discussed here) and, crucially, determined that ‘a Member State which wishes to avail itself of those derogations must establish that the protection of such interests could not have been attained within a competitive tendering procedure as provided for by’ the relevant EU public procurement rules (para 79).

The case is interesting, but hardly novel, in the narrow approach taken by the CJEU in the interpretation of exceptions from competitive tendering under the EU procurement rules (paras 69-96), as well as in relation to the standard of proof required to justify the existence of a ‘certain cross-border interest’ in the tendering of contracts not covered by the EU rules (paras 103-111, which largely follow the recent case of Tecnoedi, see here). However, I think that the case is also interesting for the ‘forward continuity’ and systemic convergence it shows amongst the different exceptions to the EU public procurement rules, which requires an appreciation of the case in the context of the evolution of EU public procurement law. I explore this idea in this post.

It is worth stressing that the case was decided in relation to the third and fourth generation of EU procurement rules, as Directives 92/50/EEC and 2004/18/EC were applicable to the case ratione temporis. Differently from the current Directive 2014/24/EU, both the 1992 and the 2004 version of the EU procurement rules preceded the adoption of Directive 2009/81/EC on defence and security procurement, as well as the development (Dir 92/50) and consolidation (Dir 2004/18) of the in-house providing and public-public cooperation exemptions (as Teckal dates back to 1999 and Commission v Germany (Hamburg waste) dates back to 2009). This is relevant in the interpretation of their exemptions based on security or essential national interests.

‘Forward continuity’ in the treatment of security or essential interest-based exemptions

Dir 92/50 foresaw the possibility for Member States to exempt the direct (or less than fully competitive) award of contracts for the provision of ‘services which are declared secret or the execution of which must be accompanied by special security measures in accordance with the laws, regulations or administrative provisions in force in the Member State concerned or when the protection of the basic interests of that State’s security so requires’ (Art 4(2), emphasis added). Similarly, Dir 2004/18 contained an equivalent exemption for ‘public contracts when they are declared to be secret, when their performance must be accompanied by special security measures in accordance with the laws, regulations or administrative provisions in force in the Member State concerned, or when the protection of the essential interests of that Member State so requires’ (Art 14, emphasis added).

This functionally-equivalent exemption under the 1992 and 2004 versions of the EU public procurement rules could have been used, for example, to justify the direct award of a contract to an entity controlled (or heavily influenced/supervised?) by the contracting authority in order to protect the relevant essential / security national interest through an organic governance relationship rather than through contract. In fact, this seems to be the thrust of the justifications put forward by Austria in the case now decided by the CJEU, given that most of the arguments are (rather implicitly based) on the ‘special relationship’ that Austria has established with ÖS (or rather, kept after ÖS’ privatisation). These exemptions would, in the end, possibly be seen as simple clarification that the existence of the EU public procurement rules did not require the contractualisation (and prior award) of the management of this type of services—provided that the existence of the security/essential national interest existed and the exemption from EU procurement rules passed muster under a (strict) proportionality assessment—although this approach to exemption based on the relationship between the contracting authority and the service provider seems to now be clearly within the functional realm of the in-house and public-public collaboration exemptions, rather than that of defence-related exemptions (see below).

Since its regulation in Dir 92/50 (and to a large extent, Dir 2004/18), the possibility to avoid contractualising (and tendering) the entrustment of the provision of services involving security or essential interests (through contracts or other types of ‘written agreements’, of which domestic administrative law regulates a garden variety) and/or the tendering of such public contracts has since evolved in two meaningful ways. First, Dir 2009/81 has come to establish a clearer instrument for the regulation of procurement involving defence and security interests and I argue that the subjection of a contract not covered by that specific instrument to the general rules of Dir 2014/24 will be largely dependent on a strict analysis similar to that carried out by the CJEU in the case against Austria, as Art 15(2) Dir 2014/24 echoes the wording of the Judgment. This will ensure ‘forward continuity’ in the assessment of these matters under EU procurement law.

Indeed, in relation to the pre-2014 rules, the CJEU has found that a ‘Member State which wishes to avail itself of those derogations must show that such derogation is necessary in order to protect its essential security interests’ (para 78) and that ‘the protection of such interests could not have been attained within a competitive tendering procedure’ (para 79), which assessment needs to take into account that ‘the requirement to impose an obligation of confidentiality does not in itself prevent the use of a competitive tendering procedure for the award of a contract’ (para 89) and that this is compatible with ‘the confidential nature of data can be protected by a duty of secrecy, without it being necessary to contravene public procurement procedures’ (para 90). Moreover, the exemption of a direct award needs to overcome a strict proportionality based on the absence of less intrusive measures, such as the possibility of establishing effective control mechanisms (para 86) and screening the trustworthiness of potential service providers based in a different Member State (para 87).

This is mirrored by the 2014 Directive’s requirement that it ‘shall not apply to public contracts and design contests … to the extent that the protection of the essential security interests of a Member State cannot be guaranteed by less intrusive measures, for instance by imposing requirements aimed at protecting the confidential nature of information which the contracting authority makes available in a contract award procedure as provided for in this Directive’ (Art 15(2) emphases added). This basically comes to ‘consolidate’ or sum up the requirements set by the CJEU in the Judgment in Commission v Austria, which is thus fully aligned with the rules in Dir 2014/24. In that regard, there will be a clear continuity in the analysis of these situations despite the approval of Dir 2009/18 in the intervening period.

Convergence with exemptions based on control of the service provider

Second, and maybe less self-evidently, the interpretation of the exemptions in Dir 92/50 and Dir 2004/18 need to be coordinated with the consolidation of the in-house and public-public cooperation exemptions in the case law of the CJEU to date—which may however experience further transformation in the future, as the rules in Dir 2014/24 start being interpreted by the CJEU.

It seems clear that, as a result of the Teckal and Hamburg doctrines, and even before their ‘recast’ in Art 12 of Dir 2014/24, Member States could have exempted the direct award of contracts for the printing of passports—or any other contracts involving security/essential national interests—not on those grounds, but on the basis of the ‘special’ relationship between the contracting authority and the provider of those ‘sensitive’ services. Where the relationship was one of ‘administrative mutualism’, the direct award could be exempted under the public-public exemption. Where the relationship was one of ‘similar control’ by the contracting authority, the exemption could be justified on the in-house providing doctrine.

In either of the cases, the relationship underlying the exemption requires a certain element of intuitu personae (to put it that way) between the entities participating in the non-tendered (contractual) arrangement. The existence of that ‘special nexus’ would justify a conceptualisation of the decision to award the contract as subjected to organic relationships and administrative governance, rather than contractualised mechanisms based on market-based governance and competition-based checks and balances. Conversely, where the contracting authority decided to contractualise the management of the relationship, and in the absence of special links with the arm’s length provider of the services, the contracting authority had to comply with the EU procurement rules.

The Commission v Austria case is interesting in that, underlying the reasoning of the Court (as well as the analysis of AG Kokott in her Opinion, see here) is an element of dismissiveness of the ‘special relationship’ created between Austria and ÖS. To put it in rather simple and tentative terms, my reading of the Judgment is that the CJEU is reluctant to recognise the exemption of a direct award where the mechanisms set up by the Member State to administer the security/essential national interest implicit in the provision of the services are fungible, in the sense that they could be easily recreated in relation to an alternative provider (or providers).

This is clear in the same paragraphs where the CJEU demonstrates the lack of proportionality of the direct award of the contract for the printing of passports (mainly, paras 80-94), where the Court repeatedly stresses the possibility for the Austrian authorities to have created adequate safeguards through contractual mechanisms aimed at: (i) ensuring the centralised execution of the contract (paras 81-83), (ii) the establishment of effective administrative supervision mechanisms (paras 84-86), (iii) guarantee of supply (para 87), (iv) the screening of the trustworthiness of the provider and confidentiality of sensitive information (paras 88-94).

This is compatible with the fact that, under the in-house and public-public cooperation doctrines, the entrustment of the provision of services to entities lacking that intuitu personae or special nexus—ie those governed by contract rather organic relationships—must comply with EU public procurement rules. This excludes the exemptability of direct awards such as that attempted by Austria, which is implicitly what the CJEU has established here by stressing the replicability with a suitable alternative provider of the ‘control’ or influence/oversight mechanisms that Austria has over ÖS—which would then fail to justify both (or either) exemption under the defence/essential interest doctrine and the in-house/public-public cooperation approach.

In my view, this is welcome as it reflects internal functional convergence across exemptions from compliance with EU public procurement rules on the basis of a distinction between the governance of relationships based on organic/administrative relationships and those based on markets and a competition logic. I think that this is a perspective worthy of further consideration, and it will be interesting to see of the CJEU makes this more explicit in future judgments.

Do EU procurement & State aid rules conflict on possibility for consortium members to 'go it alone'? (C-127/16 P)

In its Judgment of 7 March 2018 in SNCF Mobilités v Commission, C-127/16 P, EU:C:2018:165, in the context of the analysis of a measure of State aid for restructuring and recapitalisation involving a bidding process, the Court of Justice of the European Union (CJEU) indicated that it is not acceptable for the assets to be transferred to a bidder that had initially participated in the process as a member of a consortium but subsequently decided to 'go it alone' and submitted a solo bid for the assets. In establishing this principle, the CJEU seems to have taken a position that can potentially be functionally incompatible with its previous case law in the area of public procurement and, in particular, in its Judgment of 24 May 2016 in MT Højgaard and Züblin, C-396/14, EU:C:2016:347 (see here). This blog post discusses this potential functional contradiction in the case law of the Court.

 

SNCF Mobilités v Commission

In simple terms, this dispute concerned France's obligation to recover State aid given to SNCF (its national state-owned railway company) that was declared incompatible with EU law (Art 107 TFEU) by the European Commission. One of the possibilities that France had was to sell all assets of the relevant company within the SNCF group (Sernam) 'en bloc ... at market price through a transparent and open procedure to a company that has no legal link with SNCF' (C-127/16 P, para 7). The process for the sale of Sernam's assets en bloc was rather complicated, but the relevant part of the mechanism was as follows:

... Sernam’s economic situation failed to elicit any proposals based on a positive valuation in the call for tenders conducted on SNCF’s behalf by a bank. All the offers submitted under that procedure concluded that the value was very negative. As no firm offer had been submitted, the decision was taken to continue the discussions solely with the consortium established by candidate 5 who was associated with Sernam’s management team. On 15 June 2005, candidate 5 ultimately informed SNCF orally that it was not in a position to submit a takeover offer — not even a conditional one — before 30 June 2005. On 30 June 2005, SNCF took the decision to conclude the sale with Financière Sernam, which was wholly owned by Sernam’s management team (C-127/16 P, paras 8-9).

In the context of the dispute whether France met the requirements of the previous Commission decision requiring recovery of the State aid, one of the legal issues triggered by the French authorities' decision to enter into a sale agreement with Sernam's management team (through Financière Sernam) is whether it met the requirements for the transfer to result from 'a transparent and open procedure'. The Commission took the view that this was not the case. Before the CJEU considered this issue on appeal, the General Court (GC) had assessed the situation in its Judgment of 17 December 2015 in SNCF v Commission, T-242/12, EU:T:2015:1003.

In the relevant part of the Judgment (T-242/12, paras 162 and ff), the GC explains how, in the context of the procedure aimed at finding a buyer Sernam's assets en bloc, a final round of negotiations resulted in two offers. In simple terms, there was an offer by candidate 4 that valued the assets at - €65.2mn and an offer by a consortium composed of candidate 5 and Sernam's management team that valued the assets at -€56.4mn. In view of this, it was agreed to solely continue discussions with candidate 5 and Sernam’s management (para 164). During these discussions, as mentioned above, candidate 5 withdrew from the process and the management team submitted a solo offer that valued the assets at -€95.5mn (para 167). The acceptance of this offer by SNCF triggered two main issues.

First, given their significant divergence in the valuation of Sernam's assets, whether the solo offer submitted by Sernam's management team was comparable to the prior indicative offer of the consortium with candidate 5. The GC considered that 'the Commission was correct in not considering equivalent in terms of credibility and soundness the offer from a financial investor, candidate 5, who, moreover, was proposing to inject a significant amount of capital into Sernam, and the offer from 84 management and director employees financing a low amount, being EUR 2 million of the price, from their own resources' (T-242/12, para 168). Second, and more relevant for our discussion, there were concerns about the transparency and openness of the procedure for the sale of the assets en bloc. In that regard, the GC established that

... [SNCF] and the French Republic observe that the requirement that a procedure be transparent and open does not cease once the best bidder has been selected and the other candidates have, by definition, been rejected, and that the discussions continue with the ‘last interested party’.

The ‘last interested person’ in the transparent and open tendering procedure in this case was candidate 4 ... the management team’s firm offer, for EUR ‑95.5 million, was also less attractive for the vendor than the preliminary second-round offer from candidate 4, with its negative price of EUR ‑65.2 million ... As observed by the Commission in its written pleadings, following candidate 5’s withdrawal, recourse should have been had to candidate 4, who had been part of the process since the beginning and had also indicated its interest at the end of the second round.

The offer from the management team cannot be considered that of the ‘last interested party’, since it did not participate independently in the transparent and open procedure.

... the applicant submits that it is not relevant to compare the management team’s firm offer with the non-binding offer from the consortium of which it was a part, as only the firm offer is valid, even if it is not the best bid.

That argument must be rejected, since the question here is whether the management team’s firm offer was the result of the tendering procedure, which necessarily involves an examination of the non-binding offers submitted during the tendering procedure.

Therefore, the argument aimed at establishing that the management team participated from the beginning of the tendering procedure must be rejected because it did not participate independently and did not submit alone the offer it had initially submitted with candidate 5. Its offer cannot therefore be considered to result from a transparent and open procedure (T-242/12, paras 169-174, emphases added).

Regardless of the issue of equivalence of the offers, the argumentation constructed by the GC in these passages (implicitly) relies on the principle that members of a consortium cannot be seen as participating both within the consortium and in their own name, which establishes an insurmountable impossibility against any decision to 'go it alone' if the other member(s) of the consortium withdraw.

This principle was directly challenged in the appeal before the CJEU. In short, the challenge was that '... candidate 5 and Sernam’s management team had, within a consortium, been associated with the tendering procedure from the start of that procedure and had proposed the least negative value for the assets en bloc. It was only after candidate 5 withdrew that Sernam’s management team decided to pursue the process and submit on their own the takeover offer initially put forward by the consortium. The applicant thus takes the view that such circumstances meet the requirements of an open and transparent tendering procedure as reflected in the Commission’s decision-making practice and the Court’s case-law' (C-127/16 P, para 62).

Remarkably, SNCF argued that 'it is possible to accept that the principles of openness and transparency in public procurement may be applicable by analogy to procedures involving transfers of assets. It is apparent from Directive 2014/24/EU ... and from Directive 2014/23/EU ... that EU law allows for awarding such a contract to an economic operator without prior advertising or competition following an unsuccessful first tendering procedure, including when the operator did not participate in that first procedure, without that constituting an infringement of the principles of openness and transparency. Those principles should a fortiori be deemed to have been observed where the assets have been transferred to the last interested party, the only one to have made a firm offer, when it has participated in the process in its entirety, initially as part of a consortium from which the other party withdrew in the course of the procedure' (C-127/16 P, para 64).

On this point, the CJEU reasoned as follows:

First of all, without it being necessary to rule on a potential analogy between the tendering procedure relevant to the present case and the principles that are applicable in public procurement ... it should be noted that the applicant’s argument concerning that potential analogy is based on the fact that, at the end of the tendering procedure, no bid or no appropriate bid had been submitted. That kind of argument can be successful only if it challenges the General Court’s findings of fact in paragraph 170 of the judgment under appeal, to the effect that ‘[t]he “last interested person” in the transparent and open tendering procedure in this case was candidate 4. … As observed by the Commission in its written pleadings, following candidate 5’s withdrawal, recourse should have been had to candidate 4, who had been part of the process since the beginning and had also indicated its interest at the end of the second round’. That argument, which asks the Court of Justice to substitute its analysis for the one carried out by the General Court as part of its sovereign assessment of the facts and evidence, is therefore inadmissible and must be rejected.

Next, the practice followed by the Commission in its decisions or its guidelines, even if that practice were to support the applicant’s argument cannot, in any event, bind the Court in its interpretation of the EU rules ...

In any event ... according the Court’s case-law, the question whether a tendering procedure has been open and transparent is determined on the basis of a body of indicia specific to the circumstances of each case ...

Accordingly, in the light of the facts of the present case, and having held in paragraphs 170 and 171 of the judgment under appeal, that the successful bid did not originate from a candidate who had participated autonomously in the tendering procedure from the beginning of that procedure, the General Court was correct in holding, in paragraph 174 of that judgment, that the requirement of an open and transparent procedure had not been observed (C-127/16 P, paras 66-69, references omitted).

Accordingly, the CJEU SNCF Mobilités Judgment explicitly upholds the fact that for a tenderer to be awarded the contract for the sale of assets en bloc as a result of an 'open and transparent procedure', it is an absolute requirement that the 'successful bid ... originate[s] from a candidate who had participated autonomously in the tendering procedure from the beginning of that procedure'. This is in functional conflict with the previous Judgment in MT Højgaard and Züblin, as discussed below.

MT Højgaard and Züblin

In this public procurement case based on the 2004 EU utilities procurement rules (Dir 2004/17/EC), the CJEU ruled on whether the principle of equal treatment of economic operators must be interpreted as precluding a contracting entity from allowing an economic operator that is a member of a group of two undertakings which was pre-selected and which submitted the first tender in a negotiated procedure for the award of a public contract, to continue to take part in that procedure in its own name, after the dissolution of that group due to the bankruptcy of the other partner.

In that case, the contracting authority had indicated that it wanted to proceed to negotiations with between four and six candidates. It received expressions of interest from five candidates, which included interest by a consortium consisting of Per Aarsleff and E. Pihl og Søn A/S (‘the Aarsleff and Pihl group’). The contracting authority pre-selected all five candidates and invited them to submit tenders. One of the pre-selected candidates subsequently withdrew from the procedure. 

For the purposes of our discussion, the relevant fact is that Pihl entered into bankruptcy prior to the submission of the tender, which de facto implied the dissolution of the Aarsleff and Pihl group. Aarsleff decided to 'go it alone' and proceed as a solo tenderer. The contracting authority was thus left with two options: (a) to consider that Aarsleff was not qualified on its own merits (or, in the terms of the SNCF Mobilités Judgment (above) that it had not 'participated autonomously in the tendering procedure from the beginning') and to carry on with the negotiated procedure with 'only' three tenders; or, conversely, (b) to consider that Aarsleff could benefit from the qualification of the group to which it initially belonged and go forward with its desired minimum of four tenders. After some deliberation and information to all remaining candidates, Aarsleff was  allowed to submit a solo tender and, after a further round of best and final offers between the three better placed tenderers, it was awarded the contract.

In reviewing the compatibility of this decision with general principles of EU public procurement law, the CJEU established that, in the absence of specific rules on this subject, 'the question of whether a contracting entity may allow such an alteration must be examined with regard to the general principles of EU law, in particular the principle of equal treatment and the duty of transparency that flows from it, and the objectives of that law in relation to public procurement' (C‑396/14, para 36). In carrying out such analysis, the CJEU determined that

The principle of equal treatment of tenderers, the aim of which is to promote the development of healthy and effective competition between undertakings taking part in a public procurement procedure, requires that all tenderers must be afforded equality of opportunity when formulating their tenders, and therefore implies that the tenders of all competitors must be subject to the same conditions ...

...  [the rules on qualitative selection] may be qualified in order to ensure, in a negotiated procedure, adequate competition ...

If, however, an economic operator is to continue to participate in the negotiated procedure in its own name, following the dissolution of the group of which it formed part and which had been pre-selected by the contracting entity, that continued participation must take place in conditions which do not infringe the principle of equal treatment of the tenderers as a whole.

In that regard, a contracting entity is not in breach of that principle where it permits one of two economic operators, who formed part of a group of undertakings that had, as such, been invited to submit tenders by that contracting entity, to take the place of that group following the group’s dissolution, and to take part, in its own name, in the negotiated procedure for the award of a public contract, provided that it is established, first, that that economic operator by itself meets the requirements laid down by the contracting entity and, second, that the continuation of its participation in that procedure does not mean that the other tenderers are placed at a competitive disadvantage
(C-396/14, paras 38, 41, 43-44 & 47, references omitted and emphases added). 

As is clear from these passages, in MT Højgaard and Züblin, the CJEU rejected the principle that transparency and equal treatment required that a tenderer had 'participated autonomously in the tendering procedure from the beginning'. It rather established a more nuanced approach that required that the 'going it alone' tenderer was in a position to meet all relevant requirements of previous phases of the procedure (in that case, qualitative selection) and that it gained no competitive advantage--or, conversely, that no other tenderer was placed at a competitive disadvantage.

Overall comments

In my view, the SNCF Mobilités Judgment is problematic for the dogmatic principle that it sets out in terms of an absolute requirement of autonomous participation from the beginning. The MT Højgaard and Züblin Judgment can be criticised on other grounds (see here) but, from that perspective, its more nuanced approach towards tolerating decisions to 'go it alone' may be preferable in contexts where retention of a solo tender by the remaining member of a disbanded consortium can be determinative of the competitive tension within the tender procedure [see A Sanchez-Graells, Public procurement and the EU competition rules, 2nd edn (Oxford, Hart, 2015) 339].

More importantly, in my view, the SNCF Mobilités Judgment could have reached the same conclusions if it applied the more nuanced approach of MT Højgaard and Züblin. Indeed, it is hard to argue against the view that, by continuing conversations solely with Sernam's management team and accepting an offer that valued the assets at a very significant value below the previous consortium offer as well as the previous offer by candidate 4, SNCF put Sernam's management team at a clear advantage. In view of the withdrawal of candidate 5, SNCF would have been better advised to go back to the immediate previous step of the procedure and compare whichever solo offer Sernam's management team could submit with that of candidate 4. Doing that would also respect the basic principles of stage rounds of negotiations, whereby ceteris paribus the offers presented in each of the rounds should improve upon previous offers.

On the whole, then, I think that the SNCF Mobilités Judgment is a missed opportunity to have created more integration and compatibility between the procedural requirements applicable under EU State aid and public procurement rules. At the same time, given that the CJEU avoided engaging in the 'potential analogy between the tendering procedure [for the sale of assets en bloc] and the principles that are applicable in public procurement', it is to be hoped that the dogmatic approach of the SNCF Mobilités Judgment will not muddy the waters of the case law on modification of the composition of bidding consortia for the strict purposes of EU public procurement law.

Recording of seminar on procurement damages post-Fosen Linjen available

The Bergen Center for Competition Law & Economics (BECCLE) has now published the recording of the excellent seminar "Damages for breach of Public Procurement Law – Fosen-Linjen AS v AtB AS and its implications" held on 1 March--in which I had the pleasure and honour to participate. The recording includes four excellent and very lively presentations (modesty apart): 

  • Dag Sørlie Lund – “The Norwegian law and practice on damages arising from public procurement breaches before Fosen-Linjen AS v AtB AS, and the challenges it entails.”
  • Kirsi-Maria Halonen – “A comparative approach to damages: The Finnish and Swedish practice on damages arising from public procurement breaches.”
  • Albert Sánchez Graells – “Approaches to the ‘seriousness’ of the breach: The EFTA Court vs the UK Supreme Court.”
  • Halvard Haukeland Fredriksen – “Norway after the Fosen-Linjen AS v AtB AS case: What is to be expected and what are its repercussions – here and elsewhere.”

Given that the case is headed for the Norwegian Supreme Court after the Frostating Court of Appeal decided not to follow the EFTA Court's Opinion, the discussion we had in the seminar may be of particular interest. My arguments are further developed in this paper.

When will you show me the papers? Technical capacity, technical dossiers and verification during the procurement process (C-14/17)

In his Opinion of 28 February 2018 in VAR, C-14/17, EU:C:2018:135 (not available in English), AG Campos Sánchez-Bordona addressed a tricky preliminary question regarding the procurement of spare parts for buses, trolleybuses and tramways under the 2004 Utilities Procurement Directive (Dir 2004/17/EC). The legal dispute concerned the procedural stage at which contracting authorities must require tenderers to provide certificates attesting compliance with the applicable technical specifications. AG Campos suggested that such phase needs not always be prior to the award of the contract.

This case is relevant in the context of the contracting authorities’ verification duties prior to the award of the contract. In my view, while couched in promising pro-competitive terms aimed at preventing the imposition of disproportionate participation requirements, the approach followed by AG Campos can create legal uncertainty and an irreconcilable functional tension with prior cases such as EVN and Wienstrom (C-448/01, EU:C:2003:651). Therefore, the VAR Opinion merits some critical discussion.

Background

It is important to note that the VAR case has the relevant peculiarity that the contracting authority (presumably) owning a stock of vehicles of a given brand, had specified for the spare parts to be of such named brand ‘or equivalent’ as part of the technical specifications. Therefore, the relevant certificates were not of compliance with functional technical specifications or prescribed technical standards, but rather ‘certificates of equivalence’ between the offered parts and the named branded parts. The contracting authority had indicated in the tender documentation that such certificates of equivalence had to be submitted with the first supply of equivalent parts. As a result, the chosen tenderer was awarded the contract without having provided documentary evidence of the equivalence between the (cheaper) offered parts and the (pricier) branded ones. As could be expected, after the contract was awarded to the competing supplier, the ‘original equipment manufacturer’ (OEM, or owner of the brand) challenged the decision on the grounds that Dir 2004/17 required submission of the relevant certificates pre-award and that the contracting authority could not legally award a contract without having carried out minimal technical compliance verification.

The canonical view

The position taken by the disappointed tenderer that equivalence certificates should have been required prior to the award of the contract represents, in my opinion, the canonical view. Indeed, this was also the position of the Italian Government and the European Commission in this case, both of which held that a systemic interpretation of the relevant rules (ie Art 34(8), in relation to Art 34(3) and 34(4) Dir 2004/17) leads to the conclusion that certificates must be required prior to the award of the contract (see AGO, para 22).

As AG Campos sums up their arguments (see paras 38-41), such systemic/functional interpretation would derive from the fact that (i) proof of technical equivalence is a necessary element for the contracting authority to reach a judgment on which is the most economically advantageous tender amongst those received; (ii) in the absence of a prior verification of the tenderers’ ability to deliver on their contractual obligations, a contracting authority faced with non-compliant supplies would only be left with the option to terminate the contract, which is undesirable; and (iii) given that Art 34(8) Dir 2004/17 solely establishes the exceptionality of the recourse to a named brand and prohibits it except if twinned with the explicit mention of the acceptability of equivalent solutions, the general requirements for verification of technical compliance under Arts 34(3) and 34(4) Dir 2004/17—both of which require pre-award submission of documentation—should be applicable to cases where the contracting authority has made use of the exceptional reference to branded products.

In my view, this reflects the correct interpretation of the rules on verification of technical compliance under Dir 2004/17—and the same logic that remains applicable under the revised rules of the 2014 Public Procurement Package.

An alternate view

However, taking an alternate view, AG Campos suggested that Dir 2004/17 does not necessarily require tenderers to provide—and, implicitly, does not necessarily require contracting authorities to demand that tenderers submit—the relevant certificates prior to award of the contract if (i) the contracting authority has specified products of a named brand ‘or equivalent’, and (ii) it has indicated that such documents need only be submitted with the first supply of spare parts (para 74). The reasons given for this approach—which are flanked by thought-provoking references to the competition law rules applicable to the distribution of vehicles and their parts (not to be discussed in this post)—can be summarised as follows (see paras 42 and ff):

(1) AG Campos considers that the possibility to use a direct reference to branded products ‘or equivalent’ changes the contours of the technical verification to be undertaken by the contracting authority. The rules requiring pre-award verification are justified by the uncertainty or indetermination derived from the discretion conferred to the contracting authority in the way it can set technical specifications (eg by performance requirements alone, or mixed with technical standards). In contrast, “[w]hat explains the singular mention of a trademark, a patent or similar figures (always with the addition of their ‘equivalents’) is that the space of indetermination disappears. When, for example, it is only possible to supply spare parts for vehicles corresponding to a single brand …, or their equivalents, the contracting authority has already chosen to make "a sufficiently precise and intelligible description of the object of the contract". This is the key difference with respect to paragraphs 3 and 4 of Article 34 of Directive 2004/17, which makes it possible to deal disparately with the requirements on certificates of equivalence” (AGO C-14/17, para 43, own translation from Spanish). In other words, the reference to the brand ‘or equivalent’ would have made the technical specifications so precise that no verification of technical compliance would be necessary prior to the award of the contract.

In my view, this is a functionally and logically untenable position. Given that the use of a reference to branded products is only acceptable “on an exceptional basis, where a sufficiently precise and intelligible description of the subject-matter of the contract pursuant to paragraphs 3 and 4 is not possible”, the recourse to the brand can only be considered as short-hand or a proxy for what are otherwise insufficiently precise or inintelligible technical descriptions of the goods to be supplied. This cannot be seen as excluding the need to assess technical equivalence, but simply as setting the technical benchmark against which such verification needs to be carried out—for otherwise, how could the contracting authority make sure that the supplies of anyone by the OEM meet the requirements?

(2) AG Campos also considers that there is a clash of public and private interests that excludes a requirement of unavoidable pre-award verification of technical compliance. Or, in other words, “[i]t is of course legitimate to have the concern not to frustrate the success of the procedure, which could happen if the contracting authority that had not previously required [the equivalence certificates] would find, in the end, that the successful tenderer is not in a position to prove the equivalence of the pieces … That aspiration, however, cannot supersede the essential principles of public procurement, in particular, the need to guarantee bidders have equal access and are not confronted with ‘unjustified obstacles to the opening of public contracts to competition’” (AGO C-14/17, paras 48-49, own translation from Spanish).

This clash of interests between the contracting authority’s interest in carrying out sound pre-award technical compliance verification and the tenderers’ interest in being allowed access to the tender is constructed on the assumption that, for a supplier to be able to participate in a tender requiring the supply of original or equivalent spare parts, it would need to have individualised certificates for each and every one of the spare parts to be supplied (in the case at hand, over 2,000 parts). This would indeed give an advantage to the OEM manufacturer, which is of course under no need to certify compliance with its own technical standards.

However, this seems like an extremely rigid approach to technical compliance verification through documentation, which is only explained by the conflation of qualitative selection and technical verification carried out in the next set of reasons. A contracting authority could have taken a proportionate approach eg by requiring the submission of samples with the tender, together with a certificate of equivalence of the sample parts or sufficient technical information about the sample parts as to demonstrate that equivalence of the contractual supplies would be achieved. That would allow for a non-restrictive design of the tender procedure not requiring the award of the contract without carrying out sufficient verification of technical compliance.

(3) As AG Campos explains in his Opinion (see paras 57 and ff), in the case at hand, the contracting authority was able to award the contract without the need to receive documentation attesting technical equivalence because it had carried out an unduly restrictive qualitative selection by requiring that tenderers demonstrated experience in supplying a high value of spare parts of the named brand or equivalent in the previous three years. Indeed, he considers that “[p]rocurement documentation drawn up in those terms is restrictive, since it circumscribes the circle of recipients to those who have already manufactured spare parts of the [named] brand, whether original or equivalent, which excludes the participation of other manufacturers … the procuring entity, which had already imposed this rigorous conditions, could reasonably rely on them as criteria to assess the technical standing of the tenderers, without having to require them, in addition, to initially provide the certificates of equivalence of the 2,195 pieces referred to in the supply contract” (AGO C-14/17, para 60, own translation from Spanish).

In my view, this determines the existence not of one, but two, breaches of EU public procurement law. First, because the qualitative selection criteria are indeed too narrow and exclude the possibility for other OEMs or other ‘generic spare parts’ manufacturers to tender for the supply of pieces equivalent to the specific named brand on the basis of technical capability and previous experience in delivering original or equivalent pieces of other named brands (or OEMs). Second and on an alternative understanding of the facts, because in VAR the contracting authority would not have actually waived its obligation to carry out pre-award technical compliance certification by accepting certificates with the first supplies, but it would rather have carried out the verification at qualitative selection stage—which does not seem in line with the distinction between qualitative selection and award criteria according to Lianakis (C-532/06, EU:C:2008:40). Indeed, from a functional perspective, it seemed clear that in VAR the contracting authority screened potential suppliers on the basis of their ability to meet the particular technical specifications of the supplies it required, rather than on the basis of general technical capabilities to produce original or equivalent spare parts for buses, trolleybuses and tramways.

By taking the (inadvertent?) position that ‘two wrongs make a right’, AG Campos may have missed an additional important point. In practice, his position would allow contracting authorities to include requirements in the tender documentation that they have no intention of verifying prior to the award of the contract. This runs functionally contrary to the precedent of EVN and Wienstrom. There, the CJEU clearly established that “where a contracting authority lays down an award criterion indicating that it neither intends, nor is able, to verify the accuracy of the information supplied by the tenderers, it infringes the principle of equal treatment, because such a criterion does not ensure the transparency and objectivity of the tender procedure” (C-448/01, para 51). The difficulty here is not that the information cannot be verified at all, but that the information cannot be verified during the tender procedure—which in my view is a logical implication of the EVN and Wienstrom Judgment. Even if I would not support such an approach, this possibility for deferred verification during contractual execution could maybe only change now that contract modification is explicitly regulated in the 2014 Public Procurement Package; but any such logic would not apply to procurement covered by the 2004 Utilities Directive.

Moreover, the deferral of verification of technical compliance to contract execution and award of the contract without documentary or sample-based checks would create two undesirable effects: (i) opening up the possibility of self-certification of technical compliance by the tenderers and (ii) conflating verification of compliance with technical specifications for award purposes and quality control for contract performance purposes, which are not necessarily identical functions and certainly serve two distinct legal aims; respectively, ensuring the objectivity and probity of the award decision and ensuring compliance with contractual obligations.

Overall consideration

On the whole, in my view, the VAR Opinion is flawed by a misconstruction of the tests and verification carried out by the contracting authority, as well as by a misunderstanding of the technical simplification expected to derive from the exceptional recourse to branded ‘or equivalent’ supplies. As a matter of principle, contracting authorities should not be allowed to award contracts without carrying out sound checks on technical compliance. They should also not be allowed to defer them to contract execution without more. Contracting authorities should also not be allowed to use technical specifications as qualitative selection criteria due to the artificial narrowing of competition that involves (as clearly stressed, but not thoroughly analysed, by AG Campos in his Opinion).

Therefore, I would argue for the CJEU not to follow AG Campos on this occasion and rather clarify that (i) technical compliance cannot be deferred beyond the award of the contract, regardless of the use of references to branded ‘or equivalent’ products, and (ii) it is for the national court to determine whether the rules on technical specifications and qualitative selection were infringed in the design of the procedure in the case at hand. Otherwise, if the CJEU decided to follow the VAR Opinion, its case law would continue to add internal inconsistencies and unnecessary complexity in this already difficult area of procurement regulation.

CJEU greenlights ‘remedying procedural short-comings in return for (proportionate) payment’ (C-523/16 & C-536/16)

In its Judgment of 28 February 2018 in MA.T.I. SUD, C-523/16, EU:C:2018:135, the Court of Justice of the European Union (CJEU) accepted the compatibility with EU public procurement law (2004 version) in principle of domestic rules allowing for the 'remedying of procedural shortcomings in return for payment', whereby a contracting authority can invite any tenderer whose tender is vitiated by serious irregularities to rectify that tender, subject to the payment of a financial penalty--provided that the amount of that penalty is proportionate.

However, given previous case law excluding the possibility to remedy serious shortcomings in submitted tenders, the CJEU has stressed that such 'remedial mechanism in return for payment' is subject to the limitation that, despite the existence of such financial penalty, the contracting authority cannot require a tenderer to remedy the lack of a document which, according to the express provisions in the contract documentation, must result in the exclusion of that tenderer, or to eliminate irregularities such that any corrections or changes would amount to a new tender (para 65).

It is important to note, though, that despite establishing this position in principle, the CJEU also provided extremely clear indications that, in its view, there is a need to subject the assessment of the adequacy of the correction of the tenders to a strict assessment to make sure that they do not imply a new tender or the circumvention of the tender documentation (or, in other words, to make sure that the correction is not really of a serious irregularity, but rather a minor one), and that the penalties threatened in the Italian domestic cases that generated the preliminary reference cannot be considered proportionate (paras 62 & 64).

This anticipated analysis of incompatibility in concreto despite compatibility in abstracto begs the question whether the position in principle taken by the CJEU--ie the acceptaibility of non-serious modifications subject to proportionate financial penalties--is an adequate default rule, or whether a different default rule would be preferable--ie the acceptability of non-serious modifications without penalty.

In my view, and largely for the same reasons given in criticising the Opinion of AG Campos Sanchez-Bordona that the CJEU has now followed (see here, where they are developed in detail), in tolerating the imposition of financial penalties as a condition for the remediation of minor procedural defects, the MA.T.I. SUD Judgment sets the wrong default rule and is undesirable for its potential anti-SME effects, as well as due to the potential blurring of the narrow space that actually exists for the correction of serious irregularities under the Manova-Slovensko-Archus and Gama case law (see here, here and here). In adopting a seemingly more flexible approach in principle, in MA.T.I. SUD the CJEU may be creating more confusion than providing clarity, solely with the aim of maintaining a questionable space for domestic procedural administrative discretion. On balance, I would have thought it preferable for the CJEU to indicate more clearly and simply that serious irregularities cannot be corrected (with or without financial penalty), and that the correction of minor irregularities needs to be always accepted without sanction.

In MA.T.I. SUD, the CJEU assessed the compatibility with Art 51 of Directive 2004/18/EC of an Italian provision that enabled tenderers for public contracts to remedy any irregularities in their tenders, but at the same time imposed on them a financial penalty proportional to the value of the contract--of between 0.1% and 1% of the value of the contract, with a maximum ceiling of €50,000. The amount of the penalty was to be set in advance by the contracting authority and guaranteed by a provisional security (or bid bond), and could not be adjusted according to the gravity of the irregularity that it remedied. The maximum penalty was later reduced to €5,000, and eventually suppressed. This reduces the immediate impact of the MA.T.I. SUD Judgment. However, this CJEU ruling will be relevant beyond the specific context of Italian procurement rules, not only in relation with the now phased out transposition of Art 51 of Directive 2004/18, but also with Art 59 of Directive 2014/24/EU (which was not applicable ratione temporis). Both provisions foresee that contracting authorities can seek clarifications from tenderers under specified conditions.

There are some passages of the Judgment I consider relevant:

... when they implement the possibility provided for in Article 51 of Directive 2004/18 [whereby the contracting authority may invite economic operators to supplement or clarify the certificates and documents submitted to it], the Member States must ensure that they do not jeopardise the attainment of the objectives pursued by that directive or undermine the effectiveness of its provisions and other relevant provisions and principles of EU law, particularly the principles of equal treatment and non-discrimination, transparency and proportionality ...

It must also be borne in mind that Article 51 of Directive 2004/18 cannot be interpreted as allowing the contracting authority to accept any rectification of omissions which, as expressly provided for in the contract documentation, had to lead to the exclusion of the tenderer ...

... a request for clarification cannot make up for the lack of a document or information whose production was required by the contract documents, the contracting authority being required to comply strictly with the criteria which it has itself laid down ...

In addition, such a request may not lead to the submission by a tenderer of what would appear in reality to be a new tender

... the very concept of substantial irregularity ... does not appear to be compatible with Article 51 of Directive 2004/18 or with the requirements to which the clarification of a tender in the context of a public contract falling within the scope of Directive 2004/17 is subject, according to the case-law of the Court ...

It follows that the mechanism of assistance in compiling the documentation [under dispute] ... is not applicable if the tender submitted by a tenderer cannot be rectified or clarified within the meaning of the case-law referred ... above, and that, consequently, no penalty can be imposed on the tenderers in such a case (C-523/16, paras 48-49, 51-52 & 55-56 references omitted and emphasis added).

In my view, this reasoning of the CJEU reflects the state of the law and a desirable normative position. It would have allowed the CJEU to simply declare the Italian system incompatible due to the excess that a correction of serious irregularities would imply in comparison with the boundaries on tender modification derived from Manova-Slovensko-Archus and Gama. And the CJEU could have done that without entering into a discussion of whether proportionate penalties for non-substantial modifications are acceptable. On this point, it should be stressed that contested Italian rule also foresaw that '[i]n the case of non-substantial irregularities, that is, any non-essential absence or incompleteness of declarations, the contracting authority shall not require the remedying thereof or impose any penalty' (AGO, C-523/16, para 5). Therefore, in the case at hand, the narrow regulatory space left by the CJEU for the imposition of sanctions would not be occupied by the Italian rules, as the Italian legislator saw no need to sanction any such minor tender corrections.

On the whole, then, the MA.T.I. SUD Judgment seems to unnecessarily create a default rule that can be problematic in the interpretation and operationalisation of the rules in Arts 56 and 59 of Dir 2014/24. This stems from the fact that the CJEU has endorsed the underlying principle that 'the imposition of a financial penalty is indeed an appropriate means of achieving the legitimate objectives pursued by the Member State related to the need to place responsibility on the tenderers in submitting their tenders and to offset the financial burden that any regularisation represents for the contracting authority' (para 63). In my view, this runs contrary to the pro-competitive and pro-SME orientation of the 2014 Public Procurement Package. It also reflects a general understanding of public procurement law not as a mode of governance aimed at ensuring best value for money in the expenditure of public funds, but rather a set of fully justiciable rules aimed at discharging the cost and risk of the procurement function on the economic operators, which is then of course putting pressure at the other end of the spectrum via claims for damages where (complex) justiciable rules are not complied with absolutely. In my view, this creates an unrealistic framework for the carrying out of procurement efforts, and more scope for collaborative approaches within the boundaries of the requirements for equal treatment and competition would be superior.

Therefore, I can only hope that, in the future and with a right case, the CJEU will be able to further clarify its position--or, rectius, to reverse position and rule out the possibility of intra-tender sanctions for minor modifications. This is a normative point and, as I said before, the same way I argue against charging potentially interested tenderers for access to the tender documentation, I also take the normative position that imposing fines for the remediation of documentation shortcomings is undesirable, which leads me to propose their eradication de lege ferenda (by analogy, see A Sanchez-Graells, Public Procurement and the EU Competition Rules, 2nd edn (Oxford, Hart, 2015) 280-281).