Examining Brexit Through the GPA’s Lens: What Next for UK Public Procurement Reform?


Dr Pedro Telles and I have just published 'Examining Brexit Through the GPA’s Lens: What Next for UK Public Procurement Reform?' (2017) 47(1) Public Contract Law Journal 1-33 and, thanks to the permission of the American Bar Association, made it available through SSRN https://ssrn.com/abstract=3076543. This is the abstract:

The United Kingdom has formally started the process of leaving the European Union (so called Brexit). This has immersed the UK Government and EU Institutions in a two-year period of negotiations to disentangle the UK from EU law by the end of March 2019, and to devise a new legal framework for UK-EU trade afterwards. The UK will thereafter be adjusting its trading arrangements with the rest of the world. In this context, public procurement regulation is broadly seen as an area where a UK ‘unshackled by EU law’ would be able to turn to a lighter-touch and more commercially-oriented regulatory regime. There are indications that the UK would simultaneously attempt to create a particularly close relationship with the US, although recent changes in US international trade policy may pose some questions on that trade strategy. Overall, then, Brexit has created a scenario where UK public procurement law and policy may be significantly altered.

The extent to which this is a real possibility crucially depends on the framework for the future trading relationship between the UK and the EU. Whereas ”EU-derived law” will not restrict the UK’s freedom to regulate public procurement, the conclusion of a closely-knit EU-UK trade agreement covering procurement could thus well result in the country’s continued full compliance with EU rules. Nonetheless, this is not necessarily a guaranteed scenario and, barring specific requirements in future free trade agreements between the UK and the EU or third countries, including the US, the World Trade Organisation Government Procurement Agreement (GPA) seems to be the only regulatory constraint with which future UK public procurement reform needs to conform. However, the position of the UK under the GPA is far from clear. We posit that the UK will face a GPA accession process and GPA members may see Brexit as an opportunity to obtain new concessions from the UK and the EU, which could be both in terms of scope of coverage or regulatory conformity. Further, given the current trend of creating GPA plus procurement chapters in free trade agreements, such as the US-Korea FTA, the GPA regulatory baseline will gain even more importance as a benchmark for any future reform of public procurement regulation in the UK, even beyond the strict scope of coverage of the GPA. Given the diversity of GPA-compliant procurement systems (such as the EU’s and the US’), though, the extent to which the GPA imposes significant restrictions on UK public procurement reform is unclear. However, we argue that bearing in mind the current detailed regulation in the UK might itself limit deregulation due to the need to comply with the international law principle of good faith as included in the 1969 Vienna Convention on the Law of Treaties and, to a certain extent, the United Nations Convention Anti-Corruption. 

The aim of this paper is to try to disentangle the multi-layered complexities of Brexit and to explore the issues that Brexit has created in the area of international public procurement regulation, both from the perspective of ‘internal’ EU law-related issues and with regard to broader ‘external’ issues of international trade regulation, as well as to assess the GPA baseline regulatory requirements, and to reflect on the impact these may have on post-Brexit public procurement reform in the UK.

Some thoughts on regulatory substitution, public procurement and labour objectives

I am thrilled to participate in the event 'Socially Sustainable Public Procurement' organized by Dr Richard Craven at the University of Leicester tomorrow. Together with Richard and Dr Eleanor Aspey, I will be reflecting on issues around the use of public procurement for the enforcement of labour standards.

My comments (which I expect to reflect the minoritarian view) will be centered on issues of regulatory substitution and the competition implications that the ECJ's case law in Bundesdruckerei and Regiopost have created. This will help me sharpen the arguments for two papers that are in the making. More details soon. The slides for tomorrow's presentation are here:

Excellent @E15Initiative Think Piece on Competition, Corruption and Trade dimensions of Public Procurement Regulation (Anderson, Kovacic and Müller: 2016)

The E15Initiative jointly implemented by the International Centre for Trade and Sustainable Development (ICTSD) and the World Economic Forum aims to generate strategic analysis and recommendations for government, business, and civil society geared towards strengthening the global trade and investment system for sustainable development. One of their great initiatives is to publish 'think pieces' to stimulate a more informed debate about how trade policy and institutions can best be adapted to the highly interconnected global economy of the 21st century.

One of these first think pieces is Anderson, Kovacic and Müller, Promoting Competition and Deterring Corruption in Public Procurement Markets: Synergies with Trade Liberalisation (Feb 2016). In this well-thought and persuasive piece, the authors expand on their previous thoughts in this area [“Ensuring integrity and competition in public procurement markets: a dual challenge for good governance,” in Arrowsmith & Anderson (eds), The WTO Regime on Government Procurement: Challenge and Reform (Cambridge University Press, 2011) 681-718] and make a compelling case for the careful integration and balancing of competition, corruption and trade considerations in public procurement regulation. Their abstract is as follows:
Efficient and effective government procurement markets are critical to economic growth, development, and the welfare of citizens. Yet, two very serious challenges bear on the performance of these markets: (i) ensuring integrity in the procurement process (preventing corruption on the part of public officials); and (ii) promoting effective competition among suppliers. Typically, these challenges are viewed as separate and distinct: the former (corruption) is treated primarily as a principal-agent problem in which the official (the “agent”) enriches himself/herself at the expense of the government or the public (the “principal”); while the latter (promoting competition) involves preventing collusive practices among potential suppliers and removing barriers that impede participation in relevant markets. This think-piece demonstrates that these two problems often overlap, for example where public officials are paid to turn a blind eye to collusive tendering schemes or to release information that facilitates collusion. As well, while transparency requirements are often central to efforts to eradicate corruption, such measures can, if not properly tailored, facilitate collusion and thereby undermine efforts to strengthen competition. Thus, careful coordination of measures to deter corruption and to foster competition is needed. Further, the think-piece argues that participation in the WTO Agreement on Government Procurement (GPA), or in similar regional arrangements, can play an important role both in promoting competition and in deterring corruption. The GPA enhances possibilities for healthy competition in relevant markets through participation by foreign-based or affiliated contractors. It helps to prevent corruption by requiring adherence to appropriate (tailored) transparency measures, and by exposing procurement activities to checks and balances including domestic review (“bid protest” or “remedy”) systems and international scrutiny.
Focusing on my pet topic of transparency in public procurement regulation and how this can affect competition in markets where public procurement is an important demand component, I am thrilled to read that Anderson, Kovacic and Müller stress that:
... increasingly, some challenges in the design of appropriate levels of transparency at the different stages of the procurement process have been recognised in both the procurement and competition communities. The OECD (2007) points out that: 
Governments need to find an adequate balance between the objectives of ensuring transparency, providing equal opportunities for bidders, and other concerns, in particular efficiency. The drive for transparency must therefore be tempered by making transparent what sufficiently enables corruption control. 
Indeed ... certain kinds of transparency measures can clearly facilitate collusion and, consequently, are problematic from a competition policy point of view (Marshalland Marx 2012; Sanchez Graells 2015A). While, for example, there may be no way around the need for publication of award criteria and technical specifications in public procurement if responsive tenders are to be solicited, their usefulness as tools for facilitating inter-supplier agreement needs to be recognised. Similarly, the publication of procurement outcomes, while enabling monitoring by the public as the “principal,” can also serve cartel participants in policing anti-competitive agreements and thereby enhancing cartel stability. Sanchez Graells (2015B) discusses specific possible concerns regarding transparency measures that may be associated with centralised procurement registers. 
A further complication is that optimal transparency levels may differ from country to country. “Solutions” that are potentially workable in some contexts may be highly problematic in others. For example, in jurisdictions where outright corruption problems are believed to be minimal, some lessening of transparency measures might be considered, for the sake of preventing collusion. On the other hand, in economies where corruption is rampant, any lessening of transparency measures may be a recipe for disaster. This explains why the very high priority that is given to transparency in public procurement processes in some countries in Eastern Europe may, in fact, be appropriate notwithstanding possible collusion facilitation concerns, at least as an interim measure. In any case, as explained below, both competition law enforcement and competition advocacy are clearly part of the solution (pp.9-10).
Of course, I am really thankful that they picked up on some of my recent research and I hope that their think piece will help disseminate these insights, which I consider extremely important for the proper design of public procurement rules in a way that is socially advantageous [for further discussion, see A Sanchez-Graells, 'The Difficult Balance between Transparency and Competition in Public Procurement: Some Recent Trends in the Case Law of the European Courts and a Look at the New Directives' (November 2013)].

Spanish competition watchdog CNMC issues report on health care outsourcing procurement

The Spanish Competition Authority has recently published a report on the application of its Guide on Public Procurement and Competition to public health care provision-related procurement in Spain (only available in Spanish: Aplicación de la Guía de Contratación y Competencia a los procesos de licitación para la provisión de la sanidad pública en España). 

The report is interesting to read and it identifies some common trends in competition-reductive procurement practices (if not fully suppressive of meaningful competition) and areas for massive improvement in Spanish health care-related procurement. 

Some of them may offer valuable insights for other countries that also organise their health care provision around a national health system. These are some of the aspects of the report that I find more interesting:

1. The report is mainly concerned with outsourcing processes, whereby the competent (regional) public authorities tender contracts for the construction and management, or only the management, of health care facilities (mainly hospitals). This is an area that will remain lightly regulated in the future EU Directive on concessions (Art 17) and in the new version of the Directive on public sector procurement (Arts 74 to 76a). Consequently, the recommendations and best practices identified in the CNMC report may help in the construction of a fuller set of (binding and non-binding) guidelines for health care management outsourcing.

2. The report offers a radiography of the hospital sector in Spain, which shows that it is rather large and that there is a very relevant presence of private investment in the sector. Overall, there are 789 hospitals in Spain (162,070 beds), which means that each hospital serves an average of roughly 59,300 inhabitants (290 inh/bed). 

However, there are significant regional differences in availability of total hospital services, ranging from Andalusia at 378 inh/bed to Catalonia at 218 inh/bed. Furthermore, it is also interesting that only 325 of the 789 hospitals are public (41%), but they accumulate almost 67% of available beds--which means that the availability of public hospital services actually ranges between Catalonia at 523 inh/bed and Aragon at 308 inh/bed. All regions have schemes of arrangement with private hospitals, so that they extend 'public' coverage through private hospitals (49% of private hospitals are included in such schemes, again with large variations ranging from 100% of private hospitals being included in the 'extended public network' in La Rioja to only 22% of private hospitals in Catalonia). 

The big discrepancies between the availability of total and public hospital services shows large regional differences in private investment and alternative (ie non-public) health care management strategies. This also seems to show that private hospitals tend to be smaller than public hospitals (116 v 334 beds on average)--and, probably, easier (but more expensive) to manage, at least in terms of general costs if economies of scale are properly exploited in the public system (a big if, I think, although the report offers no data to test this). It may also be worth stressing that 21% of private hospital capacity (by number of beds) is controlled and run by the Catholic church and religious organisations. The next larger private (or non-public) player only reaches 4%.

The distribution by areas of activity is also relevant, and it is worth noting that generalist, geriatric and psichiatric hospitals accumulate almost 90% of the available beds--which seems to indicate that there is room for further specialisation in the sector.

The report also offers more detailed analysis of the regions where there has already been some outsourcing of public health care management: Catalonia, Madrid, Valencia, La Rioja and Navarra.

3. The main body of the report focusses on the 5 aspects of health care management outsourcing that are more susceptible to create distortions of competition: (i) the design of the tender procedure and the setting up of the technical specifications, (ii) the setting up of selection criteria, (iii) the choice and weighting of award criteria, particularly those related to (non-measurable) qualitative elements, and (iv) issues related to contract modification.

It is remarkable that, in all of these areas, the CNMC has identified specific examples of very clear distortions of competition. It is worth noting, for instance, that:

a) There has been an excessive degree of bundling of specialist and general services in hospital outsourcing (sometimes forcing the hospital concessionaire to enter into existing public services contracts with third party providers of specialist services, such as image diagnostics or laboratory analysis).

b) Regional authorities have not availed themselves of proper strategic division of tenders into lots and the dominant strategy (one lot, one hospital) may have facilitated collusion.

c) Initial contract duration may have been excessive, with a median of 30+ years for works concessions (building + managing hospitals) and 10 years for service concessions/public service contracts (management only of an existing hospital). Some of them also include relatively generous extension/renewal provisions.

d) Of the 19 contracts that included health management (others were limited to the management of the premises, but included no sanitary provision), 15 were awarded to the only tenderer submitting an offer. In the other 4 instances, only 2 offers were received. This seems to indicate that participation requirements were exceedingly restrictive (or, in an alternative and very personal view, that there was no expectation of effective competition, either due to the existence of a market sharing agreement or widespread corruption, particularly in the case of Valencia and Madrid, where criminal investigations are underway).

e) The setting of very demanding selection criteria (particularly in terms of financial standing and previous experience) have limited dramatically the number of potential offerors and been particularly alienating for temporary unions of undertakings, as a relevant part of the tender documents required that each of the undertakings individually considered met all of the requirements. This is a stark breach of procurement law and, as such, should have been the object of legal challenges.

f) There was an insufficient publicity and advertisement of the tendering for public service concessions worth Eur 4,000 mn in the Madrid region (advertised only in the region itself). This indicates that, in reality, there may be some need for the extension of publicity requirements to concession contracts as the future Directive aims to do. However, this may also have been a breach of EU law requirements, given that the contracts seem to have (at least potential) cross border interest.

g) There was an insufficient disclosure of information with relevant financial implications, such as the personnel costs to be assumed by concessionaires of existing hospitals, or the system of mutual invoicing between public hospitals (which made it difficult to calculate the cost and revenue structure of the concession, particularly for relatively unexperienced tenderers). The information asymmetries were even higher when it came to disclosure of health planning and other requirements.

h) There was widespread misuse of the price criterion as one of the key elements to award the contract. Price assessment formulae based on average prices, or that gave a very low weight to prices (of 30% in construction concessions), or that included irrelevant criteria (such as giving 30% of weight to the establishment of a stock-option scheme by the concessionaire) might have limited the ability of regional authorities to obtain value for money in the outsourcing of hospital management.

i) There were several instances of double-count of elements as both selection and award criteria, particularly as previous experience is concerned. This is another blatant breach of procurement law and, as such, should have been the object of legal challenges.

j) Insufficient or too basic quality control mechanisms and penalties for breaches thereof were included in a significant number of concession schemes. Also, remuneration was always calculated on a per capita basis, so that concessionaires and public service providers would always be remunerated almost regardless of the level of quality or actual provision of services (80% of the per capita support working as a common floor or minimum remuneration).

k) Most tender documentation either imposed or facilitated subcontracting of up to 50-60% of the contract and no proper oversight mechanisms were in place, so that concessionaires were basically free to subcontract very significant parts of their contracts as they saw fit.

l) Excessive resort to contractual modifications: "Of the 38 contracts for which information is available, there have been changes in 24 of them (64%). In 7 of the 24 contracts modified there have been two changes to the contract."

4. In its conclusions (a bit too mild in my opinion, particularly in view of the major irregularities documented in the report), the CNMC recommends, among others, the following measures (see press release in English):

  • When designing tender processes, the open procedure must be used whenever possible, as that procedure is the most conducive to competition and precludes contracts that cannot be justified on account of the pay-back times for investments.
  • As regards access to tenders for participants, publication should be more widespread in order to open up access to the highest number of potential bidders possible.
  • With respect to the weighting of criteria and the procedure for the award of contracts, a suitable weighting should be attached to the variables to avoid leaving excessive discretion to the award body. In the case of healthcare services, the overarching goal is to ensure quality in the provision of services to patients, so that a balance must be struck between competition in the price variable and the quality of the service.
  • Lastly, as regards the implementation of contracts, it is proposed, among other recommendations, that the specifications should describe the elements that define the quality of contract performance and should contain credible and robust mechanisms for monitoring and penalising failures to meet the requirements of those elements. The specifications should also lay down remuneration and transparency mechanisms that encourage the awardee to provide high quality services (emphasis added).
In my view, this Report brings to light a very serious problem and a massive challenge in the modernisation and reform of health care management in Spain. I started wondering if a sectoral regulator would not be necessary, as the ones existing in England (Monitor) or The Netherlands (NZa), as this sector seems to really be crying for some close scrutiny...

How #publicprocurement rules seem to be diminishing #competition in #China: A wake up call

The latest edition of the China Competition Bulletin reports on the state of affairs in Chinese public procurement markets, where inadequate rules and procedures seemingly fail to ensure value for money as a result of a lack of transparency and accountability.

According to the report, 
The principles of openness and transparency, fair competition, impartiality, and good faith are required to be observed in government procurement. China’s government procurement system provides general rules on competition, transparency, and fairness. However, the implementation of the rules is less than ideal. Insufficient disclosure of information, conflicts of interest, discriminatory treatment of enterprises, excessive prices, and poor quality purchasing have been frequently reported and raised the public’s concern in recent years. The newly released Blue Book of Rule of Law: Annual Report on China’s Rule of Law No. 11 (2013) provides an empirical report on the current state of government procurement.
Remarkably, other than the difficulties in having access to comparable data (and, generally, to data), the report evidences that
Data and price comparison results revealed that certain government procured goods can be much more expensive than average market prices. An extreme example mentioned in the report was a desktop computer that was procured at a cost of CNY 98,730 when the average market price for a computer with the same specifications was CNY 2,649. [...] In the end, the prices of 19,020 items were compared. These goods covered 29 product categories such as uninterruptible power systems, laptops, dehumidifiers, printers, and fax machines. The results show that the prices of 15,190 items were higher than the average market prices and that taxpayers had paid an extra CNY 20,743,897.50. On the positive side, the price comparison results show that 68,025 items purchased through the centralised procurement of the Central Government had saved taxpayers CNY 5,543,185. The 68,025 items, covering desktops, workstations, and printers, were chosen from 85,963 records collected for the research.
In view of such findings, 
the report notes that transparency is the foundation of fair competition, impartiality, and good faith. Transparency can effectively facilitate fair competition, deter corruption, and prevent China, the world’s largest procurement market, from turning into the world’s largest market for public corruption.
It seems that the Chinese public procurement system would benefit from a revision along the lines suggested by the report itself, which includes recommendations for the revision and improvement of the legal system for government procurement; which should be coupled with those in the OECD July 2012 Recommendation and, more generally, it offers a clear example of the interaction between public procurement and competition, as well as the need to consider  effects of public procurement regulations on competitive markets, as Prof. Yukins and Lt. Col. Cora have just emphasised in their featured comment in Government Contractor, March 6, 2013, Vol. 55, No. 9, ¶ 64.

When analysing the situation in the USA, Yukins and Cora conclude that
a substantial body of literature confirms that procurement rules can have a significant negative impact on competitive commercial markets. Procurement rules can, for example, raise new barriers to entry in the commercial marketplace, facilitate collusion in the commercial space, or artificially buoy commercial prices. Federal procurement regulators have not, as a regular matter, assessed those possible impacts in past rulemaking, but sound practice and legal authority, including an executive order, seem to call for such assessments. Assessing procurement rules’ likely impact on competitive markets would be in accord with best practices in rulemaking, and would help ensure that the federal procurement system integrates efficiently, and not disruptively, into the broader economy.
Their views and recommendations, which I fully share [Sanchez Graells, Public Procurement and the EU Competition Rules (Oxford, Hart Publishing, 2011)], are relevant for procurement reform in all major jurisdictions, such as the USA, the EU and  China. Hopefully, too, such revisions can lead to an exchange of best practices and, to the extent desirable, certain global convergence.