European Commission wants to see more AI procurement. Ok, but priorities need reordering

The European Commission recently published its 2023 State of the Digital Decade report. One of its key takeaways is that the Commission recommends Member States to step up innovation procurement investments in digital sector.

The Commission has identified that ‘While the roll-out of digital public services is progressing steadily, investment in public procurement of innovative digital solutions (e.g. based on AI or big data) is insufficient and would need to increase substantially from EUR 188 billon to EUR 295 billon in order to reach full speed adoption of innovative digital solutions in public services’ (para 4.2, original emphasis).

The Commission has thus recommended that ‘Member States should step up investment and regulatory measures to develop and make available secure, sovereign and interoperable digital solutions for online public and government services’; and that ‘Member States should develop action plans in support of innovation procurement and step up efforts to increase public procurement investments in developing, testing and deploying innovative digital solutions’.

Tucked away in a different part of the report (which, frankly, has a rather odd structure), the Commission also recommends that ‘Member States should foster the availability of legal and technical support to procure and implement trustworthy and sovereign AI solutions across sectors.’

To my mind, the priorities for investment of public money need to be further clarified. Without a significant investment in an ambitious plan to quickly expand the public sector’s digital skills and capabilities, there can be no hope that increased procurement expenditure in digital technologies will bring adequate public sector digitalisation or foster the public interest more broadly.

Without a sophisticated public buyer that can adequately cut through the process of technological innovation, there is no hope that ‘throwing money at the problem’ will bring meaningful change. In my view, the focus and priority should be on upskilling the public sector before anything else—including ahead of the also recommended mobilisation of ‘public policies, including innovative procurement to foster the scaling up of start-ups, to facilitate the creation of spinoffs from universities and research centres, and to monitor progress in this area’ (para 3.2.3). Perhaps a substantial fraction of the 100+ billion EUR the Commission expects Member States to put into public sector digitalisation could go to building up the required capability… too much to ask?

Interoperable Europe Act: Quick Procurement Annotation

© European Commission.

In November 2022, the European Commission published its proposal for an ‘Interoperable Europe Act’ to strengthen cross-border interoperability and cooperation in the public sector across the EU (the ‘IEA Proposal’, or ‘IEAP’) . The IEA Proposal seeks to revamp and strengthen the current European Interoperability Framework, which has seen very limited uptake since its inception in 2004, as detailed in the Communication ‘Linking public services, supporting public policies and delivering public benefits. Towards an “Interoperable Europe”’ (the ‘IEA Communication’).

The IEA Proposal thus seeks to introduce mandatory obligations and support mechanisms to foster the creation of a network of sovereign and interconnected digital public administrations and to accelerate the digital transformation of Europe's public sector, as an attempt to achieve Europe's 2030 digital targets and support trusted data flows. It also seeks to stimulate public sector innovation and public-private GovTech projects.

The IEA Proposal has a few procurement implications, some more evident than others. In this post, I try to map them, and offer some comments.

Some basics of the IEA Proposal

The IEA Proposal seeks to create a toolkit to promote increasing levels of interoperability in the network and information systems that enable public services to be delivered or managed electronically, with a primary focus on cross-border digital public services (Arts 3-14). The toolkit is complemented by institutional mechanisms for the governance of cross-border interoperability (Arts 15-18), as well as some central planning and monitoring instruments (Arts 19-20).

From a procurement perspective, some elements in the toolkit are particularly relevant, including: (i) an obligation to carry out interoperability assessments; (ii) an obligation to exchange information on ‘interoperability solutions’ and to cooperate with other public sector bodies; (iii) innovation measures with a GovTech focus; and (iv) regulatory sandboxes. Other measures, such as the creation of a portal for the publication of information on ‘interoperability solutions’, the possibility to set up Commission-driven policy implementation projects, provisions on training, or peer review mechanisms, are of lesser direct relevance. The rest of this post focuses on the four elements with a more direct procurement link.

Using procurement to trigger interoperability assessments

Interoperability assessments are one of the main elements in the IEAP toolkit. Recital (8) stresses that

To set up cross-border interoperable public services, it is important to focus on … interoperability … as early as possible in the policymaking process. Therefore, the public organisation that intends to set up a new or to modify an existing network and information system that is likely [to] result in high impacts on the cross-border interoperability, should carry out an interoperability assessment. This assessment is necessary to understand the magnitude of impact of the planned action and to propose measures to reap up the benefits and address potential costs.

Recital (10) then adds that

The outcome of that [interoperability] assessment should be taken into account when determining the appropriate measures that need to be taken in order to set up or modify the network and information system.

The minimum content of the interoperability assessment is prescribed and includes specific analysis of the ‘level of alignment of the network and information systems concerned with the European Interoperability Framework, and with the Interoperable Europe solutions [a new form of recommended interoperability standard]’ (Art 3(4)(b) IEAP). The purpose of the assessment is clearly to promote convergence towards European standards, even if there is no strict obligation to do so. The outcome of the interoperability assessment must be published on the public sector body’s website (Art 3(2) IEAP). Such transparency may support convergence towards European standards.

The IEA Proposal uses the likelihood of a procurement process as one of three triggers for the obligation to carry out an interoperability assessment. Article 3(1)(b) IEA Proposal indeed makes it mandatory to carry out such interoperability assessment ‘where the intended set-up or modification [of an existing network and information system that enables public services to be delivered or managed electronically] will most likely result in procurements for network and information systems used for the provision of cross-border services above the threshold set out in Article 4 of Directive 2014/24/EU’.

This trigger raises the question why the same obligation is not imposed when other EU procurement rules may be applicable — notably Directive 2014/23/EU on concessions, but also Directive 2014/25/EU as the infrastructure for digital public services may not be directly procured by an entity covered by Directive 2014/24/EU — although it is possible to carry out interoperability assessments on a voluntary basis.

Be it as it may, as a first procurement implication, the IEA Proposal would create an add-on regulatory obligation to carry out an interoperability assessment for (likely) procurements covered by Directive 2014/24/EU. It may be worth noting that the obligation to carry out an interoperability assessment is also triggered where ‘the intended set-up or modification affects one or more network and information systems used for the provision of cross-border services across several sectors or administrations’ (Art 3(1)(a) IEAP), so the obligation would not be circumvented in eg cases of public-public cooperation or in-house provision, whether they are considered covered and exempted, or excluded, from Directive 2014/24/EU.

The obligation to carry out the interoperability assessment can have a knock-on effect on the setting of technical specifications for the future procurement, to the extent that it promotes the adoption of Interoperable Europe solutions as standards. In that regard, it is worth noting that the IEA Proposal highlights that ‘Interoperability is a condition for avoiding technological lock-in, enabling technical developments, and fostering innovation’ (rec (22)), and also establishes a clear link between its objectives and the standardisation of technical specifications. In Recital (18), is stresses that

Interoperability is directly connected with, and dependent on the use of open specifications and standards. Therefore, the Union public sector should be allowed to agree on cross-cutting open specifications and other solutions to promote interoperability. The new framework should provide for a clear process on the establishment and promotion of such agreed interoperability solutions in the future. This way, the public sector will have a more coordinated voice to channel public sector needs and public values into broader discussions.

Therefore, a secondary procurement implication is that the IEA Proposal can have implications for the setting of technical specifications, in particular to promote the use of Interoperable Europe solutions. These can propagate beyond cross-border digital public services to the extent that such standardisation can also generate functional and financial advantages in a strictly domestic context. Moreover, as Interoperable Europe solutions are developed, they can simply become de facto industry standards.

obligations to exchange information: need for new or additional clauses in public contracts?

Another of the key goals of the IEA Proposal is to facilitate (cross-border) information exchanges between public administrations on the interoperability solutions they have implemented. Such exchange of information is meant to promote sharing and reusing proven tools as a ‘fast and cost-effective approach to designing digital public services’ (IEA Communication, at 2).

In that regard, Recital (12) of the IEA Proposal programmatically stresses that

Public sector bodies or institutions, bodies or agencies of the Union that search for interoperability solutions should be able to request from other public sector bodies or institutions, bodies or agencies of the Union the software code those organisations use, together with the related documentation. Sharing should become a default among public sector bodies, and institutions, bodies and agencies of the Union while not sharing would need a legal justification. In addition, public sector bodies or institutions, bodies, or agencies of the Union should seek to develop new interoperability solutions or to further develop existing interoperability solutions.

Such a maximalist approach would generalise a practice of ‘EU-wide’ ‘software code’ and technical documentation exchange that would likely raise some eyebrows, especially in relation to proprietary software and in relation to algorithmic source code protection. The IEA Proposal justifies this in Recital (13) on grounds that

When public administrations decide to share their solutions with other public administrations or the public, they are acting in the public interest. This is even more relevant for innovative technologies: for instance, open code makes algorithms transparent and allows for independent audits and reproducible building blocks. The sharing of interoperability solutions among public administration should set the conditions for the achievement of an open ecosystem of digital technologies for the public sector that can produce multiple benefits.

However, the IEA Proposal is much more limited than the recitals would suggest. The information exchange regime created by the IEA Proposal is regulated in Article 4. It needs to be read bearing in mind that Article 2(3) defines an ‘interoperability solution’ as a ‘technical specification, including a standard, or another solution, including conceptual frameworks, guidelines and applications, describing legal, organisational, semantic or technical requirements to be fulfilled by a network and information system in order to enhance cross-border interoperability’.

Depending on its interpretation, this definition can severely limit the scope of the information exchange obligations under the IEA Proposal, in particular due to the (functional) requirement that the covered ‘interoperability solutions’ refer to ‘requirements to be fulfilled by a network and information system in order to enhance cross-border interoperability’ (emphasis added). It should be noted that ‘cross-border interoperability’ is defined as ‘the ability of network and information systems to be used by public sector bodies in different Member States and institutions, bodies, and agencies of the Union in order to interact with each other by sharing data by means of electronic communication’. The IEA Communication and several aspects of the IEA Proposal seem to indicate that the purpose is not to restrict the relevant obligations to cases of existing cross-border interaction, but to facilitate potential cross-border interoperability. In that regard, it seems that it would have been preferable to define the scope of application as concerning information on any ‘solutions’ adopted by a public sector institution, so long as the information request was based on the potential interoperability of such solution with that (to be) adopted by the requesting institution. Nonetheless, it also seems functionally necessary for the information exchange mechanism not to be constrained to interoperability solutions already addressing issues of cross-border interoperability.

According to Article 4(1), ‘A public sector body or an institution, body or agency of the Union shall make available to any other such entity that requests it, interoperability solutions that support the public services that it delivers or manages electronically. The shared content shall include the technical documentation and, where applicable, the documented source code.’

Importantly, though, this obligation is excluded in the crucial case of interoperability solutions ‘for which third parties hold intellectual property rights and do not allow sharing’ (Art 4(1)(b)). It is also excluded regarding interoperability solutions that support processes which fall outside the scope of the public task of the public sector bodies or institutions, bodies, or agencies of the Union concerned (Art 4(1)(a)), and those with restricted access due to the protection of critical infrastructure, defence interests, or public security (Art 4(1)(c)).

So, what is left? Primarily, exchanges based on open source interoperability solutions, or exchanges of proprietary information permitted by the IP holder — eg through a licence that allows for the reuse by other public sector bodies or institutions, bodies or agencies of the Union, or other contractual means. In that regard, the obligation to exchange information is much more limited than may at first seem and does not create significant new technology governance duties on public buyers—other than the primary duty to disclose which solution is being used and to participate in the exchange of open (or permissioned) information, which can be done through a new portal to avoid multiple bilateral interactions (see Art 4(3) IEAP).

It may however be necessary to develop contractual clauses to clarify whether IP protected interoperability solutions can or cannot be shared (and in which terms), along the lines of some of the obligations regulated in the standard contractual clauses of the procurement of artificial intelligence, currently under development. Such contractual regime is also necessary in relation to software source code in any case, as a result of the CJEU Judgment in Informatikgesellschaft für Software-Entwicklung, C-796/18, EU:C:2020:395 (the ‘ISE case’, see here for discussion).

‘mandatory’ public-public cooperation

To support the reuse of (exchanged) interoperability solutions, Article 4(2) IEA Proposal includes an interesting provision on cooperation between the requesting (reusing) and the disclosing (sharing) public sector bodies:

To enable the reusing entity to manage the interoperability solution autonomously, the sharing entity shall specify the guarantees that will be provided to the reusing entity in terms of cooperation, support and maintenance. Before adopting the interoperability solution, the reusing entity shall provide to the sharing entity an assessment of the solution covering its ability to manage autonomously the cybersecurity and the evolution of the reused interoperability solution.

The sharing and reusing entities can also ‘conclude an agreement on sharing the costs for future developments of the interoperability solution’ (Art 4(5) IEAP). However, this cooperation obligation is excluded if the ‘sharing’ public sector body has published the interoperability solution in the relevant portal (Art 4(3) IEAP), which seems like a clear incentive to publish open source or broadly licensed interoperability solutions.

It is worth noting that, where arranged, such cooperation agreements (especially if they deal with future development costs) can in themselves constitute a public contract and thus be subject to compliance with Directive 2014/24/EU if the (wide) boundaries of public-public cooperation are exceeded—again, by reference to the ISE case. This seems an unlikely scenario given that the remit of the IEA Proposal is primarily concerned with networks for the cross-border (joint or linked) provision of digital public services, but it cannot be excluded if the broader interpretation of (potential) cross-border interoperability is adopted, especially in the context of reuse of a solution for a purpose (slightly) different than that for which the ‘sharing’ public sector entity implemented it.

Importantly, it is also necessary to consider whether the sharing of non-open access interoperability solutions under a cooperation agreement can have the effect of placing the IP holder in a position of advantage vis-à-vis its competitors, in which case the cooperation agreement would be in breach of Directive 2014/24/EU, once again, by reference to the ISE case. It can well be that this is a further disincentive for the sharing of IP protected interoperability solutions, even if a broad licence for public sector re-use is available.

In general, it seems like most of the mechanisms of the IEA Proposal can only really work in relation to open code and software. This is an important, general point. The IEA Communication stresses that interoperability assets ‘need to be open in order to be readily reusable by public administrations at all levels, that create interoperable systems and services, and by private sector and industry partners working with these administrations … This is why the proposed Interoperable Europe Act provides for access to reusable solutions, including code, where appropriate and possible.’ The main issue is that the IEA Proposal does not contain any explicit requirement for Member States’ public sector bodies to use open source solutions. Therefore, the effectiveness of most of its mechanisms ultimately depends on the level of uptake of open source solutions at national level.

innovation measures with a GovTech focus

Another procurement-relevant aspect of the IEA Proposal is its attempt to foster GovTech (peculiarly) defined as a ‘a technology-based cooperation between public and private sector actors supporting public sector digital transformation’ (Art 2(7) EIAP). The IEA Communication stresses that

Public-private ‘GovTech’ or ‘CivicTech’ cooperation stimulates public sector innovation, supports Europe’s technological sovereignty and opens pathways to public procurement. Gaining access to public procurement is a core concern for smaller companies, to be able to scale up and gain recognition and stable operating income (at 8).

Along the same lines, Recitals (24) and (25) of the IEA Proposal stress that

All levels of government should cooperate with innovative organisations, be it companies or non-profit entities, in design, development and operation of public services. Supporting GovTech cooperation between public sector bodies and start-ups and innovative SMEs, or cooperation mainly involving civil society organisations (‘CivicTech’), is an effective means of supporting public sector innovation and promoting use of interoperability tools across private and public sector partners. Supporting an open GovTech ecosystem in the Union that brings together public and private actors across borders and involves different levels of government should allow to develop innovative initiatives aimed at the design and deployment of GovTech interoperability solutions.

Identifying shared innovation needs and priorities and focusing common GovTech and experimentation efforts across borders would help Union public sector bodies to share risks, lessons learnt, and results of innovation support projects. Those activities will tap in particular into the Union’s rich reservoir of technology start-ups and SMEs. Successful GovTech projects and innovation measures piloted by Interoperable Europe innovation measures should help scale up GovTech tools and interoperability solutions for reuse.

However, there is little detail in the IEA Proposal on how GovTech uptake should be promoted. Article 10 indicates that the Interoperable Europe Board may propose that the Commission sets up innovation measures to support the development and uptake of innovative interoperability solutions in the EU, and that such measures ‘shall involve GovTech actors’. Such measures can be regulatory sandboxes (below). The Commission is also tasked with monitoring ‘the cooperation with GovTech actors in the field of cross-border interoperable public services to be delivered or managed electronically in the Union’ (Art 20(2)(c) IEAP).

None of this is very precise. The lack of detail on how to promote GovTech leaves many questions unanswered. This is particularly problematic because it is clear that engaging in GovTech requires rather sophisticated and advanced procurement, commercial and digital skills (see eg this report for the European Parliament) — even if only to understand the limits to pre-commercial procurement and other procurement-compliant ways to create a ‘route to market’ for GovTech companies.

It is also clear that existing support mechanisms (eg the Commission’s Guidance on Innovation Procurement) are insufficient. It remains to be seen whether the Commission can develop effective innovation measures under the IEA Proposal, which implementation will likely require overcoming the non-negligible obstacles to cross-border procurement under Directive 2014/24/EU — as the scope of the IEA Proposal is primarily constrained to cross-border digital public services and, more generally, to facilitating interoperability in different Member States.

regulatory Sandboxes and procurement?

As mentioned above in relation to GovTech, the IEA Proposal also includes the creation of regulatory sandboxes in its toolkit. Article 11 establishes that ‘Regulatory sandboxes shall provide a controlled environment for the development, testing and validation of innovative interoperability solutions supporting the cross-border interoperability of network and information systems which are used to provide or manage public services to be delivered or managed electronically for a limited period of time before putting them into service’. The aims of the sandboxes are specified, and include facilitating ‘cross-border cooperation between national competent authorities and synergies in public service delivery’; and facilitating ‘the development of an open European GovTech ecosystem, including cooperation with small and medium enterprises and start-ups’ (Art 11(3)(b) and (c) IEAP).

To me, it is unclear whether there will be much uptake of the possibility to participate in a sandbox to develop interoperability solutions for the public sector that are (tendentially at least) to be open source, as the economic incentives are not the same as those for participation in regulatory sandboxes that have as a sole purpose to exempt compliance from applicable regulatory obligations for the development of (otherwise) marketable products and services—eg in relation to FinTech services, or the pilot regulatory sandbox on Artificial Intelligence.

It seems to me more likely that the IEA regulatory sandboxes will be used in conjunction with a procurement process or for the implementation of public (services) contracts. In that case, it is unclear how the two mechanisms will interact. The IEA Proposal’s provisions on sandboxes only have detailed rules on data protection compliance, which clearly is a focus of legal risk. However, more could have been said in relation to coordinating the sandbox with the rules on cross-border procurement in Directive 2014/24/EU. Additional guidance seems necessary.

Final thoughts

The IEA Proposal has clear and not so clear interactions with public procurement. Notably, it forms part of a broader soft approach to fostering the procurement of open source digital solutions. As such, its effectiveness will be mostly constrained by the Member States’ willingness to embrace open source by default in their domestic procurement policies, as well as their proactive participation in the publication and cooperation mechanisms included in the IEA Proposal. It will be interesting to see how far such a change in public sector technology governance goes in coming years.

Some thoughts on the Commission's 2021 Report on 'Implementation and best practices of national procurement policies in the Internal Market'

In May 2021, the European Commission published its report on the ‘Implementation and best practices of national procurement policies in the Internal Market’ (the ‘2021 report’). The 2021 report aggregates the national reports sent by Member States in discharge of specific reporting obligations contained in the 2014 Public Procurement Package and offers some insight into the teething issues resulting from its transposition—which may well have become structural issues. In this post, I offer some thoughts on the contents of the 2021 report.

Better late than never?

Before getting to the details of the 2021 report, the first thing to note is the very significant delay in the publication of this information and analysis, as the 2021 report refers to the implementation and practice of procurement covered by the Directives in 2017. The original national reports seem to have been submitted by the Member States (plus Norway, minus Austria for some unexplained reason) in 2018.

Given the limited analysis conducted in the 2021 report, one can wonder why it took the Commission so long. There may be some explanation in the excuses recently put forward to the European Parliament for the continued delay (almost 2 and a half years, and counting) in reporting on the economic effect of the 2014 rules, although that is less than persuasive. Moreover, given that the reporting obligation incumbent on the Member States is triggered every three years, in 2021 we should be having fresh data and analysis of the national reports covering the period 2018-2020 … Oh well, let’s work with what we have.

A missing data (stewardship) nightmare

The 2021 report provides painful evidence of the lack of reliable procurement data in 2017. Nothing new there, sadly—although the detail of the data inconsistencies, including Member States reporting ‘above threshold procurement’ data that differs from what can be extracted from TED (page 4), really should raise a few red flags and prompt a few follow-up questions from the Commission … the open-ended commitment to further investigation (page 4) sounding as too little, too late.

The main issue, though, is that this problem is unlikely to have been solved yet. While there is some promise in the forthcoming implementation of new eForms (to start being used between Nov 2022 and no later than Oct 2023), the broader problem of ensuring uniformity of data collection and (more) timely reporting is likely to remain. It is also surprising to see that the Commission considers that the collection of ‘above threshold’ procurement data is voluntary for Member States (fn 5), when Art 85(1) places them under an obligation to provide ‘missing statistical information’ where it cannot be extracted from (TED) notices.

So, from a governance perspective (and leaving aside the soft, or less, push towards the implementation of OCDS standards in different Member States), it seems that the Commission and the Member States are both happy to just keeping shrugging their shoulders at each other when it comes to the incompleteness and low quality of procurement data. May it be time for the Commission to start enforcing reporting obligations seriously and with adequate follow-ups? Or should we wait to the (2024?) second edition of the implementation report to decide to do something then — although it will then be quite tempting to say that we need to wait and see what effect the (delayed?) adoption of the eForms generates. So maybe in light of the (2027?) third edition of the report?

Lack of capability, and ‘Most frequent sources of wrong application or of legal uncertainty’

The 2021 report includes a section on the reported most frequent sources of incorrect application of the 2014 rules, or perceived areas of legal uncertainty. This section, however, starts with a list of issues that rather point to a shortfall of capabilities in the procurement workforce in (some?) Member States. Again, while the Commission’s work on procurement professionalisation may have slightly changed the picture, this is primarily a matter for Member State investment. And in the current circumstances, it seems difficult to see how the post-pandemic economic recovery funds that are being channeled through procurement can be effectively spent where there are such staffing issues.

The rest of the section includes some selected issues posing concrete interpretation or practical implementation difficulties, such as the calculation of threshold values, the rules on exclusion and the rules on award criteria. While these are areas that will always generate some practical challenges, these are not the areas where the 2014 Package generated most change (certainly not on thresholds) and the 2021 report then seems to keep raising structural issues. The same can be said of the generalised preference for the use of lowest price, the absence of market research and engagement, the imposition of unrealistically short tendering deadlines implicit in rushed procurement, or the arbitrary use of selection criteria.

All of this does not bode well for the ‘strategic use’ of procurement (more below) and it seems like the flexibility and potential for process-based innovation of the 2014 rules (as was that of the 2004 rules?) are likely to remain largely unused, thus triggering poor procurement practices later to fuel further claims for flexibilisation and simplification in the next round of revision. On that note, I cannot refrain from pointing to the UK’s recent green paper on the ‘Transformation of Public Procurement’ as a clear example of the persistence of some procurement myths that remain in the collective imagery despite a lack of engagement with recent legislative changes aimed at debunking them (see here, here, and here for more analysis).

Fraud, corruption, conflict of interest and serious irregularities

The 2021 report then has a section that would seem rather positive and incapable of controversy at first sight, as it presents (laudable) efforts at Member State level to create robust anti-fraud and anti-corruption institutions, as well as implementations of rules on conflict of interest that exceed the EU minimum standard, and the development of sophisticated approaches to the prevention and detection of collusion in procurement. Two comments come to mind here.

The first one is that the treatment of conflicts of interest in the Directive clearly requires the development of further rules at domestic level and that the main issue is not whether the statutes contain suitable definitions, but whether conflicts of interest are effectively screened and (more importantly), reacted to. In that regard, it would be interesting to know, for example, how many decisions finding a non-solvable conflict of interest have led to the exclusion of tenderers at Member State level since the new rules came into force. If anyone wanted to venture an estimate, I would not expect it to be in the 1000s.

The second comment is that the picture that the 2021 report paints about the (2017) development of anti-collusion approaches at Member State level (page 7) puts a large question mark on the need for the recent Notice on tools to fight collusion in public procurement and on guidance on how to apply the related exclusion ground (see comments here). If the Member States were already taking action, why did the (contemporaneous) 2017 Communication on ‘Making public procurement work in and for Europe’ (see here) include a commitment to ‘… develop tools and initiatives addressing this issue and raising awareness to minimise the risks of collusive behaviours on procurement markets. This will include actions to improve the market knowledge of contracting authorities, support to contracting authorities careful planning and design of procurement processes and better cooperation and exchange of information between public procurement and competition authorities. The Commission will also prepare guidelines on the application of the new EU procurement directives on exclusion grounds on collusion.’ Is the Commission perhaps failing to recognise that the 2014 rules, and in particular the new exclusion ground for contemporaneous collusion, created legal uncertainty and complicated the practical application of the emerging domestic practices?

Moreover, the 2021 report includes a relatively secondary comment that the national reports ‘show that developing and applying means for the quantitative assessment of collusion risks in award procedures, mostly in the form of risk indicators, remains a challenge’. This is a big understatement and the absence of (publicly-known?) work by the Commission itself on the development of algorithmic screening for collusion detection purposes can only be explained away by the insufficiency of the existing data (which killed off eg a recent effort in the UK), which brings us back to the importance of stronger data stewardship if some of the structural issues are to be resolved (or started to be resolved) any time soon.

SMEs

There is also little about SME access to procurement in the 2021 report, mainly due to limited data provided in the national reports (so, again, another justification for a tougher approach to data collection and reporting). However, there are a couple of interesting qualitative issues. The first one is that ‘only a limited number of Member States have explicitly mentioned challenges encountered by SMEs in public procurement’ (page 7), which raises some questions about the extent to which SME-centric policy issues rank equally high at EU and at national level (which can be relevant in terms of assessing e.g. the also very recent Report on SME needs in public procurement (Feb 2021, but published July 2021). The second one is that the few national strategies seeking to boost SME participation in procurement concern programmes aimed at increasing interactions between SMEs and contracting authorities at policy and practice design level, as well as training for SMEs. What those programmes have in common is that they require capability and resources to be dedicated to the SME procurement policy. Given the shortcomings evidenced in the 2021 report (above), it should be no wonder that most Member States do not have the resources to afford them.

Green, social & Innovation | ‘strategic procurement’

Not too dissimilarly, the section on the uptake of ‘strategic procurement’ also points at difficulties derived from limited capability or understanding of these issues amongst public buyers, as well as the perception (at least for green procurement) that it can be detrimental to SME participation. There is also repeated reference to lack of clarity of the rules and risks of litigation — both of which are in the end dependent on procurement capability, at least to a large extent.

All of this is particularly important, not only because it reinforces the difficulties of conducting complex or sophisticated procurement procedures that exceed the capability (either in terms of skill or, probably more likely, available time) of the procurement workforce, but also because it once again places some big question marks on the feasibiity of implementing some of the tall asks derived from eg the new green procurement requirements that can be expected to follow from the European Green Deal.

Overal thoughts

All of this leads me to two, not in the least original or groundbreaking, thoughts. First, that procurement data is an enabler of policies and practices (clearly of those supported by digital technologies, but not only) which absence significantly hinders the effectiveness of the procurement function. Second, that there is a systemic and long-lasting underinvestment in procurement capability in (most) Member States — about which there is little the European Commission can do — which also significantly hinders the effectiveness of the procurement function.

So, if the current situation is to be changed, a bold and aggressive plan of investment in an enabling data architecture and legal-commercial (and technical) capability is necessary. Conversely, until (or unless) that happens, all plans to use procurement to prop up or reactivate the economy post-pandemic and, more importantly, to face the challenges of the climate emergency are likely to be of extremely limited practical relevance due to failures in their implementation. The 2021 report clearly supports aggressive action on both fronts (even if it refers to the situation in 2017, the problems are very much still current). Will it be taken?

UK Government (NHSX) modified existing contracts to buy additional data services to react to COVID-19 -- 'The greater includes the lesser' when it comes to extreme urgency procurement?

COVID-19 related procurement is the gift that keeps on giving (at least for procurement professionals and aficionados). Dr Pedro Telles has now found another emerging procurement controversy concerning the modification of pre-existing public contracts to award ‘additional services’ to mine and analyse data to inform the UK Government’s response to the pandemic—as reported by the Guardian (12 Apr 2020) and, in more detail from a procurement perspective, by the Byline Times (22 Apr 2020) . I would expect Pedro to blog about it soon, so keep an eye on telles.eu.

In short—and setting aside the controversy that surrounds the links of the awardees with political figures in the UK and the US, which is nonetheless also rather worrying—the situation is that, in the context of boosting the UK Government’s access to data science analysis as an input to its broader decision-making on pandemic response, NHSX modified a pre-existing contract with Faculty, ‘which had a pre-existing contract with other companies to help build a £250 million artificial intelligence lab for the NHSX.’

This is another procurement exercise where there is very limited public information, so my comments are based on the Byline story taken at face value. Whether entirely accurate or not, I think the story raises an important set of questions on the limits of the extreme urgency exemption from procurement rules and its interaction with the regulation of existing contracts.

The questions that immediately spring to mind are: why would NHSX modify an existing contract, and what are the implications of the contractual expansion? Given the extreme urgency in gaining better insights on the evolution of the COVID-19 pandemic, which seems to me beyond doubt, would it not have been possible (as well as neater and easier to oversee and manage ex post) to directly award a new contract? Are there any particular implications of the choice to modify rather than award a separate contract?

Given the limited public information, all I can do at this stage is speculate. However, I think that some of the unanswered questions below should be added to the already lengthy list that should form the core of a post-crisis public inquiry into COVID-19 related procurement.

Rules on modification and extreme urgency

The modification of the NHSX contract would have been justified on the basis of reg. 72 of the Public Contracts Regulations 2015, which transposes Art. 72 of Directive 2014/24/EU. In particular, the Byline piece refers to reg.72(1)(b) and (c) PCR2015, both of which allow for a contractual modification of up to 50% of the value of the original contract. Both rules simply transpose the equivalent rules of Art 72 Dir 2014/24/EU and need to be interpreted in the same manner.

Awarding additional services in the way that NHSX seems to have done it boggles the mind, mainly because the award of the additional services to mine and analyse COVID-19 related data is unlikely to be covered by either of the two rules—which need to be interpreted restrictively [for details, see A Sanchez-Graells, Public Procurement and the EU Competition Rules (2nd ed, Hart 2015) 429 ff].

Reg. 72(1)(b) PCR2015 allows for a contract to be extended to include additional services that ‘have become necessary and were not included in the initial procurement, where a change of contractor—(i) cannot be made for economic or technical reasons such as requirements of interchangeability or interoperability with existing equipment, services or installations procured under the initial procurement, and (ii) would cause significant inconvenience or substantial duplication of costs for the contracting authority’.

To put it simply, reg. 72(1)(b) PCR2015 contains a rule concerning contract modifications for ‘more of the same’ services under the relevant contract. This is also the clear indication based on recital (108) of Directive 2014/24/EU, which states that: ‘Contracting authorities may be faced with situations where additional works, supplies or services become necessary; in such cases a modification of the initial contract without a new procurement procedure may be justified, in particular where the additional deliveries are intended either as a partial replacements or as the extension of existing services, supplies or installations where a change of supplier would oblige the contracting authority to acquire material, works or services having different technical characteristics which would result in incompatibility or disproportionate technical difficulties in operation and maintenance.’

Reg. 72(1)(c) PCR2015 allows for a non-competed contractual modification to add services to an existing contract where ‘(i) the need for modification has been brought about by circumstances which a diligent contracting authority could not have foreseen; [and] (ii) the modification does not alter the overall nature of the contract’.

Reg. 72(1)(c) PCR2015 contains a rule that gets close to the general possibility to award contracts without competition (under reg.32(2)(c) PCR2015). However, this possibility is subjected to the important constraint that it cannot be used to procure something different from the object of the original contract. This is also rather clear in recital (109) of Directive 2014/24/EU: ‘Contracting authorities can be faced with external circumstances that they could not foresee when they awarded the contract, in particular when the performance of the contract covers a long period. In this case, a certain degree of flexibility is needed to adapt the contract to those circumstances without a new procurement procedure. The notion of unforeseeable circumstances refers to circumstances that could not have been predicted despite reasonably diligent preparation of the initial award by the contracting authority, taking into account its available means, the nature and characteristics of the specific project, good practice in the field in question and the need to ensure an appropriate relationship between the resources spent in preparing the award and its foreseeable value. However, this cannot apply in cases where a modification results in an alteration of the nature of the overall procurement, for instance by replacing the works, supplies or services to be procured by something different or by fundamentally changing the type of procurement since, in such a situation, a hypothetical influence on the outcome may be assumed’ (emphasis added).

We are thus in a situation where the legality of the contractual modification will crucially depend on the object of the initial contract. However, it seems really difficult to see how what NHSX describes as a bespoke data store and dashboard to monitor the evolution of the COVID-19 pandemic (see eg this blog) can fit within the remit or previous contracts, not least because it is meant to ‘self-destroy’ after the pandemic: ‘When the pandemic abates and the outbreak is contained, we will close the Covid-19 datastore. The Data Processing agreements put in place with the organisations listed above include the steps which need to be taken to cease processing and to either destroy or return data to NHS England and NHS Improvement once the public health emergency situation has ended‘.

It is quite difficult to see how the services provided in the creation of the datastore and the dashboard can be additional (in the sense of interoperable or directly complementary) to what was already contracted (see eg a rather detailed description here, where there is no reference to population-wide dashboards), when the COVID-19 specific solutions will be completely abandoned and thus, arguably not support the functioning of the NHS going forward. It is also quite difficult to see how the services provided are not substantially different from what was covered in the original contracts.

Of course, it could be possible to find some compatibility if the original contracts were not for specific solutions, but rather for activities—but, even then, this seems to be a rather distorted use of the rules on contract modification.

Assuming modification was illegal, should we care?

Of course, the discussion above can seem rather academic. If the UK Government (including NHSX) was allowed to enter into direct awards on the basis of the extreme urgency procurement exemption (as I have argued myself, eg here), what difference would it make if the modifications were illegal?

I think there are a few relevant differences. The first one concerns the need to ensure that the distortions to the normal functioning of the procurement rules that ensue from their deactivation in cases of extreme urgency are contained and, mainly, result in clear and traceable creations of new contractual relationships that allow for ex post control and oversight. The second, more practical one, is that the remedies for breach of the relevant rules are different.

While a breach of reg.32(2)(c) PCR2015 in the context of the pandemic can leave disappointed tenderers and the general public without much of a remedy, other than the possible (but in my view, rather unlikely) payment of damages, a breach of reg.72(1)(b) and/or (c) PCR2015 can have more significant and lasting effects, as the remedies in that case include the potential termination of the original contracts (see reg.73 PCR2015).

Indeed, reg.73(1)(a) establishes that ‘Contracting authorities shall ensure that every public contract which they award contains provisions enabling the contracting authority to terminate the contract where—the contract has been subject to a substantial modification which would have required a new procurement procedure in accordance with regulation 72’.

Now, this opens another potentially tricky statutory interpretation issue, which concerns whether the implicit direct award of the contract for the additional services would have required a new procurement procedure under reg. 72, given that it could have been exempted under reg.32. This creates two possibilities (or perhaps there are some additional ones we could find with more time to think about it).

First, a functional interpretation along the lines of ‘the greater includes the lesser’, so that we could waive the potential termination of the contract even in case of breach of reg.72, given that the award of the implicit contract would not have in casu required a new procurement procedure.

Second, a more formalistic interpretation, under which the cause for termination could not be waived because reg.73 is meant as a safeguard against abuses of reg.72 and, thus, is unavoidably triggered the moment the boundaries of reg.72 are exceeded.

Whether one option is preferable to the other can be debated de lege ferenda. For now, de lege data, I would incline towards the second option, as I think this is the one more in line with the case law of the CJEU to date—in particular, Finn Frogne.

So, in my view, I think we should very much care that the rules on contract modification may have been breached, and this creates a risk of termination of the modified NHSX contracts.

Why would they modify rather than award fresh contracts?

The possibility and risk of termination of the pre-existing contracts must have crossed the minds of the lawyers advising NHSX. I think this cannot be a simple oversight or a massive discounting of the risk of termination. There are likely to be some reasons why the modification of a pre-existing contract was used at the same time as the UK Government was directly awarding rather substantial contracts (eg in the context of the Ventilator Challenge).

Those reasons are difficult to disentangle with the available information, but my hunch is that they relate to the intellectual property clauses in the contracts and the likely possibility for NHSX’s contractors to retain very valuable know-how and other IP-protectable outputs of the COVID-19 data store and dashboard project. If this was the implication of the decision to modify pre-existing contracts with potentially favourable terms IP-related terms, then the modification could have been used as a shield against some of the scrutiny that these contracts were known to be likely to attract.

All in all, I think there are very relevant questions on this legal strategy that NHSX needs to answer in the context of a post-crisis public inquiry.

How does the UK Government's ventilator procurement strategy fit with the Commission's Guidance on COVID-19 procurement?

© FT Montage/Ian Bott.

In one more episode of this series—let’s call it #ventilatorgate already, shall we?—Dr Pedro Telles has quickly highlighted the UK Government’s response to an FT story (and twitter thread) that strongly criticised its approach to the procurement of medical ventilators.

One of the interesting parts of the Government’s (entirely predictable) response is the statement that ‘The Government’s strategy to increase ventilator capacity has always focused on three pillars: first, procuring more devices from existing manufacturers overseas; second, scaling up production of existing ventilator suppliers, and third, working with industry to design and manufacture new devices. It has also involved seeking specialist support in other areas including logistics, component and peripheral procurement, and technical expertise.’

Pedro has rightly stressed that ‘This is fascinating insight into the process. … why did the Government follow a pathway that could not (and [h]as not!) provide the NHS immediately with ventilators? The third leg of the stool is not really an appropriate answer here since they could never be approved quickly enough before going into production.’ He also added that ‘It is also a crucial recognition by the Government that ventilator designing and validating *new* ventilator designs takes years effectively meaning that there is no way the new designs could be validated and put in service in due time to deal with the current pandemic. There is an obvious consequence to this assumption and that is to clear any doubts that the Dyson contract illegal since it does not solve an immediate need.’

I fully agree. Of the three pillars of the UK Government’s strategy, only the first two are in line with the EU and UK procurement rules and, in particular, the extreme urgency procurement exemption. This is clear in the European Commission’s Guidance on using the public procurement framework in the emergency situation related to the COVID-19 crisis [2020] OJ C108I/1 (see here for comments). There is no doubt that, according to existing CJEU case law, ‘if extreme urgency is invoked, the procurement need has to be satisfied without delay. The exception cannot be invoked for the award of contracts that take longer than they would have taken if a transparent, open or restricted, procedure had been used, including accelerated (open or restricted) procedures‘ (Guidance, part 2.3.2, with reference to the Order of the Court of Justice of 20 June 2013 in Consiglio Nazionale degli Ingegneri, C-352/12, EU:C:2013:416, paragraphs 50-52).

Therefore, if the award of contracts under the ‘Ventilator Challenge’ was justified on grounds of extreme urgency, then those direct awards are illegal inasmuch as they concern new models or prototypes without regulatory approval and that would not be in a position to obtain it imminently (which seems to only be the case of the Penlon ventilators, which only required adaptation). If an alternative legal basis was used, the Government should disclose it without delay, as the illegality of the awards triggers serious risks of legal challenge and, potentially, pay-outs in damages. The need for a post-crisis public inquiry into these awards only keeps growing by the day.

I think this analysis is uncontroversial. However, it may perhaps be useful to also point out that this is not an instance of (EU) procurement law getting on the way of the Government’s bold ambitions or innovative approaches—else, this can further fuel the claims already been made by the UK Government that now more than ever there is a need for the UK to rid itself from the constraints of EU law, as well as the PM’s bonfire of procurement rules. This is not a time to allow procurement rules to be made a scapegoat for yet another attempt by the UK Government to use procurement to seek to boost the domestic industry, much as in the case of #ferrygate.

In fact, it should be stressed that the European Commission’s Guidance endorses similar approaches and unconventional commercial strategies to react to the COVID-19 emergency, just not within the narrow confines of the extreme urgency exemption. The Commission’s Guidance stresses that, within the narrow extreme urgency exception and ‘[t]o satisfy their needs, public buyers may have to look for alternative and possibly innovative solutions, which might already be available on the market or could be capable of being deployed at (very) short notice‘ (part 1). This highlights the requirement of the (near) immediacy in the supply to cover for the extremely urgent need—such as the adaptation of existing models.

This is distinguished from non-immediate alternatives and innovations, such as the development of new (to be tested and authorised) models, in relation to which the Guidance indicates that ‘Public buyers are fully empowered under the EU framework to engage with the market and in matchmaking activities. There are various ways to interact with the market to stimulate the supply and for the medium term needs, the application of urgent procedures could prove a more reliable means of getting better value for money and wider access to available supplies. In addition: ... Public buyers may use innovative digital tools ... to trigger a wide interest among economic actors able to propose alternative solutions. For example, they could launch hackathons for new concepts that enable reusing protective masks after cleaning, for ideas on how to protect medical staff effectively, for ways to detect the virus in the environment, etc’ (part 1, emphasis added).

By the UK Government’s own admission, the Ventilator Challenge was a (sort of) hackathon. Indeed, the Government’s response stresses that ‘[n]o one was under any illusions at the time of launching the Challenge that producing new designs for domestic production would be anything other than a significant and exacting test. Ventilators are highly complex medical devices requiring hundreds of individual components. That was precisely the point of issuing a public Challenge. Alongside new devices, the Challenge has pursued scaling up a number of existing, proven ventilators…’

Therefore, the adequate approach would have been to follow urgent procedures (either open or restricted), which would have required the UK Government to advertise the contractual opportunity (for 15, or 15+10 days, respectively). Given that the Ventilator Challenge was launched on 16 March 2020 and that, at the time of the Government response (19 April 2020), no new ventilators had received regulatory approval, there is no evidence that the same (sadly, so far, unproductive) result could not have been achieved by resorting to urgent (but not extremely urgent) procurement procedures.

However, openly advertising the requirements rather than holding a (by invitation only) conference call with UK manufacturers would probably not have satisfied the Government’s more veiled ambition of using this as an industrial policy opportunity. And this seems to have been an important element of the strategy too. And one that, once again, merits very close scrutiny in a public inquiry.

European Commission's Guidance on Extreme Emergency Procurement and COVID-19 -- some thoughts and a word on the Dyson contract

On 1 April 2020, the European Commission published its Guidance on using the public procurement framework in the emergency situation related to the COVID-19 crisis [2020] OJ C108I/1. In this Guidance, the European Commission explains ‘which options and flexibilities are available under the EU public procurement framework for the purchase of the supplies, services, and works needed to address the crisis‘. For a good critical first stab at the Guidance, see the comments by Dr Pedro Telles in his blog. My take on the guidance—and some of its implications in the UK are different from Pedro’s (see end of post).

The Guidance stresses that the EU public procurement framework ‘allows and encourages public buyers to pursue a multi-stage strategy. First, for their immediate and projected short-term needs, they should fully exploit the flexibilities of the framework. As a complementary tool, they are encouraged to procure jointly and to take advantage of the Commission’s joint procurement initiatives. Procedures with reduced deadlines serve their needs in the medium term, as they are in principle more reliable means of getting better value for money and [ensuring] wider access of companies to the business opportunities and a wider range of available supplies.‘

What I find extremely reassuring and apt is to see the Commission take the same extremely flexible and pragmatic approach already hinted in the earlier guidance issued at domestic level, eg in the UK (see here). Indeed, the Commission Guidance stresses that it ‘focusses especially on procurements in cases of extreme urgency, which enable public buyers to buy within a matter of days, even hours, if necessary. Precisely for a situation such as the current COVID-19 crisis which presents an extreme and unforeseeable urgency, the EU directives do not contain procedural constraints‘ (emphasis added).

The Commission’s Guidance confirms the view that the negotiated procedure without prior publication does not require any specific minimum level of competition between potential contractors — and should thus dispel any stringent approaches by the Member States, such as requiring at least three offers from potential contractors, as well as some negotiation with all of them.

The Guidance could not be clearer in stressing that under ‘Art. 32 of Directive 2014/24/EU (the ‘Directive’), public buyers may negotiate directly with potential contractor(s) and there are no publication requirements, no time limits, no minimum number of candidates to be consulted, or other procedural requirements. No procedural steps are regulated at EU level. In practice, this means that authorities can act as quickly as is technically/physically feasible – and the procedure may constitute a de facto direct award only subject to physical/technical constraints related to the actual availability and speed of delivery‘ (emphasis added).

The Commission also explicitly endorses ‘active buying’ techniques, which should reassure contracting authorities taking abnormal steps to try and secure emergency supplies of PPE, ventilators and any other needed equipment and consumables. The Commission Guidance explicitly mentions that: ‘In order to speed up their procurements public buyers may also consider to: contact potential contractors in and outside the EU by phone, e-mail or in person, hire agents that have better contacts in the markets, send representatives directly to the countries that have the necessary stocks and can ensure immediate delivery, [or] contact potential suppliers to agree to an increase in production or the start or renewal of production.‘ This is certainly welcome and will provide comfort to those taking a more commercial approach than they usually would to market engagement (or scouting).

Further than that, the Commission also endorses the use of urgent procurement to spur market innovation and matchmaking, thus dispelling doubts about the legality (under procurement rules) of even more active interventions in the market whereby the contracting authority is directly involved in structuring the collaboration between potential suppliers (and even potential competitors, although this will require careful competition law assessment), for example through COVID-19 challenges or hackathons.

In that regard, the Guidance is also clear that ‘To satisfy their needs, public buyers may have to look for alternative and possibly innovative solutions, which might already be available on the market or could be capable of being deployed at (very) short notice. Public buyers will have to identify solutions and interact with potential suppliers in order to assess whether these alternatives meet their needs … Public buyers are fully empowered under the EU framework to engage with the market and in matchmaking activities. There are various ways to interact with the market to stimulate the supply and for the medium term needs, the application of urgent procedures could prove a more reliable means of getting better value for money and wider access to available supplies’. 

The Guidelines also stress the relevance of these approaches in terms of boosting the uptake of other strategic considerations so that ‘environmental, innovative and social requirements, including accessibility to any services procured, are integrated in the procurement process’. However, it is unlikely that contracting authorities will be able to concentrate efforts on this, even if they can obtain some of the benefits due to engaging in some ‘unconventional’ procurement approaches, including more digital procurement (and innovation related to 3D printing, for example).

Beyond these general policy and strategic guidelines, which clearly convey the basic message that procurement professionals should do all they can to obtain the urgently required supplies, as well as aim to transition to a more sustainable (and planned, and hopefully less expensive and more innovative) approach in the medium term, the Commission also offers more detailed and technical guidance. Of that, I would stress the specific analysis of the conditions for resorting to the negotiated procedure without publication on grounds of extreme emergency.

It will be recalled that Art 32(2)(c) of Directive 2014/24/EU allows for this ‘insofar as is strictly necessary where, for reasons of extreme urgency brought about by events unforeseeable by the contracting authority, the time limits for the open or restricted procedures or competitive procedures with negotiation cannot be complied with. The circumstances invoked to justify extreme urgency shall not in any event be attributable to the contracting authority’. The Commission’s Guidance offers useful interpretation on the three main requirements: unforeseeability, impossibility of an alternative approach and causal link or direct relation between the extremely urgent need and the scope of the procurement, which implies an element of temporality.

The Commission addresses each of them as follows:

‘Events unforeseeable by the contracting authority in question’

The number of COVID-19 patients requiring medical treatment is rising daily and, in most Member States, is expected to increase further until the peak will be reached.

These events and especially their specific development has to be considered unforeseeable for any contracting authority. The specific needs for hospitals, and other health institutions to provide treatment, personal protection equipment, ventilators, additional beds, and additional intensive care and hospital infrastructure, including all the technical equipment could, certainly, not be foreseen and planned in advance, and thus constitute an unforeseeable event for the contracting authorities.

Extreme urgency making compliance with general deadlines impossible

It cannot be doubted that the immediate needs the hospitals and health institutions (supplies, services and public works) have to be met with all possible speed.

Whether this makes it impossible to respect even the very short deadlines of the accelerated open or restricted procedure (15 and 10 days respectively to submit the offers) will have to be assessed on a case-by-case basis, but it is likely in most cases, at least as regards the significantly increased short-term needs as the infection curve rises.

As clarified in the Court’s jurisprudence, if extreme urgency is invoked, the procurement need has to be satisfied without delay. The exception cannot be invoked for the award of contracts that take longer than they would have taken if a transparent, open or restricted, procedure had been used, including accelerated (open or restricted) procedures.

Causal link between the unforeseen event and the extreme urgency

For the satisfaction of the immediate needs of hospitals and health institutions within a very short timeframe the causal link with the COVID-19 pandemic cannot reasonably be doubted.

Only used in order to cover the gap until more stable solutions can be found

Negotiated procedures without prior publication may offer the possibility to meet immediate needs. They cover the gap until more stable solutions can be found, such as framework contracts for supplies and services, awarded through regular procedures (including accelerated procedures) [emphases added and references omitted].

This is truly good, clear and actionable guidance by the European Commission and it should be most welcome.

A final word on the UK Dyson contract

Those following the daily developments on COVID-19 related procurement in the UK will be aware of the award of a contract to Dyson for the supply of 10,000 ventilators, despite the fact that its prototype still needs to receive regulatory approval and can thus not be immediately put into production or delivered for use in the NHS.

You will find an excellent analysis of the background in several posts by Dr Pedro Telles in his blog (starting 24 March). He has been putting forward the claim that the award of that contract (and, presumably, the rest of contracts for emergency supply of ventilators to the UK Government; although he has been trying to distinguish them) is illegal because the UK Government decided not to participate in the EU’s JPA ahead of the immediate need of the ventilators. We have been discussing this on twitter (see below), so it may be time to bring this discussion to the blog.

My view is that the specific need for ventilators (and PPE, and other supplies needed in this pandemic emergency) is and will remain unforeseeable for quite a while. I do not think that high level political decisions (however wrong) should deactivate the possibility of recourse to extreme emergency procurement at an operational level. I think today’s Commission Guidance supports this view when it stresses that ‘These events and especially their specific development has to be considered unforeseeable for any contracting authority‘.

Pedro disagrees (with the Commission): ‘The Commission argues regarding the lack of foreseeability by the contracting authority that the specific needs for medical equipment and infrastructure (including ventilators) could not be foreseen and planned in advance. On this I do not agree fully with the Commission. It is true that there is a moment when the need could not be foreseen and planned in advance, but if after that moment no action was duly taken (as the UK Government did with the ventilators) then the extreme urgency was actually brought about by the contracting authority.‘

I disagree with Pedro. I think the extreme urgency procurement procedure needs to be the conduit for the first effort to address the pandemic, which will still take a long period. This is not time to engage in new theories about the imputability to the procurement function of rather complicated political calculations (I sense there is a PhD thesis to be written on that, after the dust settles).

However, that does not mean that this is a free for all. The Commission has also clearly indicated that ‘if extreme urgency is invoked, the procurement need has to be satisfied without delay. The exception cannot be invoked for the award of contracts that take longer than they would have taken if a transparent, open or restricted, procedure had been used, including accelerated (open or restricted) procedures‘ (which are 15 and 25 days respectively). That is the reason why I think the award of the contract for 10,000 ventilators to Dyson is very likely illegal (on this overall conclusion, Pedro and I are agreed) and that the UK Parliament (when out of recess, or virtually active) and the National Audit Office need to take a very close look into this award. As I said on twitter, this starts to look very much like #ferrygate.

Is Circular Economy a move towards or away from sustainability? A short piece on the (ab)use of the concept of circularity [guest post by Dr Lela Mélon]

With business sustainability in mind and in search of sustainable governmental behaviour, especially in terms of public purchasing practices, circularity seems like a fitting concept for fulfilling public needs in a sustainable manner (see eg Geissdoerfer et al: 2016). Given the hurdles with the implementation of green public procurement practices across the EU, and the struggles in furthering sustainable public procurement (going beyond environmental to also add social concerns), I expected that circular public procurement would be an exception and applicable only to a handful of cases. And indeed, it did not take much research to verify that the application of circularity across European public procurement is scarce at its best: while listed under green public procurement, circular public procurement exhibits few best practices across the EU that mostly arose at the local level (see eg this 2018 best practice report).

While it might be argued that circularity by definition requires local action, that does not prevent the development of practices at a regional, national or even supra-national level in specific sectors with potential to become circular, e.g. energy sector, construction sector and waste management. Yet, whether we speak about circularity in the framework of private markets or public procurement, it is absolutely indispensable to embed circular practices in the framework of sustainability and not simply formulate it under the framework of waste management.

Much has been said on recycling, less on the cycle. Seeing circularity as an exercise of recycling and bringing materials back into the loop has been widespread, leading to even higher production and consumption and straying away from true sustainability. That being said, the underpinning reasons for such developments do not lie solely in private market practices, but also stem from the lack of knowledge on circularity and policy incoherence on the national and EU level in general.

What is (true) circularity?

Applying to both private and public markets, the notion of circularity should be clear. Recycling comes last. The whole purchasing procedure needs to be rethought and redesigned to accommodate more sustainable decisions and close the loop of linear practices as in ‘buy, use, dispose.’ Already at the stage of making the purchase decision, circularity demands us to rethink: do we need the product, service or works in question? Could we upcycle a product that we already own to fulfil that need? Could the need be filled by buying a service instead of the product or conversely leasing or renting the product? If the answer to those questions is no, then we need to purchase the product, service or work in question demanding a long life-time evaluation model.

Here the companies engaging in circular production need to provide a life-long guarantee, user manual, strategic design that facilitates reparability, minimal use of raw materials and energy (and its responsible sourcing, accounting for the social aspect of sustainability), use of renewable energy and efficient service and maintenance in case of a product fault. Spare part guarantee, service agreements, small repairs, standard components and easy disassembly are the must-haves under a truly sustainable circular economy.

Reuse and sometimes upcycling are the key. Recycling under a circular model is truly the last resort and its success in extracting useful materials for further production actually depends on the way the product was designed: the absence of hazardous materials, the possibility to disassemble the product into different materials with ease, the possibility of downcycling and upcycling of the materials. These notions all run counter to the current linear economy: and the implications of such systemic change on business models and private markets as we know them will be significant, causing significant policy spill over effects and demanding the elimination of existing policy incoherences inhibiting such a transition. This piece aims to provide further food for thought on the system as it is regarding private and public markets; discussing the current state of affairs, the impediments to a higher uptake of circular practices and the policy spill over effects of a successful implementation of circularity as a general exercise.

Where are we at? – the European Commission’s Action Plan

In terms of EU policy on circular economy in general, the European Commission has issued an ambitious circular economy package—which surprisingly focuses on waste management and bringing resources back in the loop—coupled with two subsequent implementation reports in 2017 and 2019. While the package recognises that the value of circular economy lies also in job creation, savings for businesses and the reduction of EU carbon emissions; the action plan on the matter focuses heavily on reforming the waste management legislation, albeit briefly reflecting also on the broader aspects of circular economy such as job creation, innovative design, business models, research, re-manufacturing, product development and food waste. The wrong signal is therefore sent to the private and public market: the focus on getting scarce materials back into the loop instead of a systemic change of production processes themselves. This influences private and public markets and reinforces the idea that the only issue with traditional linear production and consumption processes is the scarcity of (raw) materials.

Further reinforcing this idea, the EU study on Accelerating the transition to the circular economy focuses on public funds employed to that effect, omitting the fact that this represents only a fraction of the funds needed for a true systemic change. The study has been seen as an accelerator for the deployment of the circular economy, discussed in the framework of new circular business models and in the framework of waste management (id at 10). While the need for extensive financing has been repeatedly highlighted (eg in this 2017 report’s estimate of EUR 320 billion by 2025) for a systemic transition to circular economy (with estimated combined benefits of such shift of EUR 500 billion), the focus of the report has been on providing such finance in the current ‘business as usual’ framework, advocating for higher investment in such transition by the EU, without a comparative assessment of the current private financial market frameworks and its indispensable role in such transition (cfr this call for integrating externalities in the existing risk assessment frameworks).

Arguing for a systemic approach and a stronger focus on private finance offerings, especially with regards to small and medium-size enterprises (see here and here), points to the insufficiency of public funds for the transition to a more circular economy. To boost the private finance offerings, there is a need for a systemic change of financial systems to account for the inherent risks of the current linear business models, thereby eliminating persistent unfair competitive advantage for linear business models in the access-to-finance scenario. Not incorporating the change of linear risk assessment practices in greater detail into the EU action plan is a pitfall that needs to be remedied, qualifying change that needs to occur regarding the traditional access-to-funding setting in order to accommodate circular business and the changes it entails for ‘business-as-usual’ also in terms of the access-to-finance.

The structural flaw of underestimating the risks of linear projects and overestimating the risks of circular economy projects will not be remedied simply by taxonomy and EU funds: the financial systems on their own need to ‘circularise’ their finance offerings: the world as we know it, business as usual, is about to change and it could cost them more than just their reputation. Asset backed loans will need to change into ‘relationship’ backed loans, which presupposes also changes and ameliorations to contract laws to ensure monetised value to relationships as steering wheels of the new circular economy.

The lack of circularity in finance influences the offerings of the private market and the innovation necessary for circular solutions, which will in turn influence also the success of circular public procurement: the public funds and practices in innovation procurement cannot produce a sufficient amount of circular procurement to create a strong movement on the private market.

What are the impediments to a higher uptake of circular practices and what are their implications?

Aside from these two broader policy concerns, there are some specific impediments to circularity in public procurement: the first is the low uptake of green public procurement (GPP) across the EU,[1] impeding the insertion of circularity as the next step of GPP and the second the lack of regional, national and supranational best practices to that effect.

The integration between public procurement and circular economy itself is at its early stages at the EU level, where the incorporation of social, environmental and economic specifications into public procurement is not at a sufficiently high level to produce an indirect effect on products and consumers themselves and thereby stimulating circular economy. Furthermore, as majority of circular innovation stems from small and medium sized enterprises, it is crucial to further facilitate their access to public procurement systems, aside from general efforts to support the implementation of sustainable public procurement.

While the Eco-design Directive 2009/125/EC incentivises Member States to implement waste-preventing public procurement strategies according to information about the products’ technical durability, simultaneously suggesting the recycling requirements to be designed accounting for corresponding requirements for waste treatment in the waste legislation related to product, significantly supporting the circular flow of substances and materials, it is still strongly focused on waste management. Once again, here the notion of circularity supports more the linear production models than it does true circularity: while waste management and preservation of materials is important, determining the initial need for production and the potential for lease, reuse and upcycle is more important in terms of circularity.

The second supporting tool for circular public procurement, the Environmental Footprint Initiative of the European Commission, aims at providing a harmonisation process for the development of a scientific and consensus-based method, trying to inform and direct consumer choices with clear and comparable environmental information. Again, while reliable information is an indispensable steppingstone for determining sustainability hotspots, it is a truly preliminary and indirect step towards circular procurement. It does not provide for a true move from linearity to circularity.

Aside from the general concerns introduced above, the private sector further encounters impediments to circularity in current legislation on plastics recycling, competition law and the general corporate law favouring and prioritising linear business practices, lacking clear guidance on circularity. These are all examples of policy incoherence, some representing a direct example of incoherence (the silence of corporate legal frameworks on the social norm of shareholder primacy,[2] the plastic packaging requirements preventing the use of recycled plastics), others an indirect example (competition law).

Coupled with the abovementioned issues of financial law, these impediments are sufficient to significantly reduce the development of new circular solutions beyond pure recycling efforts. Additionally, the indirect policy incoherence in terms of competition policy as it stands, needs to be revised simultaneously to other sustainable changes to EU legal frameworks, and we have not accounted yet for those changes to a significant extent. If circularity is to be a tool towards achieving true sustainability, the traditional notions of ‘separating’ competitors and keeping them from cooperating will need to be revised. Circular systems have a need to be interconnected, cooperating and sharing, especially as reuse, repair and upcycling are the building blocks of circular economy. This calls for a systemic change of competition laws in themselves.

Furthermore, to aid the financing of this transition, traditional property and contract law will need to develop additional institutions to account for a different economy, one not based on assets as in material assets but rather relationships as assets. The road towards true circularity is still long, but these policy spill over considerations need to be resolved simultaneously with other sustainable changes to areas directly connected with sustainability in order to achieve a timely change towards truly sustainable circularity.

Where to now?

To conclude, a systemic change requires efforts of policymakers, private and public market actors as well as consumers. The above presented reflections represent just a fraction of what we will have to deal with in terms of transition towards sustainability and I would love to hear about any additional concerns and/or solutions to the policy issue that you have encountered in your professional field. I would gratefully any feedback or suggestions at lela.melon@upf.edu.

Dr Lela Mélon

Lela Mélon is a lawyer and an economist, specialised in sustainable corporate law. Lela started her sustainability career in 2014 with her research on shareholder primacy in corporate law. She is currently charge of the Marie Curie Sklodowska funded project ‘Sustainable Company’ at the Pompeu Fabra University in Barcelona. She has co-authored and authored monographs, published several scientific articles in the field of sustainable corporate lawand sustainable public procurement and presented her work at conferences across Europe, as well as introduced sustainable corporate law curricula in several universities in Europe.

[1] Mélon, L. ‘More than a nudge? Arguments and tools for mandating green public procurement in the EU.’ Working Paper, Conference Corporate Sustainability Reforms Oslo 2019.

[2] Mélon, L. Shareholder Primacy and Global Business (Routledge 2018); Sjafjell, B. (2015) Shareholder Primacy: The Main Barrier to Sustainable Companies, University of Oslo Faculty of Law Research Paper No. 2015-37.

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

ⓒ Christophe Benoit (Flickr).

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

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

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

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

Backward-looking data as a necessary evidence base

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

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

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

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

More circular procurement economy based on existing stocks

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

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

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

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

Conclusion

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

Making public procurement great again?* COMMENTS on the commission's Communication of 3 october 2017

Continuing with our procurement tennis on the Commission's October 2017 procurement package, it is now turn for Pedro and me to concentrate on the Communication "Making Public Procurement work in and for Europe" COM(2017) 572 final, which is the main pillar of a renewed policy push that has a strong emphasis on the interaction between procurement and investment in the single market.

In this Communication, the Commission outlines 6 strategic priorities for public procurement policy in areas "where clear and concrete action can transform public procurement into a powerful instrument in each Member State’s economic policy toolbox, leading to substantial benefits in procurement outcomes". These include: (i) Ensuring wider uptake of strategic public procurement; (ii) Professionalising public buyers; (iii) Improving access to procurement markets; (iv) Increasing transparency, integrity and better data; (v) Boosting the digital transformation of procurement; and (vi) Cooperating to procure together.

In this post, I offer some critical comments on the 6 strategic priorities (three of which I consider highly questionable, and three which require further thought), as well as some overall considerations in the way the Commission seems to have started to shift away from its role of Guardian of the Treaties, and to morph into something else as it "commits to firmly support a change of the public procurement culture in Member States".

General comments

Overall, the Communication has undertones that bring it closer to an industrial policy for the single market, including the promotion of 'sustainability-orientated' secondary policies, than to a strategy to improve procurement as a working tool for the public sector. Indeed, procurement is presented as "a fundamental element of the investment ecosystem" because "a substantial part of public investment in our economy is spent through public procurement, representing 14 % of the EU GDP", which is language clearly linked to the instrumental use of procurement. And, to say it all, the Communication formulates that "sustainable industrial investment policy" through weird choices of words that echo the slogans of populist movements on both sides of the Atlantic--which may not send the right messages to trade partners monitoring issues such as the initiative on third country access to EU procurement markets. Therefore, it will probably not be surprising to read that I am not convinced that this is the best possible steer for public procurement policy in the EU context--much along the lines I already sketched here and here.

It will probably not be surprising either that the scant empirical evidence underlying the formulation of this policies is once again a source of criticism of the Commission's efforts. In the Communication (section 2), the Commission lists a series of examples of what it considers "encouraging steps ... to radically reform procurement practices or structures". Amongst them, the Commission resorts once more to the HAPPI Project, which it presents as having enabled"innovative solutions for healthy aging [to] have been procured jointly by contracting authorities in several Member States". However, the reality of things is that this project is far from a success story due to the extremely low take-up of the technologies procured and the limited use of the framework agreements put in place (as evidenced by reports financed by the Commission itself; see here). The Commission also presents as a success story the fact that "Slovakia has put in place a contract register that gives public access to all contracts concluded by the public authorities in the country, thus improving transparency and allowing for public scrutiny", without acknowledging that transparency in procurement remains a significant challenge and that the Commission's own initiative to promote the creation of such registries triggers some concerns (see here, here and here, as well as this paper by K-M Halonen). On the whole, the formulation of a policy priorities such as those contained in the October 2017 Communication should be supported by detailed empirical evidence and careful impact assessments. Their absence creates some questions as to the actual justification for the policies, which is regrettable.

It is also regrettable that, much as in the creation of the Internal Market Scoreboard (see here), the Commission continues to adopt random thresholds to assess the desirable intensity of specific procurement policies. For instance, the Commission indicates that there is significant scope for more strategic procurement because "55% of procurement procedures still use the lowest price as the only award criterion ... Yet, most economically advantageous tenders on the basis of a cost effectiveness approach which may include social, environmental, innovative, accessibility or other qualitative criteria are still underused". This conflates two or possibly three issues. Firstly, what is the threshold at which the use of price only would stop indicating unexploited opportunities for 'smart(er) procurement'? 10%? 20%? 30%? Why not 55%? Second, it is possible, in particular for standard products including eg environmental or accessibility requirements to be tendered on the basis of price only where sufficiently detailed technical specifications can be drafted. Thus, a simple analysis of the award criterion only tells part of the story concerning the intensity of the use of 'smart procurement' techniques. Third, the use of best price-quality ratios (BPQR, see Art 67(2) Dir 2014/24/EU) can hide or mask less than transparent procurement practices, so there is a clear (and unacknowledged) trade-off between non-price-only procurement and the integrity of the procurement procedure, as well as the costs of its administration.

In the same fashion, the Communication also indicates that "Contracting authorities are rarely buying together, as only 11 % of procedures are carried out by cooperative procurement", and that "[a]lthough not all types of purchases are suitable for aggregation, overall low aggregation rates suggest lost opportunities". Using a percentage threshold to assess whether centralised and collaborative procurement is sufficiently developed is equally unsettling, particularly because there is no good reason to consider that any given volume of procurement should be centralised. Moreover, given that the Commission has set at 10% the value of the indicator on 'cooperative procurement' for the purposes of the Internal Market Scorecard (see indicator [4]), it seems obvious that the Commission itself has no clue whether 10% of collaborative procurement suffices or not. Thus, setting policy priorities on the basis of unjustified % thresholds continues to be a dangerous path to follow.

I will not spend much time on the other fluff that surrounds the policy recommendations in the Communication. Suffice it to say that I am not convinced that "public procurement matters more than ever" (arguably, it has always mattered and will continue to matter for as long as the public sector engages with markets in the context of the development of its public interest activities, even if some of the notable challenges on the table are addressed in the future), or that the expression "a broad partnership for common success" has any relevant meaning. I would rather have the Commission avoid this type of language in communications aimed at formulating policies in relatively technical areas of EU economic law or, in the Commission's words, in a document aimed at promoting the "smart application of the new rules in practice", but that does not seem to be the thrust of the times--so let's move on and concentrate on the policy priorities.

(i) Ensuring wider uptake of strategic public procurement

The Commission takes the view that "[s]trategic public procurement should play a bigger role for central and local governments to respond to societal, environmental and economic objectives, such as the circular economy". Thus, it wants to promote the mainstreaming of "innovative, green, and social criteria, a more extensive use of pre-market consultation or qualitative assessments (MEAT) as well as procurement of innovative solutions at the pre-commercial stage". It acknowledges that this may not be feasible in all countries, where "there are still shortcomings in the proper functioning of the public procurement system", but it assumes that this not only a feasible, but also a desirable policy development elsewhere. 

In my view, there are two main issues with the assumption that strategic procurement should play a bigger role. The first one is that while some aspects of 'smart procurement' are compatible with the internal market (eg green or innovative procurement), others are structurally disaligned with internal market rules (most notably, the use of labour and social requirements, which are almost impossible to separate from their protectionist effects). Thus, talking about 'strategic' or 'smart' procurement as a solid reality is problematic. The second issue is that the inclusion of green, innovation (and social) considerations is bound to increase the cost of procurement--which is a major concern in economies still recovering from austerity periods--and will also reduce the possibilities for SME access to procurement, in particular if the public sector moves significantly away from market standards in a push for the strategic use of procurement as a market-making or making-shaping tool. All of these issues should create concern, and are in part in contradiction with other goals of the Communication (in particular, with the issue of SME access, see below iii), so a more nuanced approach may be necessary.

In addition, there is no consideration of the limits that need to be placed on strategic procurement from the perspective of public accountability (is it really in the public interest for every buyer to have its own secondary policy agenda?) and from the perspective of preventing distortions of competition created by the public buyer. Presenting strategic procurement as the 'must adopt' strategy without stressing the need for robust checks and balances even in countries with no perceived shortcomings in the functioning of their public procurement system presents a rather distorted view.

(ii) Professionalising public buyers

This is an issue developed in much more detail in the flaking initiative on professionalisation presented by the Commission on 3 October 2017, and which Pedro and I already discussed (here and here). 

(iii) Improving access to procurement markets

Surprisingly, this is one of the most disappointing aspects of the October 2017 Communication. The Commission indicates that improving access to procurement is mainly geared "to increase the SME share of public procurement in line with their overall weight in the economy", in particular "in view of promoting more cross-border procurement". However, the only specific actions mentioned by the Commission concern (i) the Remedies Directive (and, specifically, its criticisable decision not to review it, see here and here), (ii) the initiative on third country access to EU procurement markets (see here), and (iii) a sectorial initiative to increase SME participation in defence and security contracts. This is puzzling. 

While those initiatives can have some effect on increasing SME access to procurement markets, they are unlikely to facilitate a step change. Much more is needed in terms of guidance and best practice on facilitating SME access to procurement domestically and in an EU cross-border context (which the Commission should undertake), and there are obvious limitations derived from the cost of having the administrative (and language!) capacity needed to export. In that regard, the proposals in the Communication do not even brush the surface of what could be done at EU-level--starting with practical guidelines on how to maximise the advantages derived from the fact that, in the Commission's own terms, "[t]he 2014 directives include measures that should facilitate the access of companies including SMEs to public procurement, also cross-border". It would certainly be helpful for the Commission to flesh that view out in more detail.

(iv) Increasing transparency, integrity and better data

Broadly, the Commission stresses four different initiatives in this area: (1) a boost of data collection / big data, (2) a potential initiative on whistleblowing, (3) an initiative to produce tools addressing bid rigging and raising awareness to minimise the risks of collusive behaviours on procurement markets, and (4) guidelines on the application of the new EU procurement directives on exclusion grounds on collusion.

I think that initiatives 1, 3 and 4 should be welcome. I am particularly interested in the Commission's pledge to take "actions to improve the market knowledge of contracting authorities, support to contracting authorities careful planning and design of procurement processes and better cooperation and exchange of information between public procurement and competition authorities". However, in this area, it will be interesting to see the extent to which the Commission builds upon existing efforts (such as the OECD's recommendation and guidelines on bid rigging, or the draft Danish guidelines on the application of Art 101 TFEU in procurement settings, see here) and the extent to which it carries out meaningful consultations.

I am less convinced about initiative 2 on whistleblowing, as I am not sure why this would be necessary in contexts where public procurement is regularly subjected to judicial and administrative review. I do not grasp who would be in need for protection and for what purpose. In that regard, the Commission's statement that it "is currently assessing the need, legal feasibility and scope for horizontal or further sectorial action at EU level for strengthening the protection of whistleblowers" is way too cryptic.

(v) Boosting the digital transformation of procurement

This is another area where the Commission could have been clearer on what it is trying to achieve, and where its thoughts are scattered throughout the Communication. While the aim of harnessing the opportunities that "[n]ew digital technologies offer ... to streamline and simplify the procurement process through the roll-out of electronic public procurement", as well as the ambition for "the whole public procurement process [to undergo] digital transformation", are welcome--it is not clear to me where the e-procurement / digitalisation of procurement boundary lies. I am also not sure whether the Commission has already given up on the possibility of making efforts to ensure that the deadline for full roll-out of e-procurement takes place within the deadline of October 2018 (which will no doubt be missed by a majority of Member States), and whether a focus on digitalisation is an attempt to create a smoke curtain to cover the simple fact that e-procurement will soon be around 15 years late.

I am personally interested in exploring the regulatory challenges that digitalisation and automation can require and facilitate, but reading this part of the Communication left me with the impression that the Commission will work on a piecemeal fashion, rather than trying to come up with a more ambitious plan (to pilot) fully digital procurement. In my view, this is an area where the Commission could be more ambitious, and where it could explore wacky and disruptive initiatives, such as an ideas competition. Any takers?

(vi) Cooperating to procure together

Finally, the Communication also puts significant emphasis on pushing for more collaborative and centralised procurement. However, the Commission simply assumes that "[j]oint cross-border procurement, where contracting authorities from different countries jointly organise their procurement procedures, is greatly facilitated by the new EU rules". However, this overlooks the simple fact that there is a great deal of legal uncertainty surrounding articles 37 to 39 of Directive 2014/24/EU (and the equivalents in Dir 2014/25/EU, see here, here and the recent working paper by I Herrera Anchustegui, here), and that the Commission should take a much more robust approach than simply aiming to "raise awareness and promote good practice for joint cross-border procurement".

Guidance on the interpretation of the relevant provisions of the 2014 Public Procurement Package is long overdue and, in my view, the Commission continues to conflate issues of collaboration stricto sensu with issues of professionalisation and innovative procurement processes, which it considers central purchasing bodies (CPBs) to be in a good position to promote. The Commission also overlooks the impacts of centralisation on competition in procurement markets, as well as the need to ensure that standards of competitive neutrality are ensured where CPBs engage in economic activity (eg in the context of professionalisation or consultancy). In my view, the Commission's proposals here are both weak and naive, and more focused legal guidance should be the priority.

* The title for this post is far from original. See eg http://spendmatters.com/2016/02/08/make-procurement-great-again/. 

The Commission's procurement mechanism for large infrastructure projects, soft law with a new twist, or catch 22?

On 3 October 2017, the European Commission launched a strategy aimed at "Making Public Procurement work in and for Europe". As the accompanying press release indicates, the strategy has four main strands: (i) the definition of priority areas for improvement at Member State level; (ii) voluntary ex-ante assessment of large infrastructure projects; (iii) a Recommendation on professionalisation of public buyers; and (iv) a consultation on stimulating innovation through public procurement.

The first initiative consists in a policy push to prompt Member States to concentrate efforts on six priorities: "greater uptake of innovative, green and social criteria in awarding public contracts; professionalisation of public buyers; improving access by SMEs to procurement markets in the EU and by EU companies in third countries; increasing transparency, integrity and quality of procurement data; digitisation of procurement processes; and more cooperation among public buyers across the EU". None of the priority areas concern issues that I would consider of immediate practical relevance, in particular in terms of legal clarification of the 2014 Public Procurement Package (see here), but rather reflect issues that have been at the top of procurement policy-making agendas at least for the last 10 years, and where all efforts (and gains) are at best incremental. I find the push for further 'strategic' use of procurement particularly interesting, as well as the push for more procurement collaboration, including centralised and cross-border procurement. These are issues that will deserve further discussion some time soon.

The third initiative on professionalisation will also be the object of a future post, while I will aim to submit my views on the use of procurement to foster innovation in the context of the official consultation. Here, I am particularly interested in the second initiative, the voluntary ex-ante assessment of large infrastructure projects (already announced in the 2015 Strategy on Upgrading the Single Market), which is described in more detail in the accompanying Communication "Helping investment through a voluntary ex-ante assessment of the procurement aspects for large infrastructure projects".

The initiative is structured around three main elements: (i) a helpdesk where the Commission can provide clarifications on issues of interpretation of the EU procurement rules or their application to a specific case within one month, and which answers (once anonymised) will be published for more general use; (ii) a notification system aimed to apply to broader procurement plans, where Member States can ask the "Commission services [to] express their views on whether the procurement plan complies with EU procurement rules, without prejudice to any future legal interpretation or assessment"; and (iii) an information exchange mechanism meant to be a knowledge management tool for use by national authorities and contracting authorities/entities, ultimately geared towards building up reference classes of similar projects as a means of sharing experience, and to serve as a platform for exchanges on different aspects related to projects.

There are significant practical issues, in particular concerning the third strand, and especially concerning the utility of a collection of past projects where there is no indication that the information will be checked from a legal compliance perspective by the Commission (!), and where "[d]ocuments can be provided in any of the official languages of the EU [and] [t]he database will include a machine translation facility". That can significantly reduce the practical relevance of this part of the initiative, in particular given the significant difficulties in obtaining accurate machine translation of eg technical specifications or complex contract clauses.

More importantly, however, I think that this mechanism, and in particular the notification system, raise issues as to the legal nature of the assessments and clarifications obtained from the Commission, as well as some more practical issues concerning the resourcing of the helpdesk on which the mechanism relies. I will solely concentrate on the first issue for now, as the challenge of ensuring sufficient human capital to field all questions and notifications potentially coming from the Member States is ultimately a managerial issue dependent on budget availability.

Non-bindingness of specific legal assessments?

In simple terms, the Commission describes the mechanism as follows:

Complex projects can go wrong right from the beginning if the project managers do not fully grasp the complex rules that apply to large-scale procurement. The Commission will set up a helpdesk that can answer specific questions at an early stage related to projects with an estimated value over €250 million. For projects of high importance for the Member State concerned or with a total estimated value above €500 million, relevant authorities can ask the Commission to check the complete procurement plan for compatibility with the EU procurement legislation, significantly reducing uncertainties and the risk of delays and legal challenges. The mechanism is voluntary, the Commission's advice is non-binding, and information will be handled subject to strict confidentiality requirements (emphasis added).

This is also highlighted at the start of the fuller description of the mechanism, where the Commission indicates that "[n]ational authorities and contracting authorities/entities have the option to use the mechanism on a voluntary basis to raise questions with the Commission and receive an assessment of a project’s compatibility with the EU regulatory framework before taking important steps", but that the "views expressed by the Commission services in their assessment are not legally binding on those using the mechanism or on the Commission, and are without prejudice to the interpretation of the relevant rules by the Court of Justice of the European Union" (COM(2017) 573, at 4, some footnotes omitted, except footnote 10).

Already at this level of design of the mechanism for ex-ante assessment of the procurement, EU lawyers will probably raise their eyebrows in surprise, wondering how is it possible that a specific review by the Commission, where it issues a specific opinion on the compliance or not with EU law, can be considered non-binding. In my view, and particularly if there are EU funds involved in a project which risk being withdrawn, this will certainly end up being litigated on the basis of the principle of legitimate expectations (or administrative estoppel). On that note, it is worth recalling that, in its latest formulation, the Court of Justice has reiterated that, in accordance with its settled case-law,

the right to rely on the principle of the protection of legitimate expectations extends to any person whom an institution of the European Union has caused, by giving him precise assurances, to entertain justified hopes. Information which is precise, unconditional and consistent, in whatever form it is given, constitutes such assurances (Judgment of 13 September 2017, Pappalardo and Others v Commission,  EU:C:2017:672, para 39; see also references cited therein).

I would have thought that a contracting authority (and winning tenderer) that had obtained a document from the Commission indicating that the project complied with EU law could, at the very least, wave it against the Commission in case of a subsequent infringement procedure. Conversely, where the Commission issued a negative opinion and the contracting authority decided to carry on regardless, that document could end up being used against the contracting authority in domestic litigation and prove rather persuasive to review boards or domestic courts. Additionally, it is hard to see how the pre-existence of the negative opinion would not be used against the Member State in a potential infringement procedure, and how this would not raise due process claims on the Member State's side. All in all, then, this seems like another instance of soft law bound to harden, but this time with a twist, because it would be the result of a specific procedure created by the Commission to that effect--rather than as a byproduct or unintended consequence of regular administrative procedures subject to EU administrative law.

The Commission could, of course, argue that they will couch their views in such terms as to avoid a level of detail specific enough to create legitimate expectations (which would however empty this mechanism of any effectiveness or appeal), and that they will resist public disclosure of these assessments to avoid these effects (which I do not really think possible, given the duty to grant access to documents under Regulation 1049/2001, discussed here). That would not be very convincing, though. Each of these issues requires some further assessment, because none of them seem to hold much water.

Precision and legal effects

In trying to make the mechanism attractive to the Member States which it sets out to support, in the Communication, the Commission indicates that, the helpdesk can deal with rather particular and potentially complicated issues, such as

• the applicable EU legal framework governing the project: classic procurement or utilities directives; concessions directive, etc.
• conditions for exclusions from the directives;
• procurement procedures to be used and their specific features;
• selection and award criteria;
• inclusion of green, social and innovative considerations;
• how to implement joint procurement under Article 39 of Directive 2014/24/EU.

Regardless of the nature of the question, an within one month from the time when the Commission has all the information it considers necessary to answer it, the Commission will aim to provide a specific reply. That reply will later be anonymised and published on the website of the ex-ante mechanism. However, at this point and probably in awareness (and worry) of the potential legal effects of such answers to specific and potentially rather complex and tricky questions, the Communication contains a cross-referential footnote that indicates again that "[t]he views expressed by the Commission services in their assessment are not legally binding on those using the mechanism or on the Commission, and are without prejudice to the interpretation of the relevant rules by the Court of Justice of the European Union".

Similarly, concerning the notification of a procurement plan by the relevant authority, or issues specific contract amendments, and within a period of three months, "[t]he Commission services will then provide an assessment, in which the Commission services express their views on whether the procurement plan complies with EU procurement rules, without prejudice to any future legal interpretation or assessment." Interestingly, once more, at this point the Communication contains another cross-reference to the by now famous footnote 10, which indicates that "[t]he views expressed by the Commission services in their assessment are not legally binding on those using the mechanism or on the Commission, and are without prejudice to the interpretation of the relevant rules by the Court of Justice of the European Union".

At this point, one will be forgiven for wondering whether contracting authorities will have any incentive to raise issues with the Commission knowing that they will have to wait for a month (helpdesk) or three months (full-fledged notifications of procurement plans) and that all they will obtain is a view from the Commission that the Commission itself is not willing to be bound by, and at the risk of being faced with specific recommendations or warnings on how to carry out the procurement. There seems to be an opposing incentive for contracting authorities to ignore these mechanisms and the delay they imply altogether, except where they cannot afford independent legal advice (which seems rare where there is a project budget of €250 mn or €500 mn) and may see the Commission as the only source of available (free) expertise.

How confidential is confidential?

The second important issue concerns potential difficulties in preserving the confidentiality of the documents exchanged with the Commission. Indeed, as the Commission itself reminds (in another footnote!, n 23), "Regulation (EC) No 1049/2001 of the European Parliament and of the Council of 30 May 2001 regarding public access to European Parliament, Council and Commission documents applies to all documents drawn up or received by the Commission and in its possession".

This means that, even where the Commission and the contracting authority share a view on whether a piece of information is confidential or not, the fact that the Commission holds the documentation triggers a risk of disclosure (or, at least, of disclosure-related litigation) under the EU rules. This may be particularly challenging for contracting authorities in Member States imposing lower levels of transparency than the European standard. It also means that, where the Commission and the contracting authority do not share a view on the confidentiality of some information, there is additional potential for litigation. Even if the Commission was willing to defer to Member States and reassure them that the second type of problem will not arise, the first one is unavoidable.

Even if there are good reasons to think that Reg 1049/2001 (Art 4) contains sufficient exceptions to disclosure of information of the type that can worry a contracting authority, the simple fact that the Commission has felt the need to introduce specific references to those rules in relation to every document that could include confidential or sensitive information indicates that the Institution, itself, is in no position to ensure watertight confidentiality.

The devil is in the footnotes, or catch 22?

All in all, then, the mechanisms included by the Commission in its initiative on the voluntary ex-ante assessment of large infrastructure projects, including its related helpdesk and information exchange mechanism, seem to be affected by two main issues: first, an unavoidable tension between, on the one hand, the need to provide detailed assessments that make consulting the Commission worth the contracting authorities' while (in particular, in terms of time) and, on the other, the belt and braces approach to disclaiming any legal effectiveness of those assessments. Second, a risk of public exposure of all or parts of a project that can have highly sensitive implications (in political and commercial terms).

The Commission seems to have relied on the existence of a large amount of (good) willingness from contracting authorities, and the hope that the mechanism will be perceived and understood as soft (also by economic and political agents with other agendas). However, as PhD supervisors and peer-reviewers will know well, the devil is in the footnotes, where we all tend to hide those arguments that we know will be more controversial or those issues that we want to avoid having to deal with more openly. In my view, footnotes 10 (no legal effects) and 23 (confidentiality warning) and the multiple cross-references, are good indicators that this mechanism will be problematic. And this is simply because, even if it is clear that contracting authorities will always benefit from additional expertise and (good) free legal advice (in particular, but not only, when they deal with complex projects), the simple fact is that the Commission is not in a position to provide it. First, structurally, because of the legal framework within which it operates--which questions its ability to engage in this type of advocacy plus initiative at all. Second, because of important resourcing constraints, which may well become obvious rather soon if the mechanism is used.

On the whole, I think that this voluntary ex ante mechanism is the paradigm of a catch 22 for the Commission. What is noticeable is that this is one that the Commission has created for itself (ignoring the lessons of the now long-abandoned notification mechanism in the context of Article 101(3) TFEU). And what saddens me personally is that I know for a fact that the Commission heard all of these arguments long before publishing the Communication--as evidenced by the minutes of the meeting of the Stakeholder Expert Group on Public Procurement of 17 February 2016 (note the last two bullet point of para 2).

Critical Assessment of the BBG-SKI study on the feasibility of joint cross-border public procurement

Following last week's initial reaction to the publication by the European Commission of the "Feasibility study concerning the actual implementation of a joint cross-border procurement procedure by public buyers from different Member States" prepared by BBG and SKI, I have now written a response paper: "Is Joint Cross-Border Public Procurement Legally Feasible or Simply Commercially Tolerated? ~ A Critical Assessment of the BBG-SKI JCBPP Feasibility Study" (2017) European Procurement & Public Private Partnership Law Review (forthc), available at: https://ssrn.com/abstract=2944008.

The paper provides a critical assessment of the BBG-SKI study and submits that, while the study provides some interesting data and details about relevant case studies, it does not shed significant light on the doubts created by the rules on joint cross-border public procurement (JCBPP) in the 2014 Public Procurement Package [which I had previously sketched out here], and that the main weakness of the study is its lack of a general legal analytical framework.

In order to go beyond the shallow legal analysis of the BBG-SKI study and try to gain additional legal insights on the basis of the same empirical data, the paper proposes an analytical framework under which to assess the legal compliance of JCBPP structures. It then summarises each of the case studies included in the BBG-SKI study and offers a critical (re)assessment of the issues that would have required more information and/or which are insufficiently analysed in the BBG-SKI study. Based on this reorganised empirical evidence, the paper proceeds to a critical assessment of some of the outstanding legal barriers and challenges to JCBPP. It concludes by stressing some of the remaining uncertainties concerning legal development at Member State level, and calls on the European Commission to facilitate more detailed research leading to the adoption of future guidance on JCBPP under the 2014 EU Public Procurement Directives.

Study on the feasibility of joint cross-border procurement published (teaser)

The European Commission has recently published the "Feasibility study concerning the actual implementation of a joint cross-border procurement procedure by public buyers from different Member States" prepared by BBG and SKI. This study is a follow up on the Commission's work on collaborative procurement (see here and here) and is primarily meant to "to carry out a feasibility study on the possible implementation of Joint Cross-Border Public Procurement (JCBPP), in particular focusing on the legal, administrative and organisational aspects of four selected JCBPP projects" (p. 9).

At least in part, the study would have to address the complex legal issues involved in JCBPP projects, which I mapped out in my paper “Collaborative Cross-Border Procurement in the EU: Future or Utopia?” (2016) 3(1) Upphandlingsrättslig Tidskrift 11-37 (to which the study refers). However, the study does not really dig deep on any of those legal issues and keeps the analysis at a very shallow level -- eg stressing on repeated occasions that "JCBPP is more a matter of legal complexity than of legal barriers", which I struggle to understand.

I find particularly puzzling that its main conclusions concerning legal aspects of JCBPP is that

... we must be aware of the fact that the evolution of the legal framework dealing with JCBPP is still in progress and that the regulatory approach towards the complex theme of JCBPP has not wholly settled yet in all its details. Just as in other areas of EU harmonisation legislation, a number of questions will have to be dealt with by the Member State’s legislation and jurisdiction, but may eventually also need answering by the European Court of Justice. However, the relevant legal provisions on the EU level show some gaps, are not always fully coherent and definitely pose a number of interpretational problems of their own. Non[e]theless in looking at the cases portrayed in this study, we also see that from a legal point of view (sic) JCBPP initiatives are not necessarily only a risky endeavour, but also open up opportunities for achieving the goal of enhancing efficiency in public procurement (p. 111, emphasis added).

I am going to re-read the study carefully and comment on it in more detail soon, trying to identify in particular the ways in which the case studies it discusses offer viable legal solutions or allow contracting authorities to exclude or mitigate the legal risks derived from JCBPP. For now, I just wanted to raise awareness of the publication of the report.

Wish list for 2017: My Top 10 priorities for the European Commission’s future activity in public procurement

Now that 2016 is drawing to a close, and after having engaged in a large number of discussions and exchanges of views with academics and practitioners at a number of conferences, workshops and expert meetings during the year, I have sat down to write my wish list of where I would like the European Commission to concentrate its future activity in the area of public procurement. Some of these suggestions could also serve to set agendas at national level. although my preference would be for centralised action at EU level.

These suggestions only represent my personal views, and in particular do not bind the European Commission’s Stakeholder Expert Group in Public Procurement of which I am but a member. However, some of the suggestions are supported by other members of the group in their individual capacity, and these are issues which I will push for in the activities of the group in 2017.

My wish list of top 10 priorities for future action is as follows:

1. Ensure full and adequate transposition of the 2014 Public Procurement Package, and provide guidance on the direct effect of the substantive rules to support contracting authorities in Member States where transposition is being delayed. At the time of writing, 14 Member States have fully or partially failed to transpose the new Directives (see here, and take into account that Finland adopted transposition measures on 13 December 2016). The correctness and completeness of the transposition in the remaining Member States also triggers some questions. Working towards speedy and proper transposition across all EU Member States is of utmost importance in order to ensure that the intended benefits of the 2014 reform are unlocked. It is also relevant to ensure that the direct effect of the 2014 Public Procurement Package is ensured in the absence of transposition to domestic law.

2. Reform the Remedies Directives to coordinate them with the new rules in the substantive instruments comprising the 2014 Public Procurement Package.[1] In particular, further clarification needs to be provided on the remedies applicable to call-offs within framework agreements and dynamic purchasing systems, as well as for contract modification and contract termination disputes.

3. Provide additional guidance on the development of inter partes procedures where contracting authorities aim to take decisions that would imply the impossibility for undertakings and tenderers to participate or continue participating in tenders for public contracts. This is particularly relevant in relation to exclusion rules and the management of conflicts of interest, and could use the existing rules on the assessment of apparently abnormally low tenders as a blueprint.

4. Develop effective policies concerning procurement information. This should include provision of guidance on reporting obligations under Articles 84 and 85 of Directive 2014/24/EU, as well as developing the policy on public contract registries announced as part of the 2015 strategy ‘Upgrading the Single Market: more opportunities for people and business’ in a way that ensures an appropriate balance between transparency of procurement processes and the associated expenditure of public funds with the protection of commercial and competition-sensitive information.[2] This should be done in light of the transposition of Directive 2016/943/EU on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure.

5. Provide guidance on the interpretation of Article 12 of Directive 2014/24/EU and the interaction between the in-house and the public-public cooperation exemptions it consolidates. This should be done through a thorough revision of the 2011 Commission Staff Working Paper concerning the application of EU public procurement law to relations between contracting authorities. This guidance should also extend to Article 17 of Directive 2014/23/EU and to the related rules in Articles 28 to 30 of Directive 2014/25/EU.

6. Provide additional guidance on centralised and collaborative procurement, including an assessment of the competition risks and potential negative impacts of centralised and collaborative public procurement, and develop recommendations for the effective oversight of centralised and collaborative purchasing by both national competition authorities and audit/controlling authorities. This should include providing more transparency on the European Commission’s work with the CPBs Public Procurement Network, as well as on the status of the actions plan(s) underpinning the strategic goal of facilitating aggregation of demand.[3]

7. Provide guidance on the interpretation of Articles 72 and 73 of Directive 2014/24/EU concerning contractual modification and termination. In particular, provide guidance on the use of umbrella modification clauses and the interaction between different grounds of justification for contract modifications, as well as on the effects of contractual termination that are required in case of mandatory termination due to breaches of EU law. This should be coordinated with the reform of the Remedies Directive (above 2) in order to ensure consistency of legal effects derived from contractual ineffectiveness and contractual termination.

8. Provide additional guidance on the interaction between public procurement and State aid rules, and ensure the consistent application of the recent 2016 Commission Notice on the notion of State aid as referred to in Article 107(1) TFUE with public procurement enforcement. This particularly concerns the substantive tests applicable to the identification of cross-border interest/effects.[4] This also concerns additional guidance on the substantive standards applicable to the assessment of aid for SGEI and NESGI, where the interaction between the ECJ’s Judgments in Altmark (C-280/00, EU:C:2003:415), Spezzino (C-113/13, EU:C:2014:2440) / CASTA (C-50/14, EU:C:2016:56), and Zweckverband Tierkörperbeseitigung (C-446/14 P, EU:C:2016:97) is rather unclear.

9. Continue to support the transition towards eProcurement and the development of open access, free to use technical solutions and standards. The work of the Commission should concentrate on ensuring that technological barriers do not arise from the transition to eProcurement and that interoperability is ensured in both the short and the long run.[5] Work in this area could also include creating pilot experiments with public sector virtual markets on the basis of dynamic purchasing systems and electronic catalogues, which could be run entirely electronically.

10. Significantly reform the Internal Market Scoreboard for Public Procurement, so as to avoid embedding undesirable policy pushes, such as the unjustified push for aggregation of more than 10% of public sector procurement expenditure. Carefully assess the desirability and utility of similar ongoing projects in the Public Procurement Action Plan—such as “Developing an index for rating Contracting Authorities according to their performance ("Trip advisor")—and seriously consider abandoning them to concentrate on more useful initiatives.

______________

[1] See A Sanchez-Graells, “‘If It Ain't Broke, Don't Fix It'? EU Requirements of Administrative Oversight and Judicial Protection for Public Contracts”, in S Torricelli & F Folliot Lalliot (eds), Administrative oversight and judicial protection for public contracts (Larcier, 2017) forthcoming. Available at https://ssrn.com/abstract=2821828.

[2] See A Sanchez-Graells, “Centralised Procurement Registers and their Transparency Implications”, Discussion Non-Paper for the European Commission Stakeholder Expert Group on Public Procurement, 19 September 2015. Available at http://www.howtocrackanut.com/blog/2015/09/why-are-public-contracts-registers.html.

[3] As briefly described in “Public buyers save money with cooperative procurement”, 1 December 2016, http://ec.europa.eu/growth/tools-databases/newsroom/cf/itemdetail.cfm?item_id=9013.

[4] See A Sanchez-Graells, “Commission Notice on Notion of State Aid shows Contradictions with EU Public Procurement Rules, in Particular Concerning Aid and Contracts for Local SGEI”, 20 May 2016, http://www.howtocrackanut.com/blog/2016/5/20/commission-notice-on-notion-of-state-aid-shows-contradictions-with-eu-public-procurement-rules

[5] See P Ferk, “E-Procurement between EU Objectives and the Implementation Procedures in the Member States—Article 22(1) of the 2014 Directive”, in GS Ølykke & A Sanchez-Graells (eds), Reformation or Deformation of the EU Public Procurement Rules (Edward Elgar, 2016) 101-124.

Brexit may have negative effects for the control of public expenditure, particularly regarding subsidies to large companies

In the current state of turmoil, it is difficult to speculate on the exact relationship between the EU and the UK that can result from the Brexit vote and the future negotiations to be held under Article 50 TEU, in case it gets triggered. However, in order to contribute to the debate of what that relationship should look like in the interest of taxpayers in the UK, it is important to consider the implications that a post-Brexit deal could have in terms of the potential disappearance of the EU rules applicable to the control of how public funds are spent. A reduction in the control mechanisms applicable to certain types of public expenditure could indeed diminish the effectiveness of policies funded by UK taxpayers and create shortcomings in public governance more generally.

This is particularly clear in the case of the EU State aid rules in Articles 107 to 109 TFEU and accompanying secondary legislation, which ultimately aim to avoid subsidy races, as well as the protectionist financing of national champions by Member States. Ultimately, these rules establish a set of controls over the selective channelling of public funds to companies, be it in the form of direct subsidies, or in more indirect ways such as tax exemptions, special contributions to pension plans, or the transmission of public assets (such as public land) in below-market conditions.

The European Commission has created a framework that allows Member States to use State aid for horizontal purposes (such as the support of environmental, innovation or employment-related activities), but also aims to prevent the use of public funds in order to benefit specific companies, in particular through a subsidisation of their operating costs. The European Commission enforces these rules and can bring Member States that breach them before the Court of Justice of the European Union. Additionally, competitors of the companies that receive State aid can challenge those decisions in their domestic courts.

Even if these rules are admittedly imperfect and their enforcement could be improved,* there is no question that the European Commission has been active and rather effective in combating the use of public funds to benefit specific large companies. Remarkably, Member States need to notify State aid measures to the European Commission and must not provide any aid until the Commission has authorised it. Overall, this means that in cases involving large companies, no State aid contrary to the EU rules is generally put in effect, as demonstrated by the discussions surrounding the Hinkley Point project. Where Member States infringe this standstill obligation, the Commission can force a recovery of the aid. The recent tax avoidance cases involving Starbucks or Fiat are a clear testimony of this important role in controlling the way public funds are spent in support of large companies.

The European Commission is thus heavily involved in the State aid measures aimed at specific large companies and acts as a filter to ensure that the expenditure of public funds pursues a legitimate objective in compliance with EU law. This was particularly the case of the State aid channelled to banks in the aftermath of the 2008 financial crisis.

Overall, then, at least for cases of State aid involving large sums of money and large companies, the Commission acts as an important filter to prevent damaging economic interventions in the economy, which constitutes an important check on how public money is spent. Whether such a tight system could be relaxed in order to enable a more proactive EU-wide industrial policy is a subject of significant debate, but the constraints that EU State aid rules currently impose on the provision of direct and indirect financial support to large companies are certainly not perceived as minor.

The question is thus whether a post-Brexit deal could free the UK Government from such State aid control, at least in the medium to long-run, so that it could engage in largely unchecked public subsidy policies, such as creating particularly beneficial tax conditions in order to try to retain or attract large multinational companies considering relocating elsewhere in the EU, or channelling public funds to chosen companies, either in support of industrial policy goals or otherwise.

These would be policy interventions clearly tackled by the European Commission under existing rules, and they would also be caught by the EFTA Surveillance Authority in case the post-Brexit deal resulted in the UK joining the European Economic Area (the so-called ‘Norwegian option’), which would require compliance with the same rules. However, whether interventions aimed at subsidising large companies would be caught in case of a ‘WTO-based’ trade scenario is less clear because the WTO rules on subsidies are not as tight as the EU’s, and their enforcement ultimately relies on other WTO Members bringing a complaint against the UK to the dispute settlement board, which is a very political decision ultimately reliant on trade calculations. To be sure, the EU itself could bring cases against the UK, but this would be a highly contentious issue in the framework of a relationship already very strained by the UK’s exit from the EU and detachment from the EEA.

Should the UK not be a part of the internal market via membership of the EU or the EEA, and in the absence of effective WTO-based external checks on the use of public funds to provide financial support to large companies, the control of this form of public expenditure would fall solely to Parliament and the domestic UK institutions, such as the National Audit Office.

This can be seen as an advantage by those convinced by arguments of self-control and UK-centric governance, but economic regulatory capture theory, and public policy theory more generally, have repeatedly demonstrated that such a self-policing architecture is unlikely to prevent ‘politicised’ uses of public funds. It seems clear to me that, in that case, the possibilities for any given Government to engage in expenditures of this type would be greater than they currently are, which would not necessarily result in the pursuance of the best interests of taxpayers in the UK.

Therefore, if there is value in having an external control of subsidies to large companies in order to avoid anti-economical protectionist policies or redistributive policies that take money away from other pressing social priorities—and I would certainly argue that there is—it seems clear to me that any post-Brexit deal that does not include the application of EU/EEA State aid rules would imply a net loss in terms of public governance and, in particular, in terms of an effective control of public expenditure, particularly regarding subsidies to large companies. Ultimately, then, from this perspective, it seems to me to be in the interest of taxpayers in the UK to strongly support a post-Brexit arrangement that retains State aid control, either by the European Commission or the EFTA Surveillance Authority.

__________________

* A Sanchez-Graells, “Digging itself out of the hole? A critical assessment of the Commission’s attempt to revitalise State aid enforcement after the crisis” (2016) 4(1) Journal of Antitrust Enforcement 157-187.

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

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

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

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

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

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

Additional Austrian postal services to be exempted from compliance with EU (utilities) procurement rules (T-463/14) -- a warning of procedural rebalancing under dir 2014/25?

In its Judgment of 27 April 2016 in Österreichische Post v Commission, T-463/14, EU:T:2016:243 (not available in English), the General Court (GC) of the Court of Justice of the European Union ruled on judicial review of the Commission Implementing Decision exempting certain services in the postal sector in Austria from the application of Directive 2004/17 on utilities procurement, in particular as carried out by Österreichische Post AG (the Austrian national universal service provider, under public ownership of 52.8% of its capital).

The GC quashed the Commission's Decision regarding the denial of exemption for cross-border postal services for addressed (‘outbound’) business to business and business to consumer letters ('B2X letters'), as well as for addressed (‘outbound’) letters between private customers and between private customers and business customers ('C2X letters')--ie, in relation with the activities covered in paras [43]-[50].

The Commission's Decision was based on Art 30 Dir 2004/17, which allowed for utilities procurement linked to activities directly exposed to competition to be exempted from compliance with the otherwise applicable EU public procurement rules. The same regime is now foreseen in Art 34 of Directive 2014/25 on utilities procurement. Thus, the GC's Judgment in Österreichische Post v Commission is interesting in order to gain a better understanding of the procedure (and evidentiary requirements) for the exemption of activities directly exposed to competition from compliance with the revised EU utilities public procurement rules.

the contested decision

In its Implementing Decision, the Commission had considered that

(46) Competition for cross-border letter post is very different for private persons and for companies. Private persons generally have no real choice but to send international mail with their national universal service provider. The volumes sent by private persons are generally too low to offer incentives for new entrants into the market.

(47) It is noted that the competitive situation depends also on the size/population of each city due to the fact that cross-border service providers do not maintain a nationwide access network but generally collect the mail directly at the customer's premises. 

(48) Previous Commission practice... made a distinction between the cross-border postal services for addressed B2X letters market and the cross-border postal services for addressed C2X letters market. 

(49) There is no evidence that the situation is different in Austria,  therefore, for the purposes of this Decision and without prejudice to competition law, two separate product markets will be considered, namely the cross-border postal services for outbound B2X addressed letters and the cross-border postal services for outbound C2X addressed letters. 

(50) Austrian Post could not provide detailed information ... on its relevant shares in each market, nor the market shares of its main competitors. In the absence of information on the degree of competition in each of those markets, it is not possible to conclude that the conditions for granting an exemption under Article 30(1) of Directive 2004/17/EC to cross-border postal services for outbound B2X addressed letters and to cross-border postal services for outbound C2X addressed letters in Austria are met. Consequently, Article 30(1) of Directive 2004/17/EC does not apply to contracts intended to enable the pursuit of those activities in Austria (Implementing Decision 2014/184/EU, paras 46-50, references omitted).

In reviewing this argumentation, which seems to fundamentally rely on the ultimate ratio that Österreichische Post had not discharged the burden of proof imposed by Art 30 Dir 2004/17 (now Art 34 Dir 2014/25), the GC raises some important issues about the level of detail with which the Commission needs to assess estimated figures provided by applicants for exemption from compliance with EU public procurement rules:

(161) ... the applicant states that, following its own argument, the Commission should have exempted at least the B2X international market from the application of Directive 2004/17. It adds that, given that, according to paragraph 46 of the contested decision, its services were not substitutable in the C2X international market, its market share in the B2X international market should be significantly below [confidential]%, which it also corresponded with the Commission's assessment contained in paragraph 47 of the contested decision that the applicant's competitors were mainly in urban areas.

(162) This argument must be accepted. Indeed, on the one hand, the Commission did not dispute that the market share of the applicant in the market for postal services for addressed ['outbound'] B2X and C2X letters at international level was below [confidential]%, as stated in ... the application of the applicant. Moreover, as stated by the applicant, recital 46 of the contested decision shows that the services in question were not substitutable in the C2X international market, since, according to the Commission, private persons generally have no real choice but to send international mail with their national universal service provider. It follows that the market share of the applicant in the market for postal services for addressed B2X letters at international level should be well below [confidential]%, which the Commission did not take into account when considering that those postal services were not directly exposed to competition. In view of these considerations, it must be concluded that the Commission incurred in a manifest error of assessment in not exempting postal address for addressed B2X letters at international level from the application of Directive 2004/17.

(163) Accordingly, the fourth plea must be upheld in so far as it relates to the postal services for addressed B2X letters at international level and dismissed as regards postal services for addressed C2X letters at international level (T-463/14, paras 161-163, own translation from Spanish).

Cracking the specifics of the reasoning is complicated due to the confidential nature of the initial application for exemption under Art 30 Dir 2004/17, as well as the confidentiality of the market share data used by the GC. However, it seems clear that the Commission is subjected to a very demanding standard of data assessment and that it is obliged to use any information provided by the applicants in order to make educated guesses where market intelligence is insufficient to support a direct analysis. Looking to the future, this stringent approach highlights one of the differences between the 'old' regime of Art 30 Dir 2004/17 and the 'new' rules of art 34 Dir 2014/25, which may well make the Commission's life easier.

what Dir 2014/25 has changed

Under the procedural provisions of Art 30(6) Dir 2004/17, 'For the adoption of a Decision [exempting activities directly exposed to competition from compliance with Dir 2004/17] the Commission shall be allowed a period of three months commencing on the first working day following the date on which it receives the notification or the request. However, this period may be extended once by a maximum of three months in duly justified cases, in particular if the information contained in the notification or the request or in the documents annexed thereto is incomplete or inexact or if the facts as reported undergo any substantive changes'.

Conversely, Dir 2014/25 now has a new Art 35 on the procedure applicable for exemption decisions for activities exposed to competition under Art 34. And this is complemented by the additional rules in Annex IV, according to which second paragraph, 'The Commission may require the Member State or the contracting entity concerned or the independent national authority referred to under paragraph 1 or any other competent national authority to provide all necessary information or to supplement or clarify information given within an appropriate time limit. In the event of late or incomplete answers, the periods set out in the first subparagraph of paragraph 1 shall be suspended for the period between the expiry of the time limit set in the request for information, and the receipt of the complete and correct information'.

The change of the extension of the maximum period for a decision to exempt activities exposed to competition for a suspension of the period to adopt such decision is important because, both under the old [Art 30(4)(II) Dir 2004/17] and the new rules [Art 35(3)(II)(b) Dir 2014/25], in the absence of a decision within the specified time period (3 months in the old rules, and 90 working days under the new ones), the Directive ceases to apply to contracts intended to enable the activity exposed to competition. Consequently, a combination of a ticking time limit and the impossibility to reject claims based on what the Commission may have considered unreliable or insufficient evidence, would have resulted in significant pressure on the Commission under the old rules. Thus, it seems clear that, under the new rules and with the ability to 'stop the clock', the Commission will be able to relocate the burden of proof squarely onto the applicant's shoulders, which may well minimise or neutralise the tough approach indicated by the GC in its Österreichische Post v Commission Judgment.

CJEU rules on Greek Support to The Agricultural Sector under the 2008 and 2009 State Aid Frameworks: A Blow to the Commission's Waiver of Discretion? (C-431/14 P)

In its Judgment of 8 March 2016 in Greece v Commission (ELGA), C-431/14 P, EU:C:2016:145, the Court of Justice of the European Union (CJEU) ruled on the compatibility of certain measures of financial support to the Greek agricultural sector in the aftermath of the 2008 financial crisis with the EU rules on State aid--ie mainly, Art 107 TFEU and the Temporary Community Framework for State aid measures adopted by the Commission in 2008 (the 2008 TCF), as amended in 2009 (the 2009 amended TCF).

The Judgment is interesting because it assesses the boundaries of the temporary discretionary measures adopted by the Commission in order to flexibilise the enforcement of EU rules in times of economic and financial distress, on the basis that they aim 'to remedy a serious disturbance in the economy of a Member State', ex Art 107(3)(b) TFEU. In particular, the ELGA Judgment assesses whether Member States can validly raise arguments based on Art 107(3)(b) TFEU directly, regardless of the Commission's delineation of its State aid policy based on that same legal basis. Or, in simple terms, whether a valid Art 107(3)(b) TFEU can exist outside of the (temporary) scope of the 2008 TCF and the 2009 amended TCF. The case may seem very specific because of its link to the economic crisis. However, the CJEU makes some broader points about the Commission's discretion that are worth taking into careful consideration.

This discussion is relevant from a legal perspective, due to the clarification of the so far unknown exemption of the State aid prohibition of Art 107(1) TFEU on the basis of Art 107(3)(b) TFEU regarding aid aimed to remedy a serious disturbance in the economy of a Member State' [see P Nicolaides & IE Rusu, 'The Financial Crisis and State Aid' (2010) 55(4) The Antitrust Bulletin 759-782]. It is also relevant for the policy implications of the CJEU's support for the Commission's intervention [for discussion of a general framework, see H Kassim & B Lyons, 'The New Political Economy of EU State Aid Policy' (2013) 13(1) Journal of Industry, Competition and Trade 1-21; and TJ Doleys, 'Managing the Dilemma of Discretion: The European Commission and the Development of EU State Aid Policy' (2013) 13(1) Journal of Industry, Competition and Trade 23-38].

The case of the Greek support to the agricultural sector through ELGA

The specific case concerns a long-running action of the Greek State for the annulment of a 2011 Commission Decision concerning compensation payments made by the Greek Agricultural Insurance Organisation (ELGA) in 2008 and 2009, which the General Court (GC) upheld on appeal (T‑52/12, EU:T:2014:677). One of the difficulties with this case is the sequence of events. From the regulatory perspective, it is worth stressing that the 2008 TCF, which entered into force in 17 December 2008, did not cover aid to the agricultural sector. This was eventually made clear in the 2009 amended TCF, according to which

The possibility under [the TCF] to grant a compatible limited amount of aid does not apply to undertakings active in the primary production of agricultural products. Farmers, however, encounter increased difficulties to obtain credit as a consequence of the financial crisis ... it is appropriate to introduce a separate compatible limited amount of aid for undertakings active in the primary production of agricultural products.

Specifically, the 2009 amended TCF provided that

The Commission will consider such State aid compatible with the common market on the basis of Article [107(3)(b) TFEU], provided all the following conditions are met: ... (h) … Where the aid is granted to undertakings active in the primary production of agricultural products ..., the cash grant (or gross grant equivalent) does not exceed EUR 15,000 per undertaking ...

This took effect on 28 October 2009, which raises a practical temporary difficulty because, '[f]ollowing protests in January 2009 by a large number of Greek agricultural producers about the losses suffered by them in 2008 as a result of adverse weather conditions..., the Hellenic Republic provided that compensation aid of EUR 425 million would be paid to producers on an exceptional basis by ELGA' (C-431/14 P, para 11). Upon investigation, the Commission found that most of that aid was incompatible with the internal market and, in particular, that '[t]he compensation aid of EUR [387.4 million] granted to producers on dates before 28 October 2009 is incompatible with the internal market' (C-431/14 P, para 14, emphasis added).

The issue is that, in plain terms, the Commission rejected Greece's claims that the exemption foreseen in Art 107(3)(b) TFEU could be directly applied in the case because of the economic difficulties that Greece had been experiencing. The Commission rejected such claim on the basis that Art 107(3)(b) TFEU had to be applied within the boundaries of the policy documents developed to that effect, ie the 2008 TCF and the 2009 amended TCF, which could only apply for the future--that is, only from their respective dates of entry into force--which, as the agricultural sector is concerned, was that of the 2009 amended TCF: 28 October 2009. The GC upheld the Commission's approach in the following terms

185 ... it is clear that, contrary to what the Hellenic Republic claims, the Commission had to base its decision on the [TCF] and not directly apply Article 107(3)(b) TFEU in order to assess the compatibility of the payments made by ELGA in 2009 on account of the economic crisis experienced in Greece.

186 It is clear from the case-law that, in adopting rules of conduct and announcing by publishing them that they will henceforth apply to the cases to which they relate, the Commission imposes a limit on the exercise of its aforementioned discretion and cannot depart from those rules without being found, where appropriate, to be in breach of general principles of law, such as equal treatment or the protection of legitimate expectations (see judgment[s] in Germany and Others v Kronofrance, [C‑75/05 P and C‑80/05 P, EU:C:2008:482], paragraph 60 and the case-law cited, and … Holland Malt v Commission, C‑464/09 P, [EU:C:2010:733], paragraph 46).

187 ... in the specific area of State aid, the Commission is bound by the guidelines and notices that it issues, to the extent that they do not depart from the rules in the Treaty (see judgment in Holland Malt v Commission, [C‑464/09 P, EU:C:2010:733], paragraph 47 and the case-law cited).

188 Therefore, it is necessary to reject the arguments of the Hellenic Republic to the effect that, on account of the serious disturbance in the Greek economy due to the economic crisis experienced in Greece since the end of 2008 and in 2009, the Commission should have declared the payments made by ELGA in 2009 compatible directly on the basis of Article 107(3)(b) TFEU (T-52/12, paras 185-188, emphasis added).

The CJEU has now taken the same line of argument, but has introduced important nuances in determining that

69 ... as the General Court stated in paragraphs 186 and 187 of the judgment under appeal, the Court has also consistently held that, in adopting rules of conduct and announcing by publishing them that they will henceforth apply to the cases to which they relate, the Commission imposes a limit on the exercise of its aforementioned discretion and, in principle, cannot depart from those rules without being found, where appropriate, to be in breach of general principles of law, such as equal treatment or the protection of legitimate expectations (judgments in Holland Malt v Commission, C‑464/09 P, EU:C:2010:733, paragraph 46, and Banco Privado Português and Massa Insolvente do Banco Privado Português, C‑667/13, EU:C:2015:151, paragraph 69).

70 However, in the specific area of State aid, the Commission is bound by the guidelines that it issues, to the extent that they do not depart from the rules in the TFEU, including, in particular, Article 107(3)(b) TFEU (see, to that effect, judgment in Holland Malt v Commission, C‑464/09 P, EU:C:2010:733, paragraph 47), and to the extent that their application is not in breach of general principles of law, such as equal treatment, in particular where exceptional circumstances, different from those envisaged in those guidelines, distinguish a given sector of the economy of a Member State.

71      Consequently, first, the Commission may not fail to have regard to Article 107(3) TFEU by adopting guidelines vitiated by an error of law or a manifest error of assessment, nor may it waive, by the adoption of guidelines, the exercise of the discretion that that provision confers on it. Further, when, in the exercise of that discretion, it adopts guidelines of that nature, these must be kept under continuous review for the purposes of anticipating any major developments not covered by those measures.

72      Secondly, the adoption of such guidelines does not relieve the Commission of its obligation to examine the specific exceptional circumstances relied on by a Member State, in a particular case, for the purpose of requesting the direct application of Article 107(3)(b) TFEU, and to provide reasons for its refusal to grant such a request, should the case arise.

73      In the present case, it is not in dispute that, precisely because of the effect of the economic crisis experienced by the Member States, and in particular, the Hellenic Republic, on the primary agricultural sector of the European Union, the Commission exercised the discretion conferred on it by Article 107(3)(b) TFEU by adopting the TCF and then the amended TCF, since both the former and the latter expressly mention that sector.

74      However, the fact remains that although the Hellenic Republic claimed before the General Court that Article 107(3)(b) TFEU ought to be applied directly to the facts of the case, notwithstanding the existence of the rules of conduct set out in the TCF and the amended TCF, it did not argue, in support of that claim, that there were, in the present case, specific exceptional circumstances in the primary agricultural sector concerned ...

75      Indeed, it is apparent from the documents in the file that the material that the Hellenic Republic put before the General Court was intended to establish the existence of a very serious disturbance affecting the Greek economy from the end of 2008 and in 2009, but it was not such as to prove to the requisite legal standard that that economy was faced with specific exceptional circumstances that ought, in this case, to have led the Commission to assess the aid at issue directly in the light of Article 107(3)(b) TFEU (C-431/14 P, paras 69-75, emphasis added).

implications of the cjeu elga judgement

In my view, the implications of the case are two-fold, and they concern, first, the relationship between the Commission's disclosed State aid policy and the discretion that Art 107(3) TFEU gives it; and, second, the interpretation of Art 107(3)(b) TFEU in particular.

Regarding the issue of the extent to which the Commission can deviate from adopted and publicised State aid policy, the CJEU has now made it clear that 'in adopting rules of conduct and announcing by publishing them that they will henceforth apply to the cases to which they relate, the Commission imposes a limit on the exercise of its aforementioned discretion and, in principle, cannot depart from those rules without being found, where appropriate, to be in breach of general principles of law, such as equal treatment or the protection of legitimate expectations' (para 69, emphasis added); and that 'the Commission is bound by the guidelines that it issues, to the extent that they do not depart from the rules in the TFEU ... and to the extent that their application is not in breach of general principles of law, such as equal treatment, in particular where exceptional circumstances, different from those envisaged in those guidelines, distinguish a given sector of the economy of a Member State' (para 70, emphasis added). It is thus plain that 'the Commission may not fail to have regard to Article 107(3) TFEU ... nor may it waive, by the adoption of guidelines, the exercise of the discretion that that provision confers on it' (para 71, emphasis added).

Somehow, the CJEU has made it clear that the Commission cannot hide behind its disclosed State aid policy if there are relevant circumstances that require a specific discretionary decision. This can be far reaching because the CJEU ELGA Judgment clearly opens the door to Member States' claims beyond the boundaries set by the Commission in its disclosed State aid policy, and may be the end of an era of increasing push for box-ticking exercises and for the Commission's reliance on its predetermined conditions for State aid exemption under block exemption regulations. This may well lead to an increase in litigation by Member States, which may be more willing to challenge the Commission's 'self-enforcement' approach in its recently adopted State aid 2.0 strategy [for discussion, see A Sanchez-Graells, “Digging itself out of the hole? A critical assessment of the Commission’s attempt to revitalise State aid enforcement after the crisis” (2016) Journal of Antitrust Enforcement, forthcoming].

The bit that puzzles me is that, in the specific circumstances of Art 107(3)(b) TFEU and its use in the aftermath of the economic and financial crisis, the Commission had not disclosed any policy documents prior to the 2008 TCF and the 2009 amended TCF. Thus, the issue whether the Commission could block any claims prior to the entry into force of those instruments could also have triggered an argument of retroactive application of beneficial discretionary measures, which I would have expected to read in a case like this. Somehow, the issue of the inter-temporal validity of policy and legal instruments in EU economic law continues to raise unresolved issues.

Regarding the specific interpretation of Art 107(3)(b) TFEU, the implications of the ELGA Judgment are mixed. On the one hand, it seems clear that the CJEU recognises that Member States can claim the existence of specific circumstances in its economy, and this would tail up with the drafting of Art 107(3)(b) TFEU, which indicates that the exemption is available for aid aimed to remedy a serious disturbance in the economy of a Member State. On the other hand, though, the CJEU seems to require Member States to demonstrate that those circumstances 'distinguish a given sector of the economy of a Member State' (para 70) and, in the specific case, 'specific exceptional circumstances in the primary agricultural sector concerned' (para 74). This seems problematic on two fronts.

First, it clearly goes beyond the wording of Art 107(3)(b) TFEU, which has no reference to specific sectors of the economy and seems to accept the possibility of exceptional rules aimed at a distressed economy as a whole. One is left with the doubt whether this requirement to have demonstrated specific exceptional circumstances in the agricultural sector derives from the CJEU's unwillingness to quash the Commission's decision--reading the case, it seems clear that the controversy about the existence of sufficient evidence in the file could have been a driver for this outcome--or, on the contrary, it is a purposeful interpretation of Art 107(3)(b) TFEU in a way that reduces its scope. If the latter is the real reason, then the CJEU could have been more explicit in determining the parameters of such narrow interpreation, not least because of the absence of a sufficient volume of case law that interprets this provision.

And, second, it seems to create a significant limitation in the Member States' design of their macroeconomic (emergency) policies in a way that some could argue falls foul of the principle of subsidiarity. In that regard, the CJEU could have been more explicit as to the reasons for the imposition of a requirement of economic intervention in the specific sectors affected by the serious economic disturbance--which, in my view, would be relatively easy to support on the basis of the general requirements of suitability and proportionality applicable to State measures that aim to benefit from exemptions of Treaty prohibitions under EU economic law, generally.

Some thoughts on the European Commission's revised proposal for regulation on third-country access to public procurement

The European Commission has recently published a revised version of the proposed regulation on the access of third-country goods and services to the Union’s internal market in public procurement and procedures supporting negotiations on access of Union goods and services to the public procurement markets of third countries [for discussion of the initial proposal and its implications, see K Dawar, 'The Proposed "Buy European" Procurement Regulation: An Analysis'].

As the Commission stresses, nothing in the revision of the instrument has altered the fact that

The new Instrument would allow the Commission to initiate public investigations in cases of alleged discrimination of EU companies in procurement markets. In case such an investigation would find discriminatory restrictions vis-à-vis EU goods, services and/or suppliers, the Commission will invite the country concerned to consult on the opening of its procurement market. Such consultations can also take place in the form of negotiations on an international agreement. As a last resort, the Commission could, after consultation with EU Member States, apply the new tool. This means that bids consisting of goods and services from the country concerned would, while compared to other bids, be considered as offering a higher price than the one they have put forward, thus providing European and non-targeted countries' goods and services a competitive advantage. To avoid the application of this tool, third countries have only to stop such discriminatory practices (see press release).

This is clearly an instrument of trade policy and, in my view, it is not much more than the stick the Commission is trying to get itself to be able to reinforce its push for international procurement agreements (notably, the GPA) in case some trading partners are not persuaded by the carrot of having enhanced access to the EU market. I am sceptical about the likely effectiveness of the instrument, or whether it actually adds anything in terms of the EU's external foreign (trade) policy, other than the possibility of imposing compliance with retaliatory trade measures internally, on Member States that may have different views, or simply want to benefit from cheaper or more competitive offers coming from blacklisted countries with which their 'own domestic' suppliers do not trade intensely. Oddly, the proposed regulation may have more teeth from this internal perspective than outwardly. 

What troubles me is the possibility that this trade instrument, if approved and implemented, triggers litigation from foreign non-GPA covered litigants in three fronts. First, regarding investment protection claims against the EU and its Member States by tenderers from countries that find themselves unable to continue tendering for contracts in the internal market due to the Commission's imposition of retaliatory measures under the proposed regulation. Second, regarding challenges in front of the Court of Justice of the European Union on the basis of Art 263(4)III TFEU and the negative impact that the European Commission's decision to blacklist countries create [in a similar fashion as recent cases such as Council v Manufacturing Support & Procurement Kala Naft, C-348/12 P, EU:C:2013:776], which will trigger disputes as to the locus standi of these companies. And third, regarding litigation in front of the national courts, both if the foreign companies are subjected to the price discrimination mechanisms or, counter-intuitively, even if they are not.

Overall, I am not sure that it is a good idea for the European Commission to be pushing for an instrument that is very likely to judicialize trade disputes. At the same time, if the instrument is as ineffective as I am inclined to think, maybe those risks are simply theoretical and not worth worrying after all. Which strengthens the doubts about the utility of the instrument even further...

CJEU implicitly rejects GC's views on subjective assessment of two-part State aid measures under Art 107(1) TFEU (C-15/14)

In its Judgment in Commission v MOL, C-15/14, EU:C:2015:362, the CJEU upheld the previous Judgment of the GC where the selectivity of two-part State aid measures was assessed with very generous deference towards the State's exercise of regulatory powers (which I criticised here). 

 

The CJEU assessed the criticism by the Commission of the GC's position (T-499/10, paras 64 and 65) that the presence of a selective advantage cannot be deduced from the mere fact that the operator is left better off than other operators when the Member State concerned justifiably confined itself to exercising its regulatory power following a change on the market. 

 

Remarkably, the Commission took issue with the fact that the General Court linked "the assessment of the selective nature of the ... agreement, and therefore the measure at issue, to whether or not the Member State concerned had the intention, at the time of concluding that agreement, of protecting one or more operators from the application of a new fee regime" (C-15/14, para 85, emphasis added). As the CJEU stresses

According to the Commission, the General Court thus disregarded the settled case-law of the Court of Justice to the effect that Article 107(1) TFEU defines State interventions on the basis of their effects, and independently of the techniques used by the Member States to implement their interventions (see, inter alia, judgments in Belgium v Commission, C‑56/93, EU:C:1996:64, paragraph 79; Belgium v Commission, C‑75/97, EU:C:1999:311, paragraph 25; British Aggregates v Commission, C‑487/06 P, EU:C:2008:757, paragraph 89; and Commission v Government of Gibraltar and United Kingdom, C‑106/09 P and C‑107/09 P, EU:C:2011:732, paragraphs 91, 92 and 98) (C-15/14, para 86).

I had also criticised the GC for the inclusion of the element of "intention" in its previous Judgment. However, I also expressed doubts as to the CJEU's willingness to side by the GC. In my view back then,

If Article 107(1) TFEU is meant to avoid distortions of competition in the internal market, when confronted with sequential, two-part or complex aid measures, the fact that they all formed part of a 'master plan' from the outset or are the 'random or supervening' result of discrete interventions should be irrelevant. Otherwise, the burden of proving 'distortive intent' from the outset may simply make it impossible to pursue these cases. However, it may well be that the remarks made by the GC in para 67 of MOL v Commission will remain a 'mere' obiter dictum and that the assessment of two-part or complex measures will remain much more objective in the future.

Consequently, I was hoping that the CJEU would quash this part of the Judgment in T-499/10. However, the CJEU rejected the argument of the Commission and determined that the GC's argumentation in paras 64 to 67 and 82 of the Judgment in T-499/10 was not vitiated by any error of law. I disagree with the CJEU's arguments to support the GC's position, which deserve close scrutiny (below). However, given that the CJEU has managed to uphold the GC's reasoning and at the same time stress that two-part or complex State aid measures must be assessed without any reference to the "intention" of the Member State, I agree with the outcome of the case.

 

According to the CJEU,

92 ... the General Court stated, in paragraph 67 of the judgment under appeal, that [under] the case-law of the Court of Justice, ... for the purposes of Article 107(1) TFEU, a single aid measure may consist of combined elements on condition that, having regard to their chronology, their purpose and the circumstances of the undertaking at the time of their intervention, they are so closely linked to each other that they are inseparable from one another (judgment in Bouygues and Bouygues Télécom v Commission and Others and Commission v France and Others, C‑399/10 P and C‑401/10 P, EU:C:2013:175, paragraphs 103 and 104 and the case-law cited).

93 In that context, the General Court emphasised, in paragraph 67 of the judgment under appeal, that a combination of elements such as that relied upon by the Commission in the decision at issue may be categorised as State aid when the State acts in such a way as to protect one or more operators already present on the market, by concluding with them an agreement granting them fee rates guaranteed for the entire duration of that agreement, while having the intention at that time of subsequently exercising its regulatory power, by increasing the fee rate so that other market operators are placed at a disadvantage, be they operators already present on the market on the date on which that agreement was concluded or new operators.

94 It was in the light of those considerations that the General Court, in paragraph 68 of the judgment under appeal, decided that it was necessary to examine whether, in those proceedings, the Commission was entitled to consider that the contested measure was selective.

95 It follows from the foregoing that, as MOL contends, paragraphs 64 to 67 of the judgment under appeal do not, as such, concern the examination of the selectivity of the 2005 agreement, but are preliminary explanations aimed at introducing the relevant framework in relation to which the General Court examined whether the Commission was correct in finding that the measure at issue was selective (sic).

96 As the Advocate General stated in points 107 and 114 of his Opinion, by those preliminary explanations, the General Court in fact sought to deal with the issue of the links existing between the 2005 agreement and the 2008 amendment, which the Commission had not specifically addressed in the decision at issue, and more particularly, to underline the fact that, given that there is no chronological and/or functional link between those two elements, they cannot be interpreted as constituting a single aid measure.

97 By those preliminary explanations, the General Court merely applied the case-law laid down by the Court of Justice in the judgment in Bouygues and Bouygues Télécom v Commission and Others and Commission v France and Others (C‑399/10 P and C‑401/10 P, EU:C:2013:175), to which the General Court also expressly referred in paragraph 67 of the judgment under appeal, and according to which, since State interventions take various forms and have to be assessed in relation to their effects, it cannot be excluded that several consecutive measures of State intervention must, for the purposes of Article 107(1) TFEU, be regarded as a single intervention. That could be the case, in particular when consecutive interventions, having regard to their chronology, their purpose and the circumstances of the undertaking at the time of those interventions, are so closely related to each other that they are inseparable from one another (C-15/14, paras 92 to 97, emphasis added).

I find the reasoning of the CJEU very poor. By artificially breaking up paragraph 67 of the GC's Judgment in paras 92 and 93 of its own Judgment, the CJEU attempts to limit the requirement of the element of "intention" to some mysterious "preliminary explanations" excluded from the selectivity assessment, and this is very unsatisfactory and unconvincing.

In my view, the CJEU should have plain and simply said that the GC would have been wrong to include an element of "intention" in the test applicable to two-part or complex State aid measures, which assessment needs to be carried out in view of objective factors such as 'their chronology, their purpose and the circumstances of the undertaking at the time of their intervention, [or whether] they are so closely linked to each other that they are inseparable from one another' as per Bouygues and Bouygues Télécom v Commission and Others and Commission v France and Others.

Allowing the GC to save face by limiting its erroneous interpretation of that case law in para 67 of T-499/10, or failing to stress the fact that it was an unfortunate expression made obiter dictum (if they wanted to remain deferential) pays lip service to legal certainty. In my view, the CJEU could have decided otherwise because the element of "intention" is actually not assessed at any point of the GC's Judgment and the CJEU was ready to accept the selectivity analysis carried out by the GC. Consequently, there was no need for the strange and convoluted analysis in paras 92 to 97 of the Judgment in C-15/14. 

Be it as it may, the silver lining is in the fact that the CJEU has clearly rejected that the test it progressively laid down for the analysis of two-part or complex State aid measures encompasses any subjective element of "intention" on the part of the granting Member State. Consequently, the analysis of the selectivity of measures closely connected will continue to have to be carried out on the basis of purely objective factors, such as 'their chronology, their purpose and the circumstances of the undertaking at the time of their intervention, [or whether] they are so closely linked to each other that they are inseparable from one another. All is well that ends well.

A 'private tax-payer test' for State aid? ... or how the Commission is not getting it (about the Apple APA case)

Thanks to @Detig's twitter encouragement, I have finally set out to read the recently released 11 June 2014 Decision of the European Commission SA.38373 in the case of alleged Irish aid to Apple due to the treatment of its advanced pricing arrangements (APAs). Generally, this is a case that pushes the boundaries of State aid law as tax sovereignty is concerned and may force some interesting developments. However, in the particulars, its seems that some of the foundations of the Commission's position are rather shaky.

 

In my view, one of the points where the Commission's logic is particularly flimsy comes when it tries to justify the application of the private operator/investor test in this context, in what should be rebranded as 'private tax-payer' test, by stressing that 'to avoid this type of advantage [ie the allocation of profit to subsidiaries in low tax jurisdictions] it is necessary to ensure that taxable income is determined in line with the taxable income a private operator would declare in a similar situation' (para 9, emphasis added). This just does not make sense and incorrectly focusses on the incentives of the economic operator (tax payer) instead of those of the tax authority (which, in the end, is the one that may have accepted APAs that granted an undue economic advantage to the former).

 

 As the Commission had itself very clearly indicated (para 8 of the same document), the financial incentives that (multinational) private operators have are exactly in line with Apple's behaviour. Hence, the Commission should have stuck to the simple truth that, from an economic perspective, the only rational behaviour that can be expected from economic (corporate) operators is to try to minimise fiscal pressure and to incentivise their tax directors to do so [Armstrong, Blouin & Larcker, 'The incentives for tax planning' (2012) 53(1) Journal of Accounting and Economics 391-411].

 

This may not be the socially desirable behaviour, and precisely that is why tax law is there [as, indeed, 'if we were ideally virtuous, there would be no need to study what people should pay in taxes to finance subsidies to the poor, the employment of a police force, and provision of an urban infrastructure, or to find ways of reducing the environmental damage we do'; J Mirrlees, Welfare, Incentives, and Taxation (Oxford, OUP, 2006) iv]. 

 

If the Commission is of the view that the activity of the (Irish) tax authorities was not in line with rational behaviour, it should not try to find a justification in the behaviour that could be expected from the tax payer, but rather on the rationality of the decision of the tax authorities on the basis of the existing knowledge on optimal taxation--an issue discussed by Mirrlees (131-73) and many others, without having necessarily reached a final conclusion so far [see an interesting discussion of the main insights achieved so far in NG Mankiw, M Weinzierl and D Yagan, 'Optimal Taxation in Theory and Practice', (2009) 23(4) Journal of Economic Perspectives 147-74].

 

Trying to conflate this insight and to word the criterion for the assessment of Apple's APAs as a 'private tax-payer' test does not make sense and risks damaging the consistency and logic behind the principle of private operator/investor test as a general principle for the assessment of State aid [for discussion, see A Sanchez Graells, 'Bringing the ‘Market Economy Agent’ Principle to Full Power' (2012) 33 European Competition Law Review 35-39].

 

In my view, this is plain to see in the oddity of the detailed reasoning in which the Commission engages, when it establishes that

When accepting a calculation method of the taxable basis proposed by the taxpayer, the tax authorities should compare that method to the prudent behaviour of a hypothetical market operator, which would require a market conform remuneration of a subsidiary or a branch, which reflect normal conditions of competition. For example, a market operator would not accept that its revenues are based on a method which achieves the lowest possible outcome if the facts and circumstances of the case could justify the use of other, more appropriate methods (SA.38373, para 56, emphasis added).

Quite honestly, it is very difficult to understand what the Commission exactly means by this--and this is the more worrying because '[i]t is in the light of these general observations that the Commission will examine whether the contested rulings comply with the arm’s length principle' (para 57). If what the Commission indicates is that for the purposes of taxation, a rational/prudent economic operator would not accept a method that results in the lowest possible tax base, this just does not make sense. Differently, if what the Commission means is that for purposes other than taxation (which would those be?) the rational/prudent economic operator would equally oppose that method, then much more detailed explanation of why and how that is the case would be needed.

 

Worse of all, the Commission has a strong cases on the facts. The Irish tax authorities entered into negotiations with Apple and allowed the company to deviate very significantly from the applicable (general) tax rules. Moreover, despite the very significant development of international standards on transfer pricing, a 1991 ruling was used until 2007 with no revision. This sweet deal for Apple was clearly linked to an objective of keeping (regional) employment and ensruring some tax income. These may be rational (?/justifiable?) political decisions, but they do not meet any acceptable standard of objectivity, professionalism and transparency and, consequently run against the basic requirements of good (tax) administration. And, what is more important, clearly point towards a selectivity in the application of the tax system that makes the whole deal fall foul of the prohibition in Art 107(1) TFEU [the important legal point is, indeed, made at para 70 of the Decision].

 

 

In view of all this, one cannot but wonder why would the Commission base its case on such unfocussed and difficult to share (to put it mildly) points of departure. One possible option, of course, is the rebalancing of powers in tax matters derived from the Treaty of Lisbon and the very limited space for action in the front of direct taxation that is not supported unanimously by the 28 Member States (see art 115 TFEU) [for discussion, see TA Kaye, 'Direct taxation in the European Union: from Maastricht to Lisbon' (2012) 35(5) Fordham International Law Journal].

 

Another possible option is that the Commission is trying to deflect the bad publicity from the Member State concerned (Ireland) towards the multinational (Apple), hoping to find less resistance (or to trigger support) at Member State level. There can be a myriad other reasons, of course. But none of them seems to justify risking a case (and a principle of enforcement of State aid law) in an attempt to get the prohibition decision through.