'Government Cloud Procurement' as precursor of procurement gatekeeping? -- re McGillivray (2022)

I have started reading K McGillivray, Government Cloud Procurement. Contracts, Data Protection, and the Quest for Compliance (Cambridge University Press 2022), which promises to be a big addition to the literature on the procurement of digital technologies. One of the key issues the book explores at length is the central role that public contracts play in filling (some of the) regulatory gaps left by the absence of legislation addressing the challenges of cloud computing.

This got me thinking that this gap-filling function of public contracts in the cloud sphere is reflective of the broader role that procurement procedures and the ensuing public contracts are starting to develop in relation to other types of digital technology—notably, artificial intelligence (AI).

Procurement regulation will increasingly (be expected to) play a crucial gatekeeping role in the adoption of digital technologies for public governance and public service delivery. As rightly stressed: ‘The rules governing the acquisition of algorithmic systems by governments and public agencies are an important point of intervention in ensuring their accountable use’ [Ada Lovelace Institute, AI Now Institute and Open Government Partnership, Algorithmic Accountability for the Public Sector (August 2021) 33]. Ultimately, contracts and other arrangements for the development and acquisition of digital solutions are the entry point into the public sector for these innovations, and the procurement rules can be either a catalyst or a hindrance to co-production and experimentation with digital governance solutions.

The gatekeeping role of procurement underpinned eg one of the recommendations of the UK’s Committee on Standards in Public Life, in its report on Artificial Intelligence and Public Standards: ‘Government should use its purchasing power in the market to set procurement requirements that ensure that private companies developing AI solutions for the public sector appropriately address public standards. This should be achieved by ensuring provisions for ethical standards are considered early in the procurement process and explicitly written into tenders and contractual arrangements’ (2020: 51). A variation of the gatekeeping approach can concentrate on procurement practice and the embedding of specific controls as a matter of public buyer deontology [see P Oluka Nagitta et al., ‘Human-centered artificial intelligence for the public sector: The gate keeping role of the public procurement professional’ (2022) 200 Procedia Computer Science 1084-1092].

There is thus a growing recognition of the pragmatic utility of leveraging procurement mechanisms to ensure transparency and accountability in algorithmic systems, particularly considering that these systems play a crucial role in policymaking and decision-making by public agencies [DK Mulligan and KA Bamberger, ‘Procurement as policy: Administrative process for machine learning’ (2019) 34(3) Berkeley Technology L. J. 773-851]. Consequently, there is increasing interest in a reassessment of the existing procurement rules as they apply to contracts for digital technologies; as well as in the redesign of procurement to foster reliability, sustainability, and public trust in AI [see e.g. UK Government, BEIS, DCMS and Office for AI, Guidelines for AI procurement (8 June 2020); also W Naudé and N Dimitri, ‘Public Procurement and Innovation for Human-Centered Artificial Intelligence’ (2021)].

However, the challenges in effectively mobilising procurement for this gatekeeping function are yet to be properly conceptualised and understood [See e.g. P Nowicki, ‘Deus Ex Machina?: Some Remarks on Public Procurement in the Second Machine Age’ (2020) 1 EPPPL 53-60; see also K Mcbride et al, ‘Towards a Systematic Understanding on the Challenges of Procuring Artificial Intelligence in the Public Sector’ (2021)].

As I keep thinking about this (see here for earlier thoughts), I am realising that the emerging discussion or conceptualisation of public procurement (or procurement professionals) as gatekeepers of the adoption of AI by the public sector (and more broadly) can fall into the same trap of partiality as the equivalent discussion of financial gatekeepers in the corporate governance sphere years ago.

As Prof Coffee brightly pointed out [Gatekeepers: The Professions and Corporate Governance (OUP, 2006) 2-3] in the context of financial markets, there are two important dimensions of gatekeeping at play: one concerns ‘strict’ gatekeeping in terms of veto capacity (eg an audit firm can decline providing an opinion on corporate accounts, or a lawyer can decline to provide an opinion required for the closing of a specific corporate transaction). The other dimension, however, concerns a reputational aspect of gatekeeping that can generate reliance by third parties (eg an investment bank acquiring shares of a target company can lead others to also invest in that company).

In the procurement context, it seems to me that there is also a strict gatekeeping function (procurement requirements determine which technology/provider cannot get a public contract, eg to protect a specific public interest or avoid a specific public harm; or which one can provided it abides by specific contractualised requirements), as well as a reputational gatekeeping function (eg procurement of specific technologies/from specific providers can have a signalling effect that triggers further procurement by other public buyers and/or adoption by the private sector).

While in financial markets the reputational aspect is dependent on market-based issues (such as repeat transactions), in procurement settings reputation is almost a given due to a presumption of strict scrutiny of public providers (and thus the importance of ‘past performance’, or other signals such as being able to disclose that a technology or provider is used by Department X, or in some other settings ‘by appointment to HM the Queen’). This compounds the importance of procurement gatekeeping, as it not only concerns the specific decision adopted by a given public buyer, but also the broader access of technologies and providers into the public sector (and beyond).

However, a significant difference between gatekeeping in financial markets and in procurement however stems from the likely main source of potential failure of the gatekeeper. While in financial markets gatekeepers can be expected to be high-skilled but subject to structural conflicts of interest, in particular due to the way they are remunerated (which impinges on their independence), in procurement markets there is a real risk that public buyers are not only subject to potential conflicts of interest (an enduring issue in procurement regulation, and the source of incomplete attempts at the regulation of conflicts of interest and integrity in procurement), but also underprepared for the gatekeeping task.

In other words, the asymmetry of information seems to operate in reverse in both settings. While in financial markets the superior information and related skills belong to the gatekeeper (as compared to the retail, or even (passive) institutional investors), in procurement markets the information and skills disadvantage plays against the gatekeeper (public buyer) and in favour of those seeking to sell their technology.

And this is where the analysis by McGillivray is again interesting, as it highlights compliance challenges and gaps resulting from the parallel procurement-based gatekeeping of data protection law in the government cloud procurement sphere. Plenty food for thought (at least for me).

Some recent indicators of public procurement in the EU

The European Commission has published some indicators on the evolution of public procurement in the EU up to December 2014 (most recent available data). There are two sets of indicators worth having a look at.

Public Procurement Performance

First, the Commission (DG Grow) has published indicators on public procurement performance in the Member States, which provide a comparative view of the countries' adherence to 'good procurement' as measured by 6 simplified indicators. Or, in other words, indicators aimed to measure 'the extent to which purchasers obtain good value for money'.  The creation of a single 'quick-look' indicator seems appealing. However, some attention to the way in which the indicator is calculated may raise issues as to its usefulness.

View fullsize

Source: European Commission.

In that regard, it is worth mentioning that the Commission has created 6 discrete indicators: [1] One Bidder; [2] No Calls for Bids; [3] Aggregation; [4] Award Criteria; [5] Decision Speed; and [6] Reporting Quality (details available here). Interestingly, in order to construct the 'Overall Performance' indicator (used in the map above), the Commission uses a 'weighted average of all the performance indicators. Triple weight is given to most important indicators: One Bidder and No Calls for Bids.' Given this methodology, the Commission is careful to indicate that

Like all indicators, however, these indicators simplify reality. They are affected by country-specific factors such as the composition of procurement, the structure of the economies concerned, and the relationships between different tendering options, none of which are taken into account. Also, some aspects of public procurement are omitted entirely or covered only indirectly - for instance corruption, administrative burden and professionalism. Thus, although the Scoreboard provides very useful information, it gives only a partial view of EU countries' public procurement performance.

In my opinion, this is a valuable first step towards developing performance indicators in public procurement. However, the 'qualitative policy judg[e]ment on what is good practice' behind some of the criteria is questionable. For instance, the rationale behind criterion [3] Aggregation is that 'Buying in bulk often leads to better prices and also offers an opportunity to exchange know-how. While not every type of purchase can benefit from aggregation, excessively low aggregation levels mean that an opportunity is probably being missed. Aggregation measures the proportion of procedures with more than one public buyer.'

This is by no means clear, given the difficulty in assessing the net economic effects of procurement aggregation [see A Sanchez-Graells and I Herrera Anchustegui, 'Impact of Public Procurement Aggregation on Competition: Risks, Rationale and Justification for the Rules in Directive 2014/24', in R Fernandez & P Valcarcel (eds), Centralizacion de compras publicas (Madrid, Civitas, 2016) 129-163]. Moreover, the reasons that led the Commission to give a positive value of the indicator when Member States aggregate 10% or more of their procurement expenditure seems completely arbitrary.

Ultimately, the use of such indicator may push Member States towards excessive aggregation of demand (particularly through procurement centralisation, see discussion on the UK CCS' strategy below), which seems to be a policy drive of the European Commission that may well create excessive difficulties [particularly when cross-border collaboration is involved, as discussed in A Sanchez-Graells, 'Collaborative Cross-Border Procurement in the EU: Future or Utopia?'].

Therefore, great care needs to be exercised to avoid creating indicators that may trigger specific policy options with doubtful beneficial net effects.

evolution of public procurement markets

Second, the Commission has also published raw indicators of the volume of procurement subjected to the EU rules in 2014. This serves to provide a broad overview of the evolution of EU public procurement markets in recent years. 

There are two results I find interesting. At a general level, the 'estimate of total general government public procurement expenditure (TGGPPE), excluding utilities and defence, was 1,931.5 billion euros in 2014, 2.7 % higher than in 2013, continuing the increased trend of recent years'. However, there are great national disparities that still reflect the effects of the economic crisis, with 'countries like Spain, Italy or Cyprus ... with their TGGPPE the minimum in the last four years'.

And, at a country level, I find it remarkable that, overall, the UK publishes larger contracts than the EU average (see graph below). This issue is linked to the discussion on aggregation above because, '[t]he concentration of procurement in large notices is outstanding in the UK, particularly in the procurement of services, where the UK alone accounts for 84 % of the total value procured at EU level in awards of more than 100 million euros' (emphasis added).

Source: European Commission. Graph represents the distribution of contract award notices in logarithmic scale in million Euros. The dashed-blue line represents EU distribution. 

Qualitatively, it is worth stressing that this is, at least in large part, the immediate result of the enormous framework agreements for services contracts tendered by the Crown Commercial Service (CCS) in recent years. However, this strategy has led to significant operative problems and the CCS is moving away from such large service frameworks, in favour of alternative procurement strategies. 

Also from a qualitative perspective, analysing this data would require to access details on whether these contracts are adequately split into lots, eg so as to ensure SME access to procurement markets in the UK. If not, this could be an indicator that UK markets are relatively more geared towards large suppliers than in the rest of the EU, which would be a worrying situation and definitely not in line with declared policy goals.

Therefore, once more, care needs to be exercised in the extrapolation of any policy implications derived from such high-level quantitative indicators.

Quick Thoughts on Putting Public Procurement Compliance at the Heart of Strategy for Deeper and Fairer Single Market

The European Commission unveiled yesterday its Strategy for a Deeper and Fairer Single Market. In its communication, the Commission generally indicates that it "will work hand in hand with Member States and market participants to create a real culture of compliance for Single Market rules. Particular attention will be paid to the services sector and to public procurement, which is essential to spend taxpayer money efficiently". 

This is a welcome development in the area of EU public procurement regulation, particularly if it results in more legal stability and a focus on enforcement and voluntary compliance as an alternative to continuous legislative reform. Indeed, this seems to commit the Commission's efforts to make the most of the existing (recently reformed) legislative framework and, beyond the on-going process of reassessment of the remedies Directive, to focus on creating trickle-down effects through technical support and education of the business and practitioner communities.

In more detail, the European Commission's focus on public procurement is as follows:

More transparent, efficient and accountable public procurement 

Snapshot: Public procurement is critical to the European economy. EU rules aim to ensure the efficient use of taxpayer money, reduce corruption and modernise public administration. Public expenditure on goods, works, and services represents close to 19% of EU GDP: more than €2.3 trillion are spent annually in the EU. Transparent and competitive public procurement across the Single Market creates business opportunities and contributes to more efficient public administration, economic growth and job creation. EU law sets out minimum harmonised public procurement rules which have to be transposed into national law by April 2016 (by October 2018 in the case of e-procurement). 

Approach: To speed up investment and avoid protracted litigation, the Commission will assist Member States with a voluntary ex ante assessment mechanism of the procurement aspects of certain large-scale infrastructure projects. It will promote networking between first instance review bodies and provide legal and technical assistance for Member States to establish fast and fair remedy bodies. The Commission together with Member States will establish contract registers covering the whole life cycle of contracts. This will improve the transparency and the quality of national procurement systems and support the development of a data analytics and anomaly-detection tool. In a nutshell, we propose a better governance of one fifth of our GDP. This voluntary ex-ante assessment does not prejudge the Commission’s prerogatives under the Treaty.

Next steps

2017: Voluntary ex ante assessment mechanism of the public procurement aspects of certain large infrastructure projects
2017-2018: Initiatives for better governance of public procurement through establishment of contract registers, improved data collection and a networking of review bodies 

So… 

• Does the Commission only want to improve national tenders or foster more pan-European awards? Both. Currently, the proportion of public procurement contracts awarded cross border is low. This in effect restricts competition for public contracts which means tax payers are not getting value for money and not getting the best public goods and services. 

• Won't the assessment mechanism for infrastructure projects just delay the building of projects that Europe badly needs? No – on the contrary. Presently, too much time is spent in finding out whether a large scale investment project conforms or not to the procurement rules. Under the proposed mechanism, the Commission will deliver its opinion within a timeframe which should not generally exceed three months following the notification of the project. 

In my view, the general approach to the creation of a culture of procurement compliance is positive. However, there are two aspects in which I would like the implementation of the Strategy for a Deeper and Fairer Single Market to operate with caution. 

The first one refers to the action concerning public procurement registries. The Commission has indicated that "together with Member States [it] will establish contract registers covering the whole life cycle of contracts. This will improve the transparency and the quality of national procurement systems and support the development of a data analytics and anomaly-detection tool." However, as stressed here, those registers can create very significant unwanted consequences in terms of collusion in public procurement settings. Thus, I hope that a balanced approach on the accessibility of those registers will be adopted.

The second aspect concerns the assumption that a low level of cross-border awards is a restriction of competition in itself: "the proportion of public procurement contracts awarded cross border is low. This in effect restricts competition for public contracts which means tax payers are not getting value for money and not getting the best public goods and services". In my view, this is a very broad and sweeping assumption and I would like to see a more refined analysis before the European Commission pushes for measures that pursue cross-border awards for their own sake. 

There are many ways in which tendering contracts on an EU-wide basis is limited, and most importantly language plays a major role in that [see discussion in A Sanchez-Graells, “Are the Procurement Rules a Barrier for Cross-Border Trade within the European Market? — A View on Proposals to Lower that Barrier and Spur Growth” in C Tvarnø, GS Ølykke & C Risvig Hansen, EU Public Procurement: Modernisation, Growth and Innovation (Copenhagen, DJØF, 2012) 107-133]. Therefore, (re)engaging in a blind quest for cross-border awards would not be necessarily positive and, given the insurmountable language implications, it could also be a potentially doomed effort if it reached the EU Courts (see the critical discussion here, which can be easily extrapolated).

Is Inter-Environnement Wallonie alive? It is, but the CJEU does not maximise use of Directive's anticipatory effects (C-104/04)

In Federconsorzi and Liquidazione giudiziale dei beni ceduti ai creditori della Federconsorzi (Federconsorzi), C-104/14, EU:C:2015:125, the Court of Justice of the EU (CJEU) has addressed a rather obscure issue of succession of exemptions to comply with EU Directives that I find interesting. In my view, the underlying issue is one of good faith and estoppel related to the case law on anticipatory effect of Directives [such as Inter-Environnement Wallonie and Mangold; see M Klamert, The Principle of Loyalty in EU Law, Oxford Studies in European Law (Oxford, OUP, 2014) 76-77], although the CJEU has reached a different solution in Federconsorzi.

The preliminary reference sent by the Corte suprema di cassazione (Italy) concerned certain difficulties in the transition from the implementation of Directive 2000/35 to that of Directive 2011/7, both of them on combating late payment in commercial transactions, regarding Italian legislation modifying the interest on a debt predating those directives to the detriment of a State creditor.

Due to Italian post-WWII mechanisms to ensure supply of certain agricultural products that were in place until 1967, a large number of agricultural cooperatives held a significant volume of credit against the State (about €512 mn) due to the management of that centralised supply of cereals and other agri-food products. That debt was assigned to Federconsorzi (now in liquidation) in 1999 as part of a broader reform of the legislation applicable to agricultural cooperatives. The applicable 1999 legislation determined that the credits held by Federconsorzi against the State "up to 31 December 1997, shall be satisfied by the allocation [...] of government securities by the Minister for the Treasury, the Budget and Economic Planning". 

This rule was complemented in 2003 by a provision whereby the “interest referred [applicable to those credits] is calculated up to 31 December 1995 on the basis of the official discount rate, plus 4.4 points, with annual capitalisation, and for the years 1996 and 1997, only at the statutory interest rate.” In 2012 there was a further reform of these rules, whereby all outstanding credits against Federconsorzi (not only those up to 31.12.97) "shall bear interest calculated up to 31 December 1995 on the basis of the official discount rate, plus 4.4 points, with annual capitalisation, and for the subsequent period only at the statutory interest rate."

In simple terms, Federconsorzi's claim is that both the 2003 and the 2012 reforms impose a detriment on the State creditors by setting too low interest rates on debts accrued after 1995, which would run contrary to (both the 2000 and 2011) EU rules on combating late payment in commercial transactions. The difficulty from a technical perspective is that Italy opted to limit the temporal effects of both Dir 2000/35 and Dir 2011/7 in their respective transpositions, so that the rules derived from Dir 2000/35 did not apply to contracts concluded before 8 August 2002, and those transposing Dir 2011/7 only apply to transactions concluded on or after 1 January 2013.

The most interesting point is thus to determine whether the legally-mandated changes (ie reduction or cap) of the interest rates applicable to credits derived from pre-existing contracts with Federsconsorzi, but which were enacted in the period of effectiveness of the rules transposing Dir 2000/35 (both of them happened between 8 Aug 2002 and 1 Jan 2013) and one of them during the period for transposition of Dir 2011/7, are contrary to EU law--implicitly, at least in the second case, on the basis of the latter's anticipatory effect.

The CJEU has found that the relevant provision of EU law, including the third paragraph of Art 288 TFEU, "must be interpreted as not precluding a Member State which has made use of the option under Article 6(3)(b) of Directive 2000/35 [ie has limited its effects to after 8 August 2002] from adopting, during the period prescribed for transposition of Directive 2011/7, legislative provisions, such as those at issue in the main proceedings, which are capable of modifying, to the detriment of a creditor of the State, the interest on a debt arising out of the performance of a contract concluded before 8 August 2002." 

The reasoning followed by the CJEU to reach this conclusion deserves some closer look. According to the CJEU,

31 ... the option for a Member State, when transposing Directive 2000/35, of excluding contracts concluded before 8 August 2002, as the Italian Republic did [...] is expressly provided for in Article 6(3)(b) of that directive and, when exercised, that option has the effect of rendering all the provisions of that directive inapplicable ratione temporis to those contracts.

32 Furthermore, modifications to the disadvantage of a creditor of the State, made by a legislative act adopted during the period prescribed for transposition of Directive 2011/7, of the interest on a debt arising from the performance of a contract concluded before 16 March 2013 may not in any event be regarded as being capable of seriously compromising the attainment of the objective pursued by that directive (see judgment in Inter-Environnement Wallonie, C‑129/96, EU:C:1997:628, paragraph 45), as Article 12(4) of that directive gives Member States the option of excluding contracts concluded before that date, and the Member State concerned could therefore consider exercising that option.

33 Consequently, it does not follow from the obligation to transpose Directive 2011/7, nor can it be inferred from Article 12(3) of that directive, allowing Member States to retain or adopt provisions more favourable to the creditor than the provisions necessary to comply with that directive, or from Article 7 of that directive, on abusive agreements, terms or practices, that a Member State which has made use of the option under Article 6(3)(b) of Directive 2000/35 may not modify, to the detriment of a creditor of the State, during the period prescribed for transposition of Directive 2011/7, the interest on a debt arising out of the performance of a contract concluded before 8 August 2002, without prejudice, however, to the possibility of there being remedies under domestic law against such a modification (C-104/14, paras 31-33, emphasis added).

In my view, the reasoning of the CJEU at para 32 of Federconsorzi can be challenged regarding amendments of pre-existing credits that take place during the period of (unexcludable) validity of the Directives. An alternative reading would be that Member States are allowed to keep pre-existing credits as they were prior to 8 August 2002, but they cannot reduce commercial creditor protection because that goes against the very explicit goals of the Directives on combating late payment in commercial transactions. 

That could easily be squared with the Inter-Environnement test of compromising the objective pursued by the Directives, given that it originally was to "prohibit abuse of freedom of contract to the disadvantage of the creditor. Where an agreement mainly serves the purpose of procuring the debtor additional liquidity at the expense of the creditor ... these may be considered to be factors constituting such an abuse" (rec 19 Dir 2000/35), and did not change later (if not to stress the objective to avoid abuses) with its 2011 rewording: "[t]his Directive should prohibit abuse of freedom of contract to the disadvantage of the creditor. As a result, where a term in a contract or a practice relating to ... the rate of interest for late payment ... is not justified on the grounds of the terms granted to the debtor, or it mainly serves the purpose of procuring the debtor additional liquidity at the expense of the creditor, it may be regarded as constituting such an abuse" (rec 28 Dir 2011/7, emphasis added).


Consequently, I think that once again the CJEU has taken an easy way out in order to provide legal certainty to Member States at the expense of substantive compliance with EU law.

However, the Federconsorzi Judgment at least clarifies two points regarding Directive's anticipatory effect: 1) that it is alive and kicking, in terms of it being a general principle of EU law that, during the period of transposition of a Directive, Member States must refrain from any legislative measure that may "be regarded as being capable of seriously compromising the attainment of the objective pursued by that directive"; and 2) that the easiest option for Member States to avoid that anticipatory effect is to include cut-off deadlines in the Directives themselves.