- Reacting to perceived shortcomings in public governance, particularly in the aftermath of corruption scandals, or as part of efforts to strengthen public administration processes
- Complementing ‘traditional’ public audit and oversight mechanisms through enhanced access to information by stakeholders and civil society organisations, as well as enabling more intense scrutiny by the press, in the hope of ‘private-led’ oversight and audit. The possibilities that digitisation and big data create in this area of public governance are a significant driver or steer to the development of these registers.[9]
2. At a specific level, these registers aim at
- Facilitating contract management oversight and creating an additional layer of public exposure of contract-related decision-making, thus expanding the scope of procurement transparency beyond the award phase
- Facilitating private enforcement of public procurement rules by allowing interested parties to prompt administrative and/or judicial review of specific procurement decisions,[10] both pre-award and during the execution phase
Generally, then, these additional transparency mechanisms are not intended to foster competition. Their main goal and justification is to preserve the integrity of public contract administration and to increase the robustness of anticorruption tools by facilitating social or private oversight. They significantly increase the levels of transparency already achieved through pre-award disclosure mechanisms and, in simple terms, they aim at creating full transparency of public procurement and public contract management, basically for the purposes of legitimising public expenditure by means of increased (expected) accountability as a result of such full transparency and tougher oversight.
Why are public contract registries problematic from a competition perspective?
Public contract registries are problematic precisely due to the levels of transparency they create. Economic theory has conclusively demonstrated that the levels of transparency created by public procurement rules and practices (such as these registers) facilitate collusion and anticompetitive behaviour between undertakings, thus eroding (and potentially negating) the benefits contracting authorities can obtain from organising tenders for public contracts.
[11] This is an uncontroversial finding that led the OECD to stress that “[t]
he formal rules governing public procurement can make communication among rivals easier, promoting collusion among bidders … procurement regulations may facilitate collusive arrangements”.
[12]
The specific reasons why and conditions under which increased transparency facilitates collusion are beyond the scope of this discussion non-paper, but suffice it to stress here that transparency will be particularly pernicious when it allows undertakings that are already colluding to identify the detailed conditions under which they did participate in a particular bid or refrained from participating (by, for instance, disclosing the names of participating tenderers and the specific conditions of the winning tender).
[13] Moreover, conditions of full transparency are not only problematic in relation to already existing cartels, but they are also troublesome regarding the creation of new cartels because increased transparency alters the incentives to participate in bid rigging arrangements.
[14]
Furthermore, full transparency can also damage competition in industries with strong dominant undertakings. In those settings, transparency may not lead to cartelisation, but it can facilitate exclusionary strategies by the dominant undertaking by allowing them to focus exclusionary practices (such as predatory pricing) in markets or segments of the market where it detects entry by new rivals or innovative tenderers. Even in cases where collusion or price competition may not be a prime issue, full transparency can create qualitative distortions of competition, such as technical levelling
[15] or reduced participation due to undertakings’ interest in protecting business secrets (as discussed below). Overall, it is beyond doubt that excessive transparency in public procurement is self-defeating because it erodes or nullifies any benefits derived from the organisation of public tenders.
All these economic insights led the OECD to adopt a formal Recommendation to prompt its members to “
assess the various features of their public procurement laws and practices and their impact on the likelihood of collusion between bidders. Members should strive for public procurement tenders at all levels of government that are designed to promote more effective competition and to reduce the risk of bid rigging while ensuring overall value for money”.
[16] Thus the impact of increased procurement transparency on the likelihood of collusion and cartelisation in procurement markets, as well as the other potential negative impacts on the intensity or quality of competition, requires closer scrutiny and the competition implications of excessive transparency cannot simply be overseen in the name of anti-corruption goals.
[17] Not least, because a large number of cartels discovered and prosecuted by competition authorities involve public procurement markets
[18]—which demonstrates that the economic impact of such collusion-facilitative implications of full transparency is not trivial.
Estimating the economic impact of cartels in public procurement is a difficult task.
[19] However, generally accepted estimates always show that the negative economic effect is by no means negligible and that anticompetitive overcharges can easily reach 20% of contract value.
[20] Thus, particularly in view of the Europe 2020 goal to ensure ‘the most efficient use of public funds’,
[21] issues of excessive transparency in public procurement markets need to be addressed so as to avoid losses of efficiency derived from the abnormal operation of market forces due to procurement rules and practices.
This does not mean that transparency needs to be completely abandoned in the public procurement setting, but a more nuanced approach that accommodates competition concerns is necessary. As has been rightly stressed, “t
ransparency measures should at least be limited to those needed in order to enhance competition and ensure integrity, rather than being promoted as a matter of principle. Transparency should be perceived as a means to an end, rather than a goal in itself”.
[22] This is in line with the OECD’s specific recommendation that “[w]
hen publishing the results of a tender, [contracting authorities]
carefully consider which information is published and avoid disclosing competitively sensitive information as this can facilitate the formation of bid-rigging schemes, going forward”.
[23] The final section of this non-paper presents some normative recommendations to that purpose, which highlight much needed restrictions to the promotion of full transparency as a matter of principle.
Are there other reasons why procurement registries can be problematic?
As briefly mentioned above, another source of possible negative impacts derived from public contract registries is their potential chilling effect on undertakings keen to protect their business secrets. It is often stressed that tenders contain sensitive information and that disclosure of that information can damage the commercial interests of bidders if those secrets are at risk of being disclosed through the public contracts registries or otherwise.
[24] Thus, undertakings can either decide not to participate in particularly sensitive tenders, or submit offers and documentation in such a way as to keep their secrets concealed, hence diminishing their quality or increasing the information cost/asymmetry that the contracting authority needs to overcome in their assessment. Either way, these business secret protective strategies reduce the intensity and quality of the competition. Moreover, transparency of certain elements of human resources-related information (particularly in view of the increasing importance of work teams in the area of services procurement) not only can trigger data protection concerns,
[25] but also facilitate unfair business practices such as the poaching of key employees.
However, despite the clear existence of business secret and commercial interest justifications for the preservation of certain levels of secrecy, there is a tendency to minimise the relevance of these issues by creating a private interest-public interest dichotomy and stressing the relevance of public (anti-corruption) goals. This is problematic. What is often overlooked is that contracting authorities have themselves a commercial interest in keeping business secrets protected. That interest derives immediately from their need to minimise the abovementioned chilling effect (ie not crowding out or scaring away undertakings wary of excessive disclosure), so that competition remains as strong as possible. And such interest in avoiding excessive disclosure also derives, in the mid to long-term, from the need not to thwart innovation by means of technical levelling or de facto standard setting.
These issues were recently well put in the context of UK litigation concerning a freedom of information request that the contracting authority rejected on the basis of relevant business secret and commercial interest protection. As clarified by the First Tier Tribunal,
There is a public interest in maintaining an efficient competitive market for leisure management systems. If the commercial secrets of one market entity were revealed, its competitive position would be eroded and the whole market would be less competitive. As the Court of Appeal put it in Veolia ES Nottinghamshire Ltd v Nottinghamshire County Council and others [2012] P.T.S.R. 185 at [111], a company’s confidential information is often “the life blood of an enterprise”. The [Information Commissioner’s Office] argued that this is particularly so in an industry such as the provision of leisure management systems because such systems are a complex amalgam of technologies, customer support networks, and user interfaces, which involve elements individual to particular companies. Those individual elements drive competition to the benefit of public authorities and consumers.[26]
Thus, the protection of business secrets and commercial interests should not be seen as a limitation of the public (anti-corruption) interest in the benefit of private interests, but as a balancing exercise between two competing public interest goals: efficiency and integrity of procurement. Once this realignment of goals is understood, restrictions of public procurement transparency based on competition considerations should receive support also from a public governance perspective.
A final consideration in terms of potential negative impacts of public contract registries derives from the way they are financed. At least in the case of Italy, economic operators are required to pay fees towards the funding of the relevant public contract registry when they first participate in any given tender. This becomes a financial burden linked to procurement participation that can have clear chilling effects, particularly for SMEs with limited financial resources. It is widely accepted that financial barriers to participation should be suppressed as a matter of best practice
[27]—and, in certain occasions, as a matter of compliance with internal market regulation as well. Thus, the creation of any sort of public contract registry which funding requires upfront payments from interested undertakings should not be favoured.
How could competition and confidentiality concerns be embedded in the design of public contract registries, so that their risks are minimised?
The discussion above supports a nuanced approach to the level of transparency actually created by public contract registries, which needs to fall short of the full transparency paradigm in which they have been conceived and started to be implemented. As a functional criterion, only the information that is necessary to ensure proper oversight and the effectiveness of anti-corruption measures should be disclosed, whereas the information that can be most damaging for competition should be withheld.
Generally, what is needed is more granularity in the levels of information that are made accessible to different stakeholders. The current full transparency approach whereby all information is made available to everyone falls very short from the desired balance between transparency and competition goals of public procurement. A system based on enabling or targeted transparency, whereby each stakeholder gets access to the information it needs for a specific purpose, is clearly preferable.
In more specific terms, the following normative recommendations are subjected to further discussion. They are by no means exhaustive and simply aim to specify the sort of nuanced approach to disclosure of public procurement information that is hereby advocated.
- Public contract registers should not be fully available to the public. Access to the full registry should be restricted to public sector officials under a strong duty of confidentiality protected by appropriate sanctions in cases of illegitimate disclosure.
- Even within the public sector, access to the full register should be made available on a need to know basis. Oversight entities, such as the audit court or the competition authority, should have full access. However, other entities or specific civil servants should only access the information they require to carry out their functions.
- Limited versions of the public contract registry that are made accessible to the public should aggregate information by contracting authority and avoid disclosing any particulars that could be traced back to specific tenders or specific undertakings.
- Representative institutions, such as third sector organisations, or academics should have the opportunity of seeking access to the full registry on a case by case basis where they can justify a legitimate or research-related interest. In case of access, ethical approval shall be obtained, anonymization of data attempted, and specific confidentiality requirements duly imposed.
- Delayed access to the full public registry could also be allowed for, provided there are sufficient safeguards to ensure that historic information does not remain relevant for the purposes of protecting market competition, business secrets and commercial interests.
- Tenderers should have access to their own records, even if they are not publicly-available, so as to enable them to check their accuracy. This is particularly relevant if public contract registries are used for the purposes of assessing past performance under the new rules.
- Big data should be published on an anonymised basis, so that general trends can be analysed without enabling ‘reverse engineering’ of information that can be traced to specific bidders.
- The entity in charge of the public contracts registry should regularly publish aggregated statistics by type of procurement procedure, object of contract, or any other items deemed relevant for the purposes of public accountability of public buyers (such as percentages of expenditure in green procurement, etc).
- The entity in charge of the public contracts registry should develop a system of red flag indicators and monitor them with a view to reporting instances of potential collusion to the relevant competition authority.
