The Liberalisation of Public Procurement and its Effects on the Common Market

Christopher Bovis

• Publisher: Routledge
• Year: 2019
• Topic: Law
• eBook ISBN:
  9780429807893
• Subtopic: Law Theory & Practice
• Index: Law

First published in 1998, Public Procurement in the European Community has been considered as the most-important non-tariff barrier for the completion of the common market and its liberalisation reflects the attempts of law and policy makers to enhance competitiveness in the public sector and achieve uniform patterns of industrial efficiency. The opening-up of procurement stresses the fact that the Member States must embark upon a process of changing their public sector management ethos and adopt more market-orientated parameters (value for money, efficiency, improved risk management, market testing, outsourcing, private finance, savings) in the delivery of public services, alongside the principles of transparency and public accountability. The book is addressed to academics and researchers in the fields of law, public policy and government studies, legal practitioners, policy makers, government officials as well as industry executives. It provides a multi-disciplinary analysis of public procurement law and policy and assesses its impact on the European integration process. It investigates the implications of the opening-up of the European public markets on other legal and economic systems in the world and analyses the regulation of public purchasing as part of the emerging Economic Law of the European Union.

1

Introduction

The European Integration Process as the forum for the regulation of Public Procurement

The establishment of the common market, as the core objective envisaged by the Treaty of Rome (the treaty creating the European Economic Communities) and reinforced by the Treaty of Maastricht (the treaty creating the European Union) is to be achieved through the progressive approximation of the economic policies of Member States.¹ The concept of the common market embraces legal and economic dynamics of the European integration process, with clear political spillover effects from its accomplishment, and unfolds the characteristics of a genuine integral market, where unobstructed mobility of factors of production,² is guaranteed and a regime of effective and undistorted competition regulates its operation. These characteristics embrace the four basic freedoms of a customs union (free movement of goods, persons, capital and services)³ and, to the extent that the customs union tends to become an economic and a monetary one,⁴ the adoption of a common economic policy and the introduction of a single currency. Adherence by Member States to the above-mentioned fundamental principles of economic integration would ensure the abolition of any restriction, protection or obstacle to inter-State trade. The level of success of economic integration in Europe would determine the level of success in political integration, as the ultimate objective stipulated in the Treaties.

The Law of the European Community has conceived the creation of a legal -supranational - system alongside existing domestic ones, where the supremacy of the former over national laws has been declared by the European Court of Justice.⁵ The economic integration of the European Community requires the assistance of a legal order that can facilitate and observe its development with a view to achieving the ultimate aim which is the establishment of a political union. The new legal order is a conglomerate of mutual rights and duties between the Community and its subjects, both Member States and private persons, and also amongst these subjects themselves and provides for the procedures which are necessary for determining and adjudicating infringements of law. The new legal order does confer rights and obligations not only to Member States but also to individuals (physical or legal persons). Both Member States and individuals are the subjects of European Community law, with respect to compliance and observance, and in as much as Member States participate in market activities, they have the same rights and obligations as those of individuals.

Two strategic plans have facilitated the economic integration of the Member States. These plans were enacted by European Institutions and have been subsequently transposed into national laws and policies by Member States. The first plan has comprised of a series of actions, measures and mechanisms aiming at the abolition of all tariff and non-tariff barriers to infra-community trade (trade amongst Member States). The second plan has focused on the establishment of an effective, workable and undistorted regime of competition within the common market, in order to prevent possible abuse of market dominance and cartelisation, factors which could have serious economic implications in its functioning. The first plan, the abolition of all tariff and non-tariff barriers to intra-community trade, appears to have a static effect aimed at eliminating all administrative and legal obstacles to free trade and had as its focal point Member States and their national administrations, whereas the second plan, the establishment of an effective, workable and undistorted regime of competition within the common market, has been addressed at industry level and has a more on-going and dynamic effect.

All tariff barriers appear to have been abolished by the end of the first transitional period,⁶ so customs duties, quotas and other forms of quantitative restrictions could no longer hinder the free flow of trade amongst Member States. Non-tariff barriers, however, have proved more difficult to eliminate, as they involve long-established market practices and patterns that could not change overnight. Non-tariff protection represents a disguised form of discrimination and can take place through a wide spectrum of administrative or legislative frameworks relating to public monopolies, fiscal factors such as indirect taxation, state aids and subsidisation, technical standards and last but not least public procurement. Non-tariff barriers are by no means confined to the European Integration process only. The existence of non-tariff barriers is a common phenomenon in world markets and the main objective of regulatory instruments of international trade is their elimination. However, non-tariff barriers could seriously distort the operation of the common market and its fundamental freedoms and derail the process of European integration.

The European Commission’s White Paper for the Completion of the Internal market⁷ identified existing non-tariff protection and provided the framework for specific legislative measures⁸ in order to address the issue at national level. A set of Directives have been deemed necessary for the completion of the internal market by the end of 1992, and the time table was set out in the Single European Act, which in fact amended the Treaty of Rome by introducing inter alia the concept of the internal market. The internal market, in quantifiable terms, could be considered as something less than the common market but, perhaps the first and most important part of the latter, as it “would provide the economic context for the

regeneration of the European industry in both goods and services and it would give a permanent boost to the prosperity of the people of Europe and indeed the world as a whole”⁹

The internal market, as an economic concept could be described as an area without internal frontiers, where the free circulation of goods and the unhindered provision of services in conjunction with the unobstructed mobility of factors of production are ensured. Literally speaking the concept of the internal market is a reinforcement of the customs union principle as the foundation stone of the common market. The internal market embraces, obviously, less than the common market to the extent that the economic and monetary integration elements are missing. The whole Single European Act, as an instrument amending the Treaties, revealed strong public law characteristics. The regulatory and interventionist feature of its provisions indicate the importance of certain fields that had been overlooked during the past. There has been both centralised and decentralised regulatory control by Community Institutions over environmental policy, industrial policy, regional policy and the regulation of public procurement. These areas represented the priority objectives in the process of completing the internal market. Public procurement was pointed out as a significant non-tariff barrier and action was scheduled to address the issue. The European Commission based its momentum on two notable studies,¹⁰ where empirical proof of the distorted market situation in the public sector was highlighted and the benefits of the regulation of public procurement were emphasised.

Some fundamental conceptual elements in the regulation of public markets

State participation in free markets would normally take place on behalf or in pursuit of public interest.¹¹ The concept of the state embraces an entrepreneurial dimension to the extent that it exercises dominium.¹² Where state participation in the market place exists, the relevant markets can be described as public markets. Although the state as entrepreneur enters into transactions with a view to providing goods, services and works for the public, this kind of action does not resemble the commercial characteristics of entrepreneurship, in as much as the aim of the state’s activities is not the maximisation of profits but the observance of public interest. In contrast, private markets comprise of firms whose only reason of staying in the market place is profit maximisation. Public interest substitutes profit maximisation and justifies state participation in public markets.

Apart from the above fundamental differentiating factor, a number of striking variances distinguish private from public markets. These variances focus on structural elements of the market place, competitiveness, demand conditions, supply conditions, the production process, and finally pricing and risk. They also provide for an indication as to the different methods and approaches employed in their regulation.

Private markets are generally structured as a result of competitive pressures originating in the buyer / supplier interaction and their configuration can vary from monopoly / oligopoly to perfect competition. Demand arises from heterogeneous buyers with a variety of specific needs. It is based on expectations and is multiple for each product. Supply, on the other hand, is offered through various product ranges, where products are standardised using known technology, but constantly improved through research and development processes. The production process is based on mass-production patterns and the product range represents a large choice including substitutes, whereas the critical production factor is cost level. The development cycle appears to be short to medium-term and finally, the technology of products destined for the private markets is evolutionary. Purchases are made when an acceptable balance between price and quality is achieved. Purchase orders are multitude and at limited intervals. Pricing policy in private markets is determined by competitive forces and the purchasing decision is focused on the price-quality relation. The risk factor is highly present.

On the other hand, public markets tend to be organised in a different way. The market structure often reveals a monopsony / oligopsony character. In terms of its origins, demand in public markets is institutionalised and operates mainly under budgetary considerations rather than price mechanisms. It is also based on fulfilment of tasks (pursuit of public interest) and it is single for many products. Supply also has limited origins, in terms of the establishment of close ties between the public sector and industries supplying it and there is often a limited product range. Products are rarely innovative and technologically advanced and pricing is determined through tendering and negotiations. The purchasing decision is primarily based upon the life-time cycle, reliability, price and political considerations. Purchasing patterns follow tendering and negotiations and often purchases are dictated by policy rather than price/quality considerations.

Whereas the regulatory weaponry for private markets is dominated by anti-trust law and policy, public markets are fora where the structural and behavioural remedial tools of competition law emerge as a rather inappropriate regulatory framework. The applicability of competition law is limited, mainly due to the fact that anti-trust often clashes with monopolistic structures which exist in public markets. State participation in market activities is regularly assisted through exclusive exploitation of a product or a service within a geographical market. The market activities of the state are protected from competition by virtue of laws on trading and production or by virtue of delegated monopolies. Another reason for the limited applicability of anti-trust law and policy in public markets is the fact that conceptual differences appear between the two categories of markets - private and public - in the eyes of anti-trust, which could be attributed to the very different nature between them. In private markets, anti-trust law and policy seek to punish cartels and abusive dominance of undertakings. The focus of the remedial instruments is the supply side, which is conceived as the commanding part in the supply / demand equation due to the fact that it instigates and controls demand for a product. In private markets, the demand side of the equation (the consumers in general) are susceptible to exploitation and the market equilibria are prone to distortion as a result of collusive behaviour of undertakings or abusive monopoly position. On the other hand, the structure of public markets reveals a different picture. In the supply / demand equation, the predominant part appears to be the demand side (the state and its organs as purchasers), which initialises demand through purchasing, whereas the supply side (the industry) fights for access to the relevant markets. Although this is normally the case, one should not exclude the possibility of market oligopolisation and the potential manipulation of the demand side.¹³ These advanced market structures can occur more often in the future, as a result of the well established trends of industrial concentration.

Another argument in relation to the different regulatory approach in relation to public and private markets that deserves attention refers to the methods of market segmentation and abuse. In private markets segmentation occurs as a result of cartels and collusive behaviour, which would lead to abuse of dominance, with a view to driving competitors out of the relevant market, increasing market shares and increasing profits. It is maintained that the segmentation of private markets appears different than the partitioning of public ones. The difference lies in the fact that private markets can be segmented both geographically and by reference to product or service, whereas public ones can only be geographically segmented. This assumption can be substantiated by reference to the fact that the partition of the public markets would be probably the result of concerted practices attributed to the demand side. As such concerted practices focus on the origin of a product or a service or the nationality of a contractor, then the only way to effectively partition the relevant market would be by reference to its geographical remit. In contrast, in relation to private markets, the segmentation of the relevant market (either product or geographical) is attributed to the supply side. The argument goes further to reveal the fact that the balance of powers between the supply and the demand side are reversed when superimposed in private or public markets. In the latter, it is the demand side that has the dominant role in the equation by dictating terms and conditions in purchases, initiation of transactions, as well as by influencing production trends (supplies, works and services destined for the public sector tend to shift from the traditional inventory pattern of production to a custom made / build by order one).¹⁴

In public markets, concerted practices of the demand side (e.g. excluding foreign competition, application of buy-national policies, application of national standards policies) represent geographical market segmentation, as they result in the division of the European public markets into different national public markets. It could also be maintained that public markets are subject to protection ...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• Table of Cases
• Acknowledgements
• 1 Introduction
• 2 The Intellectual and the Policy Approaches to the Regulation of Public Procurement
• 3 The Evolution of European Public Procurement Law
• 4 The Mechanism of Integration of the European Public Markets
• 5 Enforcement of and Compliance with Public Procurement Law: A Critique of the System
• 6 An Impact Assessment of the European Public Procurement Law and Policy
• 7 Policy Choices and the Regulation of Public Procurement in the Common Market
• Concluding Remarks
• Index