The Applied Law and Economics of Public Procurement

Gustavo Piga, Steen Treumer, Gustavo Piga, Steen Treumer

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781136217760
• Edition: 1
• Topic: Negocios y empresa
• Subtopic: Negocios en general

This book explores Public Procurement novelties and challenges in an interdisciplinary way. The process whereby the public sector awards contracts to companies for the supply of works, goods or services is a powerful instrument to ensure the achievement of new public goals as well as an efficient use of public funds. This book brings together the papers that have been presented during the "First Symposium on Public Procurement", a conference held in Rome last summer and to be repeated again yearly.

As Public Procurement touches on many fields (law, economics, political science, engineering) the editors have used an interdisciplinary approach to discuss four main topics of interest which represent the four different parts in which this book is divided:

• Competitive dialogue and contractual design fostering innovation and need analysis,

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• Separation of selection and award criteria, including exclusion of reputation indicators like references to experience, performance and CV's from award criteria,

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• Retendering a contract for breach of procurement rules or changes to contract (contract execution),

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• Set-asides for small and medium firms, as in the USA system with the Small Business Act that reserves shares of tenders to SMEs only.

Part I
Competitive dialogue and contractual design fostering innovation and needs analysis

1 Dialogue

Steen Treumer and Elvira Uyarra

1 Argument by Steen Treumer

1.1 Introduction

Competitive dialogue is one of the most important novelties in the EU public procurement regime. It is well known that the objective of the introduction of the procedure of competitive dialogue was to achieve procedural simplification and to make the EU public procurement regime more flexible.¹ This is also spelled out in the Explanatory Note on Competitive Dialogue from the European Commission² where it is mentioned that the procedure was introduced in the Public Sector Directive 2004/18/EC in response to the finding that the ‘old’ Directives, Directives 92/50/EEC, 93/96/EEC and 93/37/EEC, did not offer sufficient flex­ibility with certain particularly complex projects due to the fact that the use of negotiated procedures with publication of a contract note is limited solely to the cases exhaustively listed in the Directives.

The introduction of the procedure should therefore allow increased dialogue fostering innovation and a much better needs analysis than what has been feas­ible according to the classical public procurement procedures. However, this presupposes that the procedure can be used where it is relevant which leads to the analysis of the field of application of competitive dialogue in the second section of this chapter. Furthermore, it is relevant to consider the limits following from EU public procurement law to the contractual design fostering innovation and needs analysis. This issue is considered in the third section of this chapter with emphasis on the so­ called ‘ban on cherry picking’.

1.2 The field of application of competitive dialogue

The field of application of competitive dialogue is considered in several provisions and a recital in the Public Sector Directive. It follows from Article 28 of the Directive that contracting authorities may award their public contracts by means of the competitive dialogue in the specific circumstances expressly provided for in Article 29. The latter article provides that in the case of particularly complex contracts Member States may provide that where contracting authorities consider that the use of the open or restricted procedure will not allow the award of the contract, the latter may make use of the competitive dialogue in accordance with that Article. ‘Particularly complex’ is defined in Article 1(11)(c) of the Public Sector Directive to mean where the contracting authorities are not objectively able to define the technical means in accordance with Article 23(3)(b)(c) or (d) capable of satisfying their special needs or objectives, and/or are not objectively able to specify the legal and/or financial make­ up of a project. A part of Recital 31 in the preamble to the Classic Directive reads as follows:

Contracting authorities which carry out particularly complex projects may, without this being due to any fault on their part, find it objectively impos­sible to define the means of satisfying their needs or of assessing what the market can offer in the way of technical solutions and/or financial/legal solutions.³

The formulation of the below-mentioned provisions and the quoted recital from the Public Sector Directive clearly indicate that the access to the procedure is limited to special circumstances. This is noteworthy but it is important to stress that this is only one of several elements which has to be taken into consideration when determining the field of application.

The Court of Justice of the European Union has not considered the field of application of competitive dialogue in its case law. This is remarkable as the procedure was introduced several years ago and has been used thousands of times in the Member States of the EU. There do not appear to be pending cases on the issue that would lead to a clarification of the state of law in the near future. However, it is important to stress that the Court is known for its purpose-oriented and dynamic interpretation of EU law and that the background for the introduction of the competitive dialogue procedure was to ensure a more flexible approach for complex public contracts. So even though the wording in the Public Sector Directive clearly points towards a restrictive interpretation of the competitive dialogue procedure the legislative history and the purpose of the introduction of the procedure obviously points in the opposite direction.

As a consequence it has to be expected that the approach of the Court of Justice will be more flexible and pragmatic than the one that is reflected in the wording of the Public Sector Directive. It can be added that the current tendency in the case law of the Court of Justice of the European Union is to interpret the public procurement rules in a more flexible and pragmatic manner than previously. The field of application of competitive dialogue is therefore presumably broader than what follows from a literal interpretation of the Public Sector Directive.

The European Commission is ‘the guardian of the Treaties’ and for this reason it is of obvious relevance to consider the Commission’s interpretation and approach to the enforcement of the rules on competitive dialogue. Again it is remarkable that there is a general lack of case law. I have looked in vain for references to concrete cases where the Commission has questioned the application of competitive dialogue procedures. It would therefore appear that the Commission implicitly has accepted the experimental approach in the Member States.⁴ This is noteworthy as you get the impression that the grounds for application is interpreted fairly flexible at least in some Member States and in particular in the United Kingdom and France where the procedure has been applied in more than 3,000 instances.

As the contracting authorities in some Member States appear to interpret the conditions for the use of the competitive dialogue procedure in a flexible manner one could expect that there would be several challenges of the use of competitive dialogue at national level. However this is absolutely not so and it appears surprisingly enough that Denmark actually is the only Member State with case law of this type.

To summarize, the field of application of competitive dialogue therefore clearly appears to be broader than what follows from a literal interpretation of the Public Sector Directive.

1.3 Limits on the contractual design fostering innovation and needs analysis

It follows from Article 29(3) that the contracting authorities may not reveal to the other participants solutions proposed or other confidential information communicated by a candidate participating in the dialogue without his/her agreement. This provision has to be read in conjunction with Article 29(6) according to which the contracting authority shall ask the participants in the procedure to submit their final tenders on the basis of the solution or solutions presented and specified during the dialogue. From this follows that the so­ called ‘cherry picking’ is not allowed unless the participant agrees and that each participant must submit a bid based on their own proposal for a solution.

The background for the ban is that the Commission’s first proposal for the procedure⁵ met strong objections from trade and industries because it allowed cherry picking as the proposal made it possible for the contracting authority to define the final technical specifications either by retaining one of the solutions presented by one of the participants or by combining the solutions presented to it. The adopted rule was inserted in order to strike a better balance between the interests of the contracting authority and the participants in the procedure.

For obvious reasons the approach of the legislator in this respect is likely to be challenged in practice. Many contracting authorities will surely be tempted to set aside the ban on cherry picking in order to obtain value for money. However, there appears not to be case law on the issue yet competitive dialogue has in general been the object of very few public procurement disputes at the national level.

As mentioned above there is an important exception to the ban on cherry picking as the participants in the procedure can agree that their solutions or other confidential information can be revealed and applied by the contracting authority (see Article 29(3)). The contracting authorities can specify prices and payments to the participants in the dialogue (see Article 29 (8)), which is likely to make it easier to get the agreement of the firms involved. It appears that this opportunity is not frequently applied in the practice of the Member States which is rather surprising.

It is not clear if a contracting authority can insert a tender condition in the contract notice or descriptive document to the effect that the participants must accept that the contracting authority may share its solution with the other participants in the competitive dialogue. One point of view is that this is excluded as it is inconsistent with the set up of the competitive dialogue procedure as a systematic use of such tender conditions could completely undermine the effect of the ban on cherry picking. However, it is submitted that a contracting authority can insert such a condition in the tender conditions as the participants are made aware of the foreseen procedure when they enter the competition and before they have submitted their solution. The contracting authority using such a tender condition from the very outset of the procedure risks that the procedure becomes a failure as the potential tenderers in general might oppose the idea of sharing their solutions and know-how.

Finally, it should be mentioned that it can also be questioned whether variant bids can be authorized in competitive dialogue procedures. The state of law is unclear and the issue is of interest because authorization of variant bids occasionally is seen in practice and has been disputed in a case at national level.

2 Argument by Elvira Uyarra

2.1 Introduction

Public procurement accounts for a significant proportion of overall demand for goods and services (17 per cent of EU GDP) and as such it is increasingly seen as an attractive and feasible instrument for furthering the goals of innovation policy. While the interest in the use of procurement as an industrial and technology policy tool is by no means new⁶ there has been a renewed focus on this underexploited ‘demand side’ policy tool in recent years.⁷

A range of specific policy initiatives have been launched, both at European and at national level, to encourage the use of public procurement in support of innovation. The Europe 2020 strategy sees public procurement as one of the market­ based instruments that should be used to achieve the objectives of smart, sustainable and inclusive growth.⁸ A recent Green Paper by the European Commission⁹ states that existing procurement tools and methods should be modernized in order to make them better suited to deal with the evolving political, social and economic context. This includes increasing efficiency of public spending and support of common societal goals such as protection of the environment, higher resource and energy efficiency and combating climate change, promoting innovation and social inclusion, and ensuring the best possible conditions for the provision of high quality public services.

Challenges associated with taking this agenda forward include regulatory complexity, potential conflict between policy objectives, and capacity and resource constraints in contracting authorities. Difficulties also arise in defining what constitutes innovation in procurement terms, and in relation to measuring the extent and impact of such innovations. The policy and academic debate has all too often focused on ‘buying innovations’, implicitly overlooking innovation effects beyond the initial purchase, and on radical (new to the world) innovations, paying less attention to other categories of innovation.¹⁰ Innovation cannot be confused with novelty, indeed novelty may not necessarily be a good thing. As Geroski notes, ‘using procurement policies to encourage firms to develop new capabilities does not imply that one ought to uncritically encourage them to generate something new’.¹¹ Procurement decisions will always have innovation impacts via their influence on intermediate outcomes such as competition, industrial structure and network effects. The key question is therefore not whether but how innovation impacts take place.

This brief section looks at some of the mechanisms recently encouraged to favour innovation, particularly the competitive dialogue procedure, highlighting key issues around their use and some key challenges, and finally stresses the need to keep a broad and flexible framework that reflects the diversity of situations in which innovation is enabled through procurement whilst providing better guidance on their application.

2.2 Procedures to promote innovation procurement

The current EU Directives on public procurement incorporate a number of mechanisms that enable contracting authorities to encourage the market to find innovative solutions. For instance under the design contest procedure participants can propose ideas outside of the strict terms of reference and that may be used in a future procurement procedure. ‘Pre­ commercial procurement’ has been introduced¹² to enable the procurement of research and development services for the development of new solutions, with a view to their possible purchase at a later stage through a normal public procurement procedure. Pre-commercial procurement has been taken up mainly by innovation promotion agencies in a number of Member States, which have introduced their own scaled down versions of the US SBIR programme, linked to national innovation policy objectives.

One key challenge, however, is to connect the development of new products through pre­ commercial procedures with commercial (normal) procurement. At the moment there are no clear mechanisms to link commercial procurement with pre­ commercially procured goods or services so that they can compete with their off-the-shelf counterparts.

In the case of complex contracts the directive allows for the use of competitive dialogue procedure. As suggested by Lundvall,¹³ user–producer interaction is key for the production o...