Some thoughts about blockchain and public procurement

This past semester I have been teaching a module on blockchain and the law as part of our LLM in LegalTech. It is not directly about public procurement, but preparing classes forced me to organise my thoughts about the possible uses of blockchain overall. What I think about blockchain as a technology in general maps out quite well to public procurement too.

As a broad stroke, blockchain (permissionless or permissioned) cannot really compete in terms of efficiency with centralised or decentralised databases. The shared ledger approach of blockchain is simply too slow and (thus far) unable to scale to process transactions as efficiently as a database. In my view this makes it highly improbable that we will see blockchain replace existing technologies already deployed.

Its killer feature however is to provide a good enough technological solution where none is currently available. In other words, to do electronically what we have been unable to do at all thus far. For that, slowness and cumbersome may be good enough.

Where does this takes us in procurement then? Out of the top of my head to two areas. One I mentioned 4 years ago in this same blog (reputation mechanism - which I have to elaborate upon). More recently I have thought about another area where the current approach is lacking: cross-border technology.

Currently, each Member State is stuck on its own silo and even inside each Member State you have multiple non-communicating silos. I see a potential use for a (permissioned) blockchain solution is for this problem we are yet to solve. ESPD is a mess and e-Certis simply a 2010 mindset at attempting to solve the problem of sharing what is *public* information. How do we then 'integrate' multiple databases across multiple countries, preferably with a single codebase?

A centralised database with APIs for connection to the various national databases is always an option but then I look at TED which remains as, cumbersome and user (un)friendly as ever. It painfully shows its late 90s/early 2000s roots and mental models.

So what would we do with a magic blockchain solution to do away with the syncronization of information contained in the myriad databases?

We could force compatibility via APIs with a single blockchain maintained at EU level. Only the entities holding the information would be able to inscribe new data in the blocks. Ie, Companies Registries would sync company data, Criminal Registries criminal data, etc. This should be done automatically as new data is inscribed in the original database itself. In effect, all that boiler plate data that suppliers are expected to produce today or indicate the contracting authority where it can find it. Restricting writing permissions to the official entities holding the canonical data solves the oracle problem regarding data soundness.

Who could read the data included there then? Only each contracting authority in the context of a procurement procedure and *after* obtaining consent from the economic operator. This authorization could be limited in time/milestones for example. Another alternative might be a querying system whereby the contracting authority would query the blockchain if candidate X met certain conditions and all the blockchain would answer would be yes or no.

What this allows for is for the automation of what is still in 2019 a manual, menial job that does not really add value to procurement process. Yes, perhaps a database is a more efficient way of doing it but so far we have been unable to really iron the kinks of cross-border information management.

There are two important points I have not touched in this blogpost. The first compliance with GDPR - that needs a lot more thinking on my part and I'm simply not ready at the moment for such task.

The second the competencies of the Union to force Member States to change their administrative systems since this might fall under administrative rules where the competence of the Union is more limited than the general internal market competence. But then, the same could be said about the ESPD in itself.

Some further thoughts on the European Single Procurement Document

A couple of days ago, Timo Rantanen posted on Facebook the following comments about the ESPD (reprinted with his permission). I will provide my own responses inline, and expand a little bit on some of the ideas included in my recent paper about the ESPD.

"- not all countries and CAs have required the attestations from EOs when submitting the tender when 2004 Direcrive was in power. At least in Nordic countries it was already common to require self-declarations from EO at the time of submitting the tender. Most of these were not standardised like ESPD is - so the EO had to fill in different styles of self-declarations for each procedure and CA. However, these were MUCH easier and shorter for EOs to reply."

Agreed, that was the case as well in Portugal (and in the small number of pilots I ran here in the UK). However, the problem with that approach from a systems perspective is that "national islands" are created ending up making life more difficult for economic operators wanting to bid for cross-border contracts. The ESPD trades flexibility (to be shorter and easier) for a standardised approach in all Member States. The same way the container traded flexibility for standardisation of cargo.

"ESPD on lots: planned new 2.0.0 version includes 'improved handling of lots (See: However, to me this is far too complicated for EOs and I hope it would vanish from the final version. If the CA uses lots it can do separate XML files for each lot if and when the selection criteria vary (the exclusion criteria are in most cases always the same). Hence, EO would only need to read in and fill in XML files for those lots that it bids for. Personally, I think this importing and exporting of XML files is a crappy solution. We can no much better (and at least we have in 🇫🇮) by doing our own national solution inside our eTendering platform that still complies with the Commission Data Model."

I don't know enough about the technology implications (hey, I could not code an "Hello World!" if my life depended on it!) but if I read correctly, there is still room for improvement both on the standard and even on national implementations if the standard does not offer the granularity required.

"A philosophical thought: in eTendering and when making the invitation to tender as structured data (I wish everyone would get rid of those darn PDFs) it is very easy to make each lot a separate call for tender. Why do we need this lot thing anymore? I think the main reason for using lots was the CAs laziness in paper world to provide separate piles of paper for each call for tender. But in electronic form is just copy-paste and changing information in the few places where it varies between lots. Or actually this can and should be done even without copy-paste as one call for tender can act as master to all others."

That's a very good point and drives home the message that lots are in reality no more than smaller contracts which could be disaggregated if it wasn't for the current "bundle up everything up as much as possible" mantra. What you have highlighted here is a permanence of the previous paradigm irrespective of the technological change that was introduced. We used PDFs and not structured data because doing it in plain text is what we have been doing so far in paper. Even the PDF is a representation of the paper we used before!

Remember when in the 90s the internet was referred to "cyberspace" (still is in the criminal area...) and we would "surf" the internet as one surfs the waves? Those metaphors are quite useful of describing the new world for a transition period from technology A to technology B. It can be quick or slow. For example, we still refer to car power in "horsepower," but at least that metric is not present in electric cars!

"- ESPD and other entities: (relied or not relied on): when discussing the version 2.0.0 it was decided to use term 'entity' in meaning of both relied on other companies and those that are not relied on. So the version 2.0.0 no longer uses term subcontractor but talks about entities relied on and entities not relied on. Tricky!"

Well, if that is the case then we are bound for some confusion down the line. Any idea on the rationale to use the same term to describe two very clearly distinct underlying concepts?

"- Commission ESPD Service: I would like to see the Commission ESPD Service to be shut down soonest possible. It contains too many errors, particularly translation errors, that using it may causes also legal problems if a country has not transposed the Directives 'as is' but has done some 'gold plating'. The Commission should maintain the ESPD data model and require the Member States to comply with it in their national solutions (build inside eTendering solutions). Further, the ESPD Service is written in 'the Commission English' or 'the Commission Portuguese" that is very alien to sales reps in companies - especially SMEs. Can you imagine them understanding what 'entity relied upon' means! Also, the Commission has indicated that it would like to shut down the ESPD Service in 2019 by which time all countries and suppliers of eTendering solutions should have implemented their own ESPDs. At the moment I do not see this happening and the big MS have done little to implement national ESPDs that would comply with the commission data model."

Whether we like it or not, the Commission ESPD service is fundamental at this time since the Commission guessed (correctly) that Member States would not do their home work in time for the transposition of the Directives even if they made use of the extension for electronic procurement until 2018. Upon reflection, I think you are right however that by making the service available for longer than needed will reduce the incentive for Member States to actually implement the ESPD on their national systems. After all, why spending money if the canonical version is available for free?

An alternative would be instead to keep it going for the foreseeable future, keeping it sync with updates to the underlying data model and working out its kinks. You correctly highlighted one: language. The more inaccessible language is, the more SMEs will be turned off from participating in public procurement. This is an area of interest to me and one I hope to work in the future. Had not considered to do so within the context of an ESPD, but perhaps that would be an interesting angle.

"- Costs related to ESPD: while it is true and I do agree and support reducing transactions costs related to bidding, everything that is 'won' by introducing ESPD is lost with the need for awarded supplier to present the except of criminal records. This is an arising issue at last in the Nordic countries. Let me give a real life example: the Directive requires the self-declaration to be replaced by official documents - in this case excerpt of criminal records. With the 2004 Directive we only requested these documents If we had a hunch that something fishy is taking place (as professional buyers we are pretty good 😊 in detecting this kind of foul play. Often we can smell it when opening the bids). Now we need to get this damned criminal records excerpt from numerous persons and we have no idea who should present us their records. We had a case that included awarded suppliers for Finland, Denmark and the UK. We searched far and wide (eCertis was of little help) what we should request from the supplier and its relied on partners. Finland was easy for us, somehow also Denmark but the UK proved difficult as we found out that there was no criminal records database and self- declaration (that we already had in ESPD) would be the only thing we'd get from the 🇬🇧. Now, this puts suppliers in unequal ground: Finnish supplier needed to present us some 20 excerpts of criminal records each costing 12 € + the company criminal record costing 22€. I do not know what the Danish costs were but the UK relied on company only needed to provide us one piece of paper stating the all persons (see the exact wording for the Directive) involved do not have entries in criminal records. In an other case we had a FA where we needed to see some 200+ persons criminal records. It took nearly two months to get these as some people were away and could not request their except online. In many countries there are serious data protection and privacy issues with the criminal records."

Let's unpack this: self-declaration is different from providing documentary evidence afterwards. By internalising the cost in the contracting authority it forces the contracting authority to consider which information to request and also from which economic operators. If you use the open procedure, there is no obligation for you to check the information of all economic operators and you can simply check the information of the winner. Therefore you will be simply incurring in the transaction cost for one economic operator instead of all of them. Why do you need to check that information from everyone? What is the added value?

The inequality you mention was already present in some Member States that required criminal records. Portugal and Spain would traditionally ask for those certificates in each tender although Portugal switched to self-declaration with information checking of the winner only in 2009. By asking for evidence only from the winner you are negating that unequal treatment: costs of certificates are different in all Member States the same way corporate tax rates or minimum wages are (and we don't consider those as being a source of unequal treatment).

It is true that the final bit of Article 57(1) is too broad by demanding checking the information from administrative(?), management, supervisory bodies or those individuals with powers of representation, decision or control. It would be preferable to have restricted that to management and those with powers of representation, decision or control relevant for that contract. That is not the case and so, another reason to simply ask those certificates from the winners. Having said that, I would argue that on a de minimis principle,  there is reason to interpret the requirement as for those involved in the tender at least for those with powers of representation, decision or control.

As for who is going to be more affected by this measure: clearly bigger economic operators with complex governance structures will face higher costs. They will also adapt more quickly to those requirements. SMEs will have more difficulty if those requirements were not already common in the country and yet again that is a reason to interpret the requirements in the lightest way possible.

One final word for eCertis: yes it is not useful today because there is no information in there - a classical chicken and egg situation. eCertis is subject to Metcalfe's law, as its usefulness grows proportionally to the square of the nodes (data sources in this case) present. It can be useful in the future if everyone pulls their weight instead of waiting for the others to do their bit.

New paper: The European Single Procurement Document

This paper will show that the European Single Procurement Document (ESPD) introduced by Directive 2014/24/EU and Commission Implementing Regulation 2016/07 constitutes a paradigm shift on how public procurement procedures are run in the EU and one with unintended consequences. Before its introduction, each economic operator wishing to take part in a public procurement procedure had to submit all qualifying information at the start of the procedure. This mean incurring in transaction costs that are certain to have the opportunity of an uncertain benefit: winning the contract. The ESPD alters the balance of power (and costs) by replacing the full documentation requirement with a simple self-declaration form, aiming for a reduction in transaction costs and the removal of a barrier to the participation of economic operators in public procurement procedures. It is unclear if in reality its use will amount to savings in transaction costs or if those will actually increase and if the change in incentives may lead to more strategic non-compliance by economic operators and reduced legal compliance by contracting authorities, which may be tempted to overlook at least minor shortcomings by winning bidders.

The paper is published on the most recent issue of Upphandlingsrättslig Tidskrift journal.

Commission publishes ESPD review

The Commission has just put out its European Single Procurement Document review covering what has been done so far to get it to work and what is the current status of its implementation. The report makes for grim reading with most Member States still fumbling their way around with the majority using the paper version (!) at the end of 2016.

The Commission suggested that the current electronic ESPD service provided by itself is a transitional measure (I assumed as much in my paper about the ESPD) but the fact that 16 Member States are still using it instead of implementing national versions is worrying, since it now anticipated the electronic ESPD system will be shut down after April 18th 2019. On a more positive note, Bulgaria, Croatia, Denmark, Latvia, Lithuania, the Netherlands and Romania have made the use of the ESPD also mandatory for contract below-thresholds, with Hungary, Italy, Slovenia, Slovakia and Spain accepting their use without it being mandatory.

As expected, most countries are woefully behind when it comes to integrate databases where data that feeds into the ESPD may be accessed and until that happens, the real benefits of the system will not be felt. Nonetheless, the Commission claims Denmark and Croatia have been able to quantify the benefits (I would love to see the research and data) while no "Member State has tried yet to quantify the benefits deriving from a reduced administrative burden for buyers." Again, that will take a while and a painful adaption period.

While criticism by some Member States, suppliers and buyers is briefly mentioned, the report is silent on any particular difficulties in implementation or improvements necessary. As for the drawbacks, yesterday's post gives a flavour that is missing from the Commission's report.



The European Single Procurement Document is upon us

The Commission Implementing Regulation (EU) 2016/7 of 5 January 2016 establishing the standard form for the European Single Procurement Document was published yesterday, moving forward the implementation of a hallmark change introduced by Directive 2014/24/EU. The Regulation 2016/7 includes as an annex a model of the ESPD and what users can expect to see and use once the system is live.

The European Single Procurement Document (ESPD) aims to reduce the transaction costs for economic operators and public sector when assessing the conditions of the economic operator to take part in public procurement procedure. This is to be achieved by allowing economic operators to self-declare their compliance with the requirements and not having to immediately submit certificates and supporting evidence. The ESPD is to be a fully online solution (from April 2018 onwards) which should make amending/updating information on it easier.

In addition to mandatory exclusion grounds, the ESPD covers as well certain suitability requirements that may be imposed by the contracting authority (suitability, economic and financial standing, technical and professional ability. QA schemes etc).

There are a few things the ESPD does not do. First, it does not allow economic operators to defer their compliance until the end of the procurement procedure. Personally, I am of the opinion that the later in the process that this compliance is checked, the lower the costs for all involved.

Second, because it is a standard document it does not cover all the areas a contracting authority can ask information about an economic operator. Out of the top of my head, insurance levels come to mind.

Third, although it standardises a lot of questions/information - and that is to be welcome - it will not be suitable in all situations. That is a cost of standardising what can be standardised, but I can imagine mounting criticism in fringe use cases. In a country obsessed with pre-qualification like the UK, those will not be fringe cases.

One of my concerns with the current ESPD structure is the freedom allowed to contracting authorities to require underlying documentation and certificates at any time during the procedure. In the UK, where the job to be done with pre-qualification is indeed to restrict the   number of bids assessed downstream, it is not hard to conceive that a practice will quickly emerge whereby contracting authorities will keep on requesting those documents in all cases. Unfortunately, the Regulation does not close such door completely:

"Contracting authorities or contracting entities may choose or may be required (12) by Member States to limit the information required on selection criteria to a single question whether, yes or no, economic operators meet all the required selection criteria. While this may be followed up by requests for further information and/or documentation, care should be taken to avoid imposing excessive administrative burdens on economic operators through systematic requests of certificates or other forms of documentary evidence of all participants in a given procurement procedure or practices consisting in identifying in a discriminatory manner the economic operators to be requested such documentation."

What does this even mean? Technically that a contracting authority cannot be systematically asking for the documents (ie, every single time) but in practice what is the likelihood ofan authority being dragged over the coals. Plus, any enforcement action would be taken by the Commission against the Member State and not individual authorities...and we know how seldom that happens and the time it takes. In short, the incentives are there for contracting authorities to keep doing business as usual.

Having said that, there are provisions which may change incentives for contracting authorities going forward: "The obligations for the contracting authorities and contracting entities to obtain the documentation concerned directly by accessing a national database in any Member State that is available free of charge also applies where the information initially requested on selection criteria has been limited to a yes or no answer. If such electronic documentation is requested, economic operators will therefore provide the contracting authority or contracting entity with the information needed to obtain the documentation concerned when the selection criteria are being checked rather than directly in the ESPD."

What the above provision makes is reversing the onus of which party needs to come up with the information from the economic operator to the contracting authority. If we multiply this by all economic operators in all public procurement procedures covered by Directive 2014/24/EU, pretty quickly contracting authorities will find the transaction cost (previously borne by the market...) quite high.

I suspect that the learning curve will be steep at the start and that in a few years time we will take it for granted. If only this work had been done 10 years ago...