What is wrong with procurement?

Nailing it in the head:

Vague descriptions = More complexity = less competition = worse outcomes.

For those complexity paddlers who think their special interest can be delivered by procurement in a cost free way.

The risks arising from single bidder tenders in the UK

Ian Makgill from SpendNetwork and OpenOpps ran a twitter thread a few days ago based on a presentation he did on procurement data analysis.

The whole thread is worth reading and Ian was kind enough to send around the slide deck. One of the slides immediately captured my attention:

File 26-02-2018, 09 38 49.jpeg


It seems that from 2015 onwards there has been an increase in the total number of single bid tenders in the UK as well as a decrease in the average number of days for tenders to be submitted. As far as I can tell, Ian is implying both are correlated since the Public Contracts Regulations 2015 allow for shorter timescales to submit tenders. On another slide he argues a total increase of single bid tenders of 476% since 2012 and that is visible on the slide above as well. There is a clear trend for 2016 and 2017 which is markedly different from the years prior to 2015.

It is unclear how the increase is distributed, ie if the increase is happening across the board or if it is concentrated around specific characteristics, such as sector, project complexity or choice of procedure. It may be that, for example, in large/complex contracts the reduction in timescales affects them more than smaller contracts or the opposite - it is in the smaller contracts that the very short turnaround times really impact competition.

Single bid tenders are problematic for competition since they imply an absence of real competition during the procedure. The Economist had already pointed out in late 2016 the decrease in competition for public contracts. Lack of competition is bad by itself on a traditional open or restricted procedure but potentially much more problematic on any procedure with negotiations or dialogue such as the competitive procedure with negotiation or the competitive dialogue. 

For example, between March 2015 and January 2018 the competitive procedure with negotiations was used 458* times in the UK. It may have displaced some use of competitive dialogue (502 contract notices in the same period) but I suspect most of the substitution happened with the restricted (6,467) and open procedures (22,428) since they remain the 'standard' procedures. I would love to see how likely it is for the competitive procedure with negotiation and competitive dialogue to end up with a single bidder. However, for now a change in procedural practice does not seem to hold the smoking gun.

There are a couple of additional potential explanations for Ian's finding in addition to his implied justification of reduced timescales. At this moment I don't think either of them fully explains what Ian found. The first is an increase in pre-market engagement which has long been touted as a "great" idea for public procurement. The second is a negative competition externality arising from the increase in transparency in contract award information.

Regarding pre-market engagement, it is now clearly allowed in Regulation 40 (Preliminary market consultations) for the contracting authority to engage with conversations with potential bidder(s) before launching an official tender. I have had reservations about the negative impact of said conversations on competition and guaranteeing a level playing field in the subsequent tender procedure. Combined with the shorter timescales for tender submission, any bidder with advance information about the contract will be in a better position than the competition to participate. 

As for the second, the argument in competition law circles goes that the more information you give to the market, the easier it is for cartels to collude. Overall this idea is not to be disputed but I find it unlikely we would observe in the data such a quick increase in collusion immediately after the new rules came into being. Especially as contract award data is still patchy and not really easy to parse.

How do we go about checking the reasons behind this sudden increase in single bid tenders? First, I think we need to narrow down on which sector/types of contracts this is really happening. Then we need to test those hypothesis and there are a few (non-robust) ways of going about to do so. Comparing with the previous status quo (ie, what was happening with contracts before the legal change) and comparing with other EU Member States where this data is reliably collected like Portugal or Slovakia. Portugal has just transposed the Directives so the reduction in timescales is effective only from January 1st onwards. And while the country publishes a monthly summary of procurement data, the monthly report does not include any information about the number of bidders whereas the larger yearly one does. 

* I used data directly from the TED which mostly covers contract above tje EU financial thresholds and as such is a lot less complete than Ian's.

Is public procurement becoming less competitive in the EU?

Excellent article on The Economist:

Governments use competitive bidding in procurement both to obtain the best service for the lowest price, and to prevent cronyism and graft. The fewer the bids, the higher the risk of bid-rigging, says Mihaly Fazekas, a corruption expert at Cambridge University. Single-bid contracts are the worst, but even a drop from eight bidders to four increases the risk of collusion. Experts see the drop in the number of bidders per tender as a worrying sign.

Great plug for Mihaly Fazekas and Spend Network on the article.

Shame the piece only focus on contracts above thresholds, which as mentioned in some of the graphs only represent about 26% of all EU procurement spend. Whatever is happening beneath the surface is surely not better.

No one really likes competition

Although procurement rules are usually conceived to pursue increased competition via transparency and say non-discrimination, those which benefit from the increased access to procurement contracts coming from the private sector are not really keen in more competition that what is strictly necessary. Particularly, they do not like competition coming xfrom the public sector.

It is no surprise then that in the US private suppliers to the Government are throwing fits of rage with the work being done by 18F (a public agency) to improve procurement practice and procedures within the US Federal Government. It appears lobbyists from industry associations are busy trying to clip 18F's wings as its activity is affecting their profits. Apparently, the problem is not only the work carried out by 18F itself but its role in increasing competition from new private suppliers. 

I for, one welcome competition irrespective of its public or private origin.

More details (and a great writeup) here.

Food for thought, competition and procurement edition

Another factor that is often not taken into account, he argues, is government purchasing. Monopolists, he notes, often sell to “large intermediary organizations, which may distribute the incidence of monopoly charges progressively.” In the US, federal procurement accounts for roughly one-seventh of the GDP, not including state and local governments. Government, he argues, pays these monopoly overcharges and ultimately transmits them to taxpayers. Since the U.S. tax code is generally progressive, he argues, those overcharges are being borne progressively. Meaning: wealthy people should, in theory at least, pay a greater share, “which actually means that an antitrust intervention that diminishes anticompetitive conduct in government procurement actually has the effect of increasing wealth inequality.”
— https://promarket.org/antitrust-answer-rising-wealth-inequality/

Interesting discussion about the effects (or not) of competition law enforcement and inequality and how procurement in the US may function as redistribution mechanism. The problem with Crane's argument I suspect is that larger companies generate more profit but can pay a lower effective rate of corporation tax than smaller ones by being able to shift profit to cover for unprofitable divisions or using the tax regime to their advantage.

Links I Liked [Public Procurement]

1. Israel's Competition Authority finds a cartel operating in Auschwitz tour operators. It seems that the government tendered a contract to take Israeli kids on tours to Auschwitz to 5-6 companies. I assume Israel set up something akin to a framework agreement as each individual school was supposed to negotiate with the companies. Nothing like a stable market with few economic operators to "help" competition.

2. Speaking of competition, the Competition and Markets Authority and the Crown Commercial Service launch a e-learning programme to help spotting bid rigging. It is free as far as I can tell, but you need to register. It would have been better to just put it out in the open in my view.

3. All you wanted to know about Korean e-procurement, courtesy of the OECD. Good report.

4. Indian government lowers bar for startups in public procurement. In general, I am in favour of transaction cost reducing measures, but this is the wrong way to go about it. By giving a preferential treatment to startups what will happen is that the market will adapt and all tenderers will become "startups" in the future (although I am assuming it is easy to set up companies in India...).

5. Sascha Haselmayer pushes for more innovation in cities. I agree with him and under the right conditions the innovation partnership could help here in Europe. But not as the Azores regional government transposed it!

Links I Liked [Public Procurement]

1. Lord Carter's report on NHS procurement is out. Apparently it recommends a deep cleaning. Or a good scrubbing.

2. 18F tests GitHub for reverse auctions for small pieces of coding work. Contracts start at $3499 and contractors bid down the price and are only paid if they deliver the code on time and with the expected quality. I think this is an incredible idea, but one of commenter has already put the finger where it hurts: potential collusion. However, in liquid markets such as web design/website coding, I think we'll be better off overall.

3. Abby Semple writes about the living wage in public procurement.

4. Corruption in Malaysian public procurement?

5. Albert writes about the definition of body of public law and illegal presumptions in restrictions of competition in public procurement.

What is the potential upside of public contract registers?

Over the weekend Albert published an awesome post on the competition-related downsides of public contract registers. By and large I stand on the other side of the argument, but genuinely welcome my views (and any orthodoxy) to be challenged. Contrary to some colleagues or proponents of specific policies (social policies supporters I am looking at you...) I really want to know the downsides of whatever policy I think its best.

All policies are made of tradeoffs and it is fundamental to know what those tradeoffs are. When someone tells you a certain policy has no cost or any implications (as I have been told and in public, by a well known proponent of social policies...) it usually means one of two things: either they have not looked hard enough or they do not want you to know about the downsides.

Albert and I have discussed issues surrounding transparency and competition for years. His view is pretty much the standard view of competition lawyers: extra transparency comes at a cost for competition and public procurement is a market prone to collusion in the first place. Although I have slowly come to be more nuanced in what concerns transparency during the procedure (read, my view is slowly moving on his direction), I remain bullish on the beneficial tradeoff from having more ex-post contract transparency. The crux of our difference is precisely that: I think contract registers will leave us better off, Albert probably thinks we will not. In reality there is only one way to sort this and that is by looking at data (but more on that later).

Public contract registries (post award)

On his post Albert suggests that the logic behind post award contracts registries is based on reducing the perceived shortcomings of public governance and complementing traditional public audit and oversight mechanisms by enabling citizens to monitor contract data. He is right on both counts and is the fault of proponents for public contracts registries like myself to come up with other justifications for the registries. In my view, there are valid economic reasons to push for post award contract registries, mostly connected with the reduction of price arbitrage.

On the plus side: Reduced arbitrage

One of the iceberg type problems in public procurement is information asymmetry and arbitrage. It is well known that the same supplier will charge different prices to different contracting authorities without batting an eye lid. Can we imagine this happening in other sectors? A couple of years ago Amazon tried precisely that and people went absolutely bananas. Somehow, we accept that this should be the norm in public procurement. Having said that, there are other sectors where price discrimination is an accepted practice, like airlines.

But the arbitrage arising from the lack of price information is crucial in another way. How many sectors do we perceive to be efficient if the price is not public? How would the oil market work for example? Or the stock market? Can you imagine buying houses without knowing the price paid recently in the area?

Price transparency brings efficiency into a system by reducing the scope for arbitrage. And in my view this is the strongest argument in favour of public contract registries: by and large they will make the public procurement market more efficient. How? Via two mechanisms.

First, it will allow contracting authorities to have access to more reliable information...if they are so inclined and willing to invest the time. They can more easily know what their peers paid for a similar item/service. (I am assuming here the contracts register works well and is fully searchable, which may not be the case).

Second, it provides every potential supplier in the market with granular pricing data. How much are your competitors charging for the equivalent service/good? Are we pricing ourselves out of the market? How can we be more competitive? By knowing the average pricing on a public procurement market you can easily make a decision to invest in that area (because there is arbitrage) or to stay away.

Again, let's go back to the oil example. When price of oil is high, companies invest in exploration. When it is low, they do not and hoard their supplies (that is why there is so much oil sitting in tanks at the moment). How could suppliers make those decisions if price transparency did not exist? The oil market is an excellent example where the attitudes of a strong cartel (OPEC) which supported high oil prices for years enabled lower cost suppliers to come into the market and eat that profit margin.

Once more participants in that market do not bat an eyelid to making the pricing public. And yes, I am talking about a commodity, but then a lot of public procurement is made around commodities, including oil.

There is no fundamental reason why price has to be a private piece of information. If it was always made public, it could be factored in into the decision-making of economic operators to take part or not in that market. It would be akin to patents to a certain extent. For an economic operator to be granted a patent, it needs to tell the world (by and large) how the patented invention works. That protection is time limited, so it forces economic operators to make an informed decision on going or not for it. And they still go for it in droves. They have no problem with that trade off...

To a certain extent a public contract is similar to a patent monopoly: it gives you exclusive access to a market for a set period of time. Why should we treat price differently from the crucial information that goes into patents?

A similar problem with lack of price transparency happens in the developing world where farmers have limited access to price information. Guess what happened once they start buying mobile phones...

On the downside...

The downside of the above is that price transparency makes it possible for collusion agreements to flourish. The more transparent you are, the easier it is for cartel members to police one another. Albert makes a bunch of very strong arguments along the traditional competition law line: more transparency = more and better cartels.

Albert argues that 20% of contract value are due to anticompetitive overcharging arising from cartels operating in public procurement. One of the perennial problems when talking about public procurement is the poor quality of data, particularly of "ground truth" data. By and large, we simply do not know exactly what is happening on the day to day operations of contracting authorities (another argument in favour of contract registries!) But let's assume the value is right.

If we increase post award transparency of public contracts what would happen then?

The answer is, it depends on the market. If the situation is really that bad already, there is not a lot of scope for it to get worse. However, the numbers can be wrong by an order of magnitude and in either direction. In any event, I think three things would happen:

In markets where cartels traditionally operate, things will get worse as the extra pricing information makes the policing easier. But I would limit this downside to those markets where cartels are already prevalent and no new entrants to the market are expected due to the extra transparency. The latter is possible if it becomes evident to an economic operator that a specific market is inefficient.

In markets where cartels do not currently operate, but numbers are limited, things may get worse. Yes, it is possible (as argued by Albert) that the extra pricing information may make cartels more likely. Have you ever noticed as on highway's the petrol prices tend to be more or less identical and always higher than in smaller roads? That may be a good example of where price transparency may be leading to tacit collusion.

In all other markets, competition will be enhanced at least until we reach a new equilibrium and weaker suppliers are driven out. And this is why that by and large the new equilibrium will leave us better off. This would not be valid if competition was compromised in the majority of markets, most of the time.

Albert does not address potential upsides of having more data available in terms of cartel fighting. What can be done when reams and reams of contract data are available? You can spot odd behaviours. For example, you can corroborate a whistleblower account and you can then check if certain collusive practice/tactic is happening in other sectors as well.

Small example: years and years ago I was doing a due diligence on a supposedly very competitive sector. I had access to hundreds of contracts and saw no evidence of litigation and was surprised to see that the competitiveness of companies fluctuated a lot on different procedures. I was very puzzled with the pattern, was not convinced by the company's explanation and wrote something along those lines on my report to the (foreign) client. Interesting enough, the client did not quizz me for further information...

There is another analogy that could make my argument easier to understand here and that is the debate between open and closed source software. Open source software effectively means all code is available for any one to see, peruse (and mostly) to do whatever they want with it. When it comes down to bugs and security vulnerabilities it means anyone (good or bad) can spot weaknesses in the code either for exploit purposes (bad) or to patch them (good). It also means that every new release indicates clearly what bugs were patched. Again, there are pluses and minuses here: on the one hand, everyone knows what bugs were patched, on the other hand attackers now what bugs were on the previous version and have an attack vector to use on unpatched systems. It cuts both ways.

On the closed source model, only the owner of the intellectual property knows the code and has access to it. In what concerns security this is known as "security through obscurity", ie believing that by withholding certain information companies and users are better off when it comes down to security. We have seen how well this has played out for Windows over the years and more recently for routers (more here), cars and virtually anything classified as part of the Internet of Things. Not having access to the source code has not really stopped attackers from finding vulnerabilities on various closed sourced systems.

So at the root of the discussion we have two opposite camps: one is proposing that we are better off by hiding information (security by obscurity); the other suggesting we will be better off by putting all that information out in the open (security by transparency), even though in specific case we will be worse off. Life is made of tradeoffs.

Can we minimise the competition impact of the contract information?

Personally, I still believe we will come ahead by releasing that information as soon as possible. But here are a couple of suggestions to mitigate the competition impact of post award transparency.

1. Delay the release of data

What would happen if we time delayed the release of the contract data? Say for a year or 18 months, so that by the time it came out it would no longer be of immediate use or value for cartels? This would provide an indication of the prior practice but not the current one, thus limiting the benefits for cartels but also for the market to operate more efficiently.

2. Release only aggregate data

In addition to delaying the release of data, perhaps we could aggregate data by CPV code for example. This would imply that no individual contract information is released and makes it difficult to find a balance between what type of information gets released when, but it already exists (at least in the UK) under the form of spend data.

The downside of both options is that the data exists in the first place and is kept private for a set period of time (back to the security by obscurity). In consequence, anyone invested in that market has an incentive to get access to that data before the market has, like a public procurement "insider dealing". Again, life is made of trade offs.

 

 

The slippery slope of collusion in public procurement

It came to my attention by @JackOfKent on twitter yesterday that the London Criminal Courts Solicitor's Association (LCCSA) is collating information from various firms which may have put in tenders for the Legal Aid Crime Tender 2015 (put out by the Legal Aid Agency) and may be willing to withdraw them.

I do not have any comments for or against the Legal Aid reforms the LCCSA is fighting, other than by default all public contracts should be procured transparently and with respect for equal treatment (a boy can dream...), even Part B services as in this case. I have said time and time again that there is no fundamental reason why the procurement of legal services should be treated differently from any other.

The problem with the LCCSA approach to putting pressure on the MOJ as a means to force the Legal Aid reform to be dialled back, is that for now it comes dangerously close to collusion:

"Many of us felt compelled to submit a bid for a contract but did so with little, if any, enthusiasm. In the past 6 weeks members have told us that given the right circumstances they would withdraw their bids. We understand from informal soundings in meetings with London members that there is a belief that the great majority of solicitor firms who have submitted bids would withdraw them if they could be confident that other firms would act in a similar manner. This survey formalises those discussions and will inform our ongoing engagement with the MoJ.   
We intend to collate information from firms confirming whether they have bid, and if so, whether they will now refuse a tender offer or will withdraw bids if they felt confident that a sufficient number of other firms in their area/s would also refuse or withdraw. When the number of potential indications of bid withdrawals/refusals reaches a sufficient number we would then be in a position to share this information with the firms concerned and publicise the findings."

(emphasis mine)

There are a few ironies here. The first is that we are talking about solicitors making this proposal. The second, that I was patronised on twitter for not "reading deep enough" and not understanding the "smart contracting" technique being deployed by the LCCSA. Now, I am not a competition law expert but I have seen enough colluding practices in procurement to spot obvious ones, but maybe my instinct had failed me this time. So I asked Albert on his views which were beautifully put on this blogpost. Furthermore, it appears that Dr. Angus MacCulloch from Lancaster spotted similar worrying signs on a previous Legal Aid tender.

At this moment it looks as if there is no cartel yet, only the apparent intention by the LCCSA of forming one. Going from A to B depends on what actually happens with the information collated in the proposed surveying process and how solicitors act afterwards. To the LCCSA credit, it has introduced some firewalls to avoid information being disclosed, namely that a single solicitor from a firm which did not tender for the contract will collate the data. But the problem is not the data collection in itself, but what is going to be done with it afterwards. For the survey to have any benefit in the negotiations, the information contained herein must be released in some way or form.

The last sentence cited above suggests that the information will be disclosed with the firms involved (red flag) and also publicised (another red flag). Albert is particularly concerned with the first one and rightly so as the survey participants signalled an interest in a common approach by taking part in the survey. In addition, I am also worried by the impact that even disclosing anonymised/aggregated information may have in non-participants or even non-LCCSA members. How will the wider market react if a survey of say 100 firms indicates a willingness of 90% to withdraw their bids? It signals to the market that perhaps everyone else should do the same. Once more, I am not a competition law expert but perhaps this amounts to tacit collusion? There is a very good article by Prof. Carmen Estevan de Quesada on this from 2014 (Carmen Estevan de Quesada, "Competition and transparency in public procurement markets" P.P.L.R. 2014, 5, 229-244).

As for the public procurement angle, let's just say that perhaps the solicitors should look into the potential debarment consequences of these activities before getting involved, particularly paragraph 8(d) and (f) of Regulation 57 of the Public Contracts Regulations 2015.

A final comparative note on the LCCSA proposal:there would be no legal way to withdraw bids from a public procurement procedure in other jurisdictions such as Portugal and Spain...

 

Slovakia, public procurement and transparency

Transparency International put out a detailed report about the experience in Slovakia of mandatory advertising of contract award information. I am a huge fan of contract award transparency and am always on the lookout for things like this report which is full of interesting findings.

Apparently Slovakian contracting authorities have to publish the contract award information since 2011 and covers contracts both above and below the EU thresholds. The result is that a plethora of contract information is now available online and Slovaks are making good use of it: apparently the database website gets 54,000 visits...every month. That is a lot of people for such a small country. I wonder how many are from citizens and how many from suppliers trying to figure out how the market is working and what prices are being paid (I do not see this as negative, but Albert probably objects).

What about the effects of this radical transparency? On the one hand...

On the plus side the report claims the accountability brought by the interest citizens show on the information, plus the media is reporting more and more cases. This can be a double edged sword as Gustavo Piga told me: more information in the hands of good journalists is great, in the hands of bad journalists it's a nightmare. I can totally relate to that. As a lawyer one of the cases I was involved in was plastered all over the press. Obviously, the "journalist(s)" only presented one side of the story and had no interest in the actual truth. The authors also mention this as an issue.

Another positive finding claimed by the authors is that the radical transparency led to higher participation in tenders. There may be some correlation between transparency and more participation and perhaps suppliers are more confident that the increased transparency leads to reduced foulplay, but I saw no evidence of causation. In my view, the increased participation rate is probably due to a combination of factors wider than just transparency. Moving procurement online (cradle to grave e-procurement) seems to me as a bigger reason and one that can be married to the more difficult economic times which lead to suppliers having to compete more fiercely for business.

Increased transparency reduces the incentive to use non-transparent procedures as the benefit of the non-transparent procedure disappears if at the end you need to make the end result public. The authors mention the reduction in non-transparent procedures but make no claim about the connection to the transparency reform.

Another positive finding is a lower perception of corruption. I agree that putting all the information online can contribute to dispel foulplay myths surrounding many contracts, thus contributing to a reduction on corruption perception levels. Furthermore it apparently also led to a reduction in queries from the public (makes sense as well), thus reducing the burden on contracting authorities to provide that information time and time again with each request.

On the other hand...

The authors looked into costs and concluded that apart from startup costs (ie, systems and moving everything online) the marginal cost of uploading the information of each contract to the database is quite limited. Although it seems the data came from empirical research with only 4 authorities and it would have been preferable to test it wider, this seems a reasonable finding. I would add that we can reduce the marginal cost to zero with proper e-procurement software (ie, getting software to do it automatically). That is a hint for platform providers as other countries (such as parts of the UK) want to move in a similar direction.

I am less convinced however by the dismissal of collusion and cartels. The authors state that "As for fear of collusion in tenders or loss of interest of companies in dealings with the state, we find little evidence of their existence." Little evidence is one thing, lack of evidence another. I suspect they meant the latter. It is a well known fact that identifying cartels is difficult without whistle-blowing so the absence of evidence is not the evidence of absence. I am not sure the authors dug deep enough to reach the latter (Am I channeling Albert here?) and have made similar comments about Portugal in the psat. The contrarian argument made by the authors is that even with the added transparency, average tender participation numbers have crept up. In my view, it indicates that i) suppliers are discounting the fact the contract will be published; ii) in general, competition appears to have improved even with the added transparency. Additionally, as I mentioned here before more information tends to make markets better (by reducing arbitrage) not worse, except for the cases where there are underlying conditions for cartel formation. More information makes life difficult for the insiders who benefited from access to the decision-makers.

Issues

The authors highlight the lack of compliance monitoring as one of the current issues in the system. Compliance is still not 100%, contracts miss vital information and there are reports of contracts "disappearing" from the register. This will always be a problem with centralised systems, or any system that uses human intervention for that matter. I will take the bait and plug again my idea of a blockchain type of interface to deal with contract information and feedback.

 

Public Contracts Regulations 2015 - Regulation 55

Regulation 55 - Informing candidates and tenderers

Regulation 55 defines the timings and kind of information tenderers are entitled to receive at the end of their participation in a procurement procedure, particularly in case they were unsuccessful. The obligations for the contracting authority cover both the decision to conclude or not a procedure and the grounds on which the decision was taken. This Regulation is a perfect example of the underlying tensions between the principles of transparency and competition in public procurement.

This Regulation is quite similar to Article 55 of Directive 2014/24/EU as well as part of Regulation 32 of the Public Contracts Regulations 2006, although it is much cleaner and prescriptive than the latter. Regulation 55 includes three exceptions to the disclosure rule. First, in case it would impede law enforcement or would be against public interest. Second, that it would prejudice legitimate commercial interests of a particular economic operator (ie, the contract winner). Finally, in case it might prejudice the fair competition between economic operators. Personally, I think these will be over-used as in the past to avoid disclosure of information about contracts.

Explaining why a procedure was not taken to the end does not appear problematic. However, the main rule under Regulation 55  that tenderers are to be informed of the outcome of the procedure and a certain degree of information about the winning tender, raises some questions. Last week Albert criticised the amount of information provided on competition law grounds and provided excellent reasons why that is so. I disagree with him as we come from completely different perspectives. He believes that too much transparency about contract awards distorts the market and facilitates collusion (it does, at least in markets/sectors where collusion is already present or likely). Myself, on the other hand I believe that disclosing a lot more information will actually make the market less imperfect by providing the same level of information to *all* interested players in the market. It would significantly change the market dynamics. Furthermore, less information creates opportunity for arbitrage which, in my view, economic operators have been benefiting from over the years. Unless, perhaps economic operators have been always fair and charging different contracting authorities the same price for the same products/services, right? I believe that more information leaves markets *better overall*, even accepting that in some cases it will indeed help out colluders.

The test subject on this should be Portugal where since 2009 all (read: most) contracts awarded below thresholds are published online and have to follow e-procurement from cradle to grave. Technically contracts above thresholds should have been published as well but a clear obligation is more recent than 2009 and was part of the bailout programme Portugal benefited from. So far, no evidence coming from the country supports the claim collusion is rampant. Now, absence of evidence is different from evidence of absence, but there are two data points that are important to take into account: SME participation rates are going up and prices have come down in some sectors, indicating at least a modest increase in competition. I will try to get some more information about the country tomorrow as I will be at a conference in Porto.

I would heartily support a proper piece of research on this in Portugal. Any takers?

 

 

 

Public Contracts Regulations 2105 - Regulation 46

Regulation 46 - Division of contracts into lots

One of the biggest changes introduced by Directive 2014/24/EU is the new preference for division into lots. The (flawed) logic behind idea is to make procurement easier, more accessible for smaller suppliers by dividing contracts into smaller chunks. This logic is flawed in two accounts: one, it destroys the value of aggregation by increasing the transaction costs for the contracting authority (and to a certain extent) to suppliers who want to bid for multiple lots as they now need to submit multiple bids. Two, it is a competition law nightmare by facilitating collusion immensely, particularly if similarly sized lots are used. Issue two will be more pressing on sectors where there are either limited suppliers or where collusion is already prevalent (yes, *that* industry). I suspect Albert will hammer this point home later today. UPDATE: Here it is.

Thankfully both Article 46 of the Directive 2014/24/EU and Regulation 46 stop short of mandating the use of lots or prescribing any particular strategy to undertake them. The key point is that although lots should be used, they do not have to and all the contracting authority needs to provide is a justification for it. That's it. I suspect "competition fears" would make a good excuse as any other.

In terms of rules, if lots are to be used the ifs, buts and hows need to be spelled out from the start in the tender documents or contract notice. Therefore, any limitations on the number of lots that may be won or the obligation/foreclosure to bid to all lots has to be disclosed.

Paragraph 6 also provides contracting authorities with the possibility of combining lots, again under the condition of informing all putative participants at the start of the procedure that this is a possibility and how it can be done. I am struggling to see how this can be done transparently as different combinations of lots may lead to different winners, therefore creating the risk of steering contracts to a preferred supplier. Having said that, it also creates uncertainty into the system and the extra variable may create issues for cartels and candidate collusion. What is your take Albert?

Public Contracts Regulations 2015 - Regulation 41

Regulation 41 - Prior involvement of candidates or tenderers

Can a prospective tenderer be involved in drafting the tender documents before a procedure is launched? According to Regulation 41, yes it can. The main rule of Regulation 41 allows for such participation, but digging deeper into the Regulation allows us to find some limitations to this possibility related with the principle of competition. Albert has already published a barn storming entry on the issue this morning.

Leaving the buck in the back of the contracting authority

Regulation 41(1) leaves to the contracting authority the obligation to take appropriate measures ensuring competition is not distorted by the participation of the entity which was involved in drafting the tender documents, based on the rules of Regulation 40 or otherwise. Two problems are immediately apparent. The first one is that Regulation 41 accepts that in some circumstances, economic operators may be involved in helping contracting authorities outside the remit of Regulation 40. I would like to know how that could be done.

The second problem is more practical: being involved in drafting the technical specifications and participating in the subsequent tender will always distort competition as the supplier will be in a position it would not have been otherwise. It will know the terms of deal before everyone else, it may know more about the deal than everyone else, perhaps even information that will not be made public such as the budget the authority has. The only way I can see the prior involvement not raising competition issues is if the contracting authority only asks a very direct, specific question and provides no other details on the project (what is really being acquired, when and for what price). All other scenarios where the supplier helps the contracting authority define what it wants to buy - which I suspect are the true reason behind Regulation 40 - will distort competition. As Regulation 41(1) has no qualifier on the level of distortion acceptable, the correct interpretation has to be that any distortion leads to the automatic exclusion of the putative tenderer. Yes, Regulation 41(1) states that the contracting authority shall take appropriate measures to ensure competition is not distorted, but as the distortion occurs when the information that something is being procured in the future is passed to the helper and subsequently when the same economic operator helps the contracting authority design the tender documents, the distortion has already occurred!

The irony of Regulation 41(1) is that the burden of correcting the distortion is left in the hands of the contracting authority. This appears to me to be impossible for the reasons above but perhaps leaves the helping economic operator with the possibility of suing the contracting authority in case it does not fulfil this (impossible?) obligation.

Papering over the cracks

Paragraph 2 of Regulation 41 offers some potential solutions for the competition distortion. Helpfully, other candidates should be informed of the relevant information exchanged between the helping economic operator and the contracting authority. How does this solve the distortion of competition arising from the asymmetry of information and the fact one of the suppliers influenced the rules of the procedure? In fact, informing the market that someone was involved in drafting the tender documents AND will be participating may have the opposite effect on competition: effectively reducing the attractiveness of the project for everyone else and thus reducing competition.

The same paragraph doubles down on irrelevant suggestions by putting forward that perhaps a solution is to fix the an adequate time limit to receive the tenders. The problem is not the time per se as all economic operators would have to comply with the minimum time limits (although it would have been preferable to just block the use of accelerated or time-reduced procedures) but the fact one of the economic operators had access to information before everyone else and influenced the design of the tender documents.

If everything else fails, lower the standards

Paragraph 3 admits that to ensure compliance with Regulation 18(1) (that is, the principle of equal treatment and non-discrimination, but not competition) perhaps the economic operator will have to be excluded, but only as a last resort. Why as a last resort? Would it not be preferable instead to block it from the start and ensure the economic operator is compensated for the help? Would it not be simpler and cleaner for everyone involved? Even if it was a last resort, at least the burden of proof that no distortion of competition occurred (which paragraph 3 should have referred to!) should be left with the economic operator who helped the contracting authority, which as we have seen above, does not happen in any moment.

As it stands, Regulation 41 is a mess and prone to create difficulties and complications for contracting authorities. To be honest, this is a mess originating from Article 41 of the Directive (and as pointed out by Albert, the C-34/03 Fabricom case)  but still, it is up for the Member States to provide further rules if they so see fit. For example, under the 2008 Portuguese Public Contracts Code, no economic operator involved in the development of a procedure can take part in it. This solution will probably have to be nuanced in the future due to the Directive, but I would not be surprised if the country takes once more a harder line on this matter.

 

Public Contracts Regulations 2015 - Regulation 33

Regulation 33 - Framework agreements

In Regulation 33 we can find the rules applicable to framework agreements. This Regulation transposes Article 33 of Directive 2014/24/EU. Regulation 33 also starts the section on "Techniques and Instruments for Electronic and Aggregated Procurement". How exciting!

Framework agreements have become remarkably popular in the UK over the last few years and I have already covered some of their problems before. Albert had a lot to say today about competition (scathing, scathing!) and this is an area of intense interest for me in terms of research opportunities in the future.

For creation of a framework agreement, contracting authorities can use any procurement procedure included in part 1, thus meaning that they can even use the negotiated procedure assuming there was a benefit in doing so. One of most interesting uses of framework agreements I have seen over the last few years was done by the FiredUP project, where a competitive dialogue was used to create a framework agreement. Abby Semple gets full credit for that work.

Framework agreements can either be single or multi-supplier, with different rules for each type. Rules for the first are contained in paragraph 7 and state that any subsequent contracts must respect the limits set by the framework and that the operator may be consulted to supplement its tender if needed. One of the problems with these rules is that due to the lack of transparency after the institution of a framework it is nay impossible to know if these rules are being complied with.

Multi-supplier rules can be found in paragraph 8 and are divided into three sets: i) without reopening competition; ii) by partly reopening competition; iii) by completely reopening competition.

Contracts can be awarded without reopening competition if the terms and conditions of the framework agreement were detailed enough and in an objective manner in the procurement documents leading to framework agreement. The litmus test is thus: do the suppliers need any extra information to be able to perform the contract and does the contract authority has enough information from them, or more is needed?

Even if the framework agreement sets out all the necessary terms for awarding subsequent contracts, contracting authorities can still reopen competition if such possibility was mentioned in the procurement documents.

Finally, in case the terms governing the framework are not detailed enough, then the contracting authority is entitled to reopen competition within the framework to award subsequent contracts.

Issues with framework agreements

Framework agreements have a number of issues associated with them in my view: duration, market foreclosure, lack of transparency and collusion. I will focus on the first three and redirect you to Albert's excellent tirade on the last.

The first issue I see with framework agreements is their duration. According to Regulation 33, framework agreements can last for 4 years, which seems like a reasonable duration until it is obvious that the limitation is for the framework agreement in itself and not the subsequent contracts. In other words, it is possible for contracts to extend long after the supposed 4 year deadline. And as the UK does not have a 3 year limitation for the starting term of a contract as other Member States do, I have a feeling they can last for long. If they should last for long is another question, my view is that they should not (they should be called every year to reduce market foreclosure, collusion and keep suppliers on their toes).

The second issue is market foreclosure. This is particular important as the use of framework agreements is on the rise in the UK. Framework agreements may have a market foreclosure by restricting access to billions of pounds worth of spend every year to the few suppliers which are admitted to them. Now multiply that for at least four years and the potential effect is quite big. In my view, framework agreements represent the opposite of what procurement rules were originally designed for: transparency and opening the internal market.

The third problem is lack of transparency. Framework agreement proponents argue that they are subject to transparency, procurement rules and principles in their creation stage. They are right, but to a point. The problem is that by then not a single penny has been spent yet. So effectively transparency only applies to a "pre-award stage". Imagine that we apply the same standard to the open procedure: we would get transparency for a PIN notice or a selection stage, but no transparency whatsoever for the award stage. Would we say that the the principle of transparency had been served well then?

Lack of transparency has other pernicious effects. It is pretty much impossible to know what happens on a framework agreement once it is set in place. How are the calloffs done? How often are they done? What has changed from the original documents of the framework agreement? How many contracts have been awarded? How much money was spent via said contracts? I am not arguing that all practice is bad, but the lack of transparency ensures that is impossible to answer those questions and others.

Framework agreements are information black holes: we know they exist, they attract a lot of attention, but nothing ever leaks out.

Public Contracts Regulations 2015 - Regulation 30

Regulation 30 - Competitive Dialogue

After our short Easter break (yes, it was short for academic standards...) myself and Albert are back to our running commentary on the Public Contracts Regulations 2015. Today we will be talking about Regulation 30 which transposes Article 30 of Directive 2014/24/EU on competitive dialogue. Competitive dialogue is one of my favourite procurement topics to talk or write about. After all I did my Ph.D thesis on it!

Competitive got an unfair reputation over the last few years in the UK. From being commonly used between 2006 and 2010 ('the default procedure for complex contracts') to being branded by guidance as a procedure to avoid from 2011 onwards due to its limitations and perceived shortcomings (complexity, duration, cost, etc). 

The truth is competitive dialogue was never conceived as a default procedure for all "complex" contracts and, in fact, no other Member State bar France used the procedure as often as the UK over the last decade. I will leave the responsibility for its overuse at the feet of the commentator(s) who argued back in 2004-2006 that competitive dialogue was a standard procedure and could be use almost freely. A lot of damage to the procedure was done by experts passing off their ideas as "best practice". It is a shame, as when well used (as I saw in Spain) it is a really useful tool for contracting authorities. Therefore the question is, can we rely on the new Regulations to improve the legal regime up to a point that it makes possible for contracting authorities to routinely use well the procedure?

The more things change...

As many other regulations, the draft of Regulation 30 is slightly different from the Directive in terms of structure but not really on content. In effect, this Regulation sets the rules under which the competitive dialogue procedure is to be run. We saw that the grounds for use are set on Regulation 26, leaving Regulation 30 to deal exclusively with procedural matters. For all intents and purposes the structure of the procedure has not changed (start, dialogue, final tenders, preferred bidder) significantly and the novelties are essentially surgical. 

I will focus my commentary on a couple of points. One, the ban on general confidentiality waivers and the confidentiality hard line. Second, the possibility of "negotiations" with the preferred bidder.

Confidentiality, oh confidentiality!

It is no secret I have never been a fan of the way confidentiality has been applied to competitive dialogue under Directive 2004/18/EC. It is one sided binding only the contracting authority and conveniently it is not extended to suppliers. "But they are already under the obligation of not colluding!" you argue. Sure, so is the contracting authority subject to the principles of equal treatment and non-discrimination. What does this tell you about who/whom pushed for confidentiality to be included as it was?

But my biggest gripe with the "enhanced" confidentiality of Regulation 30 is that it actually forecloses the possibility of contracting authorities legally adopting a structure for the competitive dialogue that actually makes sense for them: the "crowd-sourced model" I described in my Ph.D in 2010. In this model of competitive dialogue, suppliers compete to influence the contracting authority in the design of common technical specifications which are then used by all candidates to base their final tenders on. Under this model passing information around is no longer a zero sum game and the more a supplier can persuade a contracting authority about the merits of its idea, the more likely it is it will have a slight advantage at the tender stage. If the new rules allow for suppliers involved in drafting technical specifications in other procedures, why bar it on competitive dialogue with an ultra-orthodox view of confidentiality?*

Most of the time, the differences expressed by participants will be variations of the same theme and not really completely different ideas. If anyone ever saw a competitive dialogue where the textbook example provided by the Commission in 2005 of crossing the river using the bridge, tunnel or ferry service, please let me know. Until then it remains a unicorn for me.

The alternative is to force contracting authorities to use competitive dialogue as it was originally conceived: whereby each supplier develop their own ideas completely in separate and without benefiting from information coming from other suppliers (the zero sum game of the "own solution model"). Well, that never happens in practice because it is pretty much impossible to do at all, let alone efficiently. Even the sequence of meetings has an effect on equal treatment. If you go first, you can influence immediately the contracting authority but then risk that information leaking out even indirectly by influencing how questions are posed subsequently. There is no equal treatment when suppliers are interviewed separately in a sequence and believing otherwise is a fallacy. As usual, my reading recommendations on this is Kahneman.

But the traditional own solution model has other drawbacks. If indeed the ideas are separate and distinct, then pretty soon the contracting authority will know what is the best solution. Therefore, any time or effort with and by other suppliers is being wasted. That supports the argument that is preferable to whittle down the field to two suppliers as soon as possible. However, the underlying problem remains: the second supplier is and will always be a dead horse in this race. It has no chance whatsoever of winning and effectively is being used as a dupe (for free) to fool the other supplier into thinking that competition exists. In continental legal systems this constitutes a gross violation of the good faith principle. However, as far as I know, good faith is not really a contract law principle in England and Wales.

Another serving of negotiations please?

One example of practice passing off as "best practice" with competitive dialogue in the UK has been the race to award and the idea that is more efficient to leave the financial commitments to confirm only with the preferred bidder. The fact that the law provides for this is moot. It does, but that does not mean is a great idea. Having said that, the fact Regulation 30 (16) states that "tenders shall contain all the elements required and necessary for the performance of the project", so I do not know how a contract can be performed without a price or financial make up of a contract to be defined.  

Yes, I am aware of the usual "oh, but the banks will not be involved during dialogue/tender stage, they just want to deal with winner" defence for PFI contracts. Again, my experience in Spain with similar structure contracts tells me otherwise: if you define clearly the rules of the game and force that discussion during the tendering stage, all interested parties will be drawn into it, including banks if appropriate.

Leaving the door open for negotiations and discussions with the preferred bidder, particularly over money and financial commitments is foolish. By the time a preferred bidder has been chosen and financial matters start to be discussed, there is no longer any competition leverage in the hands of the contracting authority. The supplier knows it can drag the discussions out for as long as necessary to get what it wants as the reputational risks lies squarely in the contracting authority's court and particularly with the procurement officers allocated to that project. Therefore it is easy for the supplier to extract concessions at this stage, even with all the legal safeguards included in Regulation 30. After all what is the likelihood that any of this will leak and an aggrieved bidder challenging it in the courts? Especially in a jurisdiction where "commercial bid secrecy" is so important, something that does not happen in other Member States like Portugal.

The second problem with negotiations with the preferred bidder is time, or the lack of it. Without any competitive pressure these things drag for a long time. It is no surprise then that in 2010 or 2012 the target for a "good" competitive dialogue was something along 18 months. In Spain, where contracting authorities never entered into discussions with the preferred bidder, almost all were conducted in less than 12 months and most under 9 months. In my research, contracting authorities were happy with the outcomes achieved in general, although my research was conducted too early for most contracts to actually have been performed.

My bottom line is this: the race to select a preferred bidder at the expense of discussing some important matters during the dialogue stage is a false economy. It is a shame that neither the Directive nor the Regulations solved this. I am glad that the competitive procedure with negotiation does not have such failings.

* Before I am accused of having my cake and eating it (I am not a fan of Regulation 41), let me just say that is one thing having all interested parties involved in drafting technical specifications (as I propose with competitive dialogue), another that only one or a few are given the privilege.

 

Public Contracts Regulation 2015 - Regulation 18

Regulation 18  - Principles of procurement

Regulation 18 introduces Section 2 - General Rules. And there is no better way to start talking about general rules than to mention the principles applicable to public procurement. This Regulation transposes Article 18(1) of Directive 2014/24.

Strictly speaking, there is nothing earth shattering in Regulation 18. The Regulation expressly recognises that equal treatment, transparency and non-discrimination are applicable to public procurement in England, Wales and Northern Ireland, but only for contracts covered by Part 2. Albert argued in his entry that this is nothing new in the UK and that Peter Cane has held the view that those principles already applied in England, Wales and Northern Ireland. In consequence, the first paragraph of Regulation 18 does not create any new law or rules. Frankly, I do not know enough about English administrative law to say that is correct or not.

Paragraphs 2 and 3 constitutes a clear and unambiguous assumption that the principle of competition is now firmly accepted as a public procurement principle. We could deduct it from the Treaty (and the logic that EU public procurement rules exist to achieve the internal market) but now is crystal clear. I expected Albert to blow his trumpet loudly today but as he was too  humble, I will do it for him: the man as been arguing this for most of his career, so it is fitting that even here this principle has been accepted. Let's not forget that other reputed scholar(s) think otherwise (and in my view are on the losing side of the argument).

Although it can be argued as Albert did that the principles of equal treatment, non-discrimination and transparency are not new in England, Wales and Northern Ireland, I doubt the same can be said about competition. The clear indication that the principle of competition is applicable to the public sector (and in consequence, administrative law) is certainly a novelty in these shores. Or at least it should be.

What about Article 18(2)

Albert picked up yesterday on the detail that the Regulations only transposed half of Article 18, ignoring the second paragraph which imposes the obligation on Member States to ensure compliance with obligations on environmental, social and labour law created by EU law, national law or international instruments included in Annex X to the Directive. This is a prime example where a Directive establishes an obligation of outcome (compliance with certain rules) but does not prescribe the means to do so. Whereas he stated the command is not technically an obligation for contracting authorities, I take a different angle: this is a Directive provision which needs to be transposed into national law, if not here somewhere else. The (persuasive) counter-argument to my point is that this compliance obligation exists all along, this is not a new command (or enhanced compliance requirement) so there is no need to put it down in law once again. To what I would reply: sure, but then the same can be argued about the references to Article 346 of the TFEU and other similar examples. My question thus is: why the difference? Is this an honest mistake of treating differently what should be equal? Or was this a political decision?

As I argued before, a little bit more time for the transposition and this rough edge could have been ironed out.

So public procurement should be more like private procurement you say...

Then you should see this week's BBC Panorama about Tesco's procurement practices. Only available in the UK unfortunately. I was aware that supermarkets made good money from "commercial deals" (ie, flogging suppliers) but was unaware of the size of the problem. It is big.

Public procurement is probably inefficient if one looks into the how the private sector does business and the headline prices paid by the public sector, but suppliers should remember the grass on the other side is not exactly greener, especially if they are working with supermarkets.

This leads me to reversing the question from my good friend Albert Sanchez-Graells about the impact of large public buyers in the rest of the market (they can be ultra-competitive and/or have a huge impact on specific markets, forcing suppliers to raise prices elsewhere): so, can large private buyers have the same effect on suppliers working with the public sector?