Simplification for whom?

One of the topics for discussion in last week's Procurement Week was simplification of public procurement and how Brexit could finally enable the simplification of the legal framework in the UK. Simplification, like flexibility, is on the eye of the beholder.

The problem with simplification is that it has different meanings for the various public procurement stakeholders. Simplification for the public sector means fewer constraints when awarding a contract, and in that sense is closer to flexibility than really simplification. As for the private sector, simplification means lower transaction costs and standardisation, ie the certainty the procedure will be identical (or very similar) irrespective of the contracting authority managing it. It is fundamentally at odds with the public sector view of simplification. Although both sides want simplification, what is meant by it is very different.

The simplification oxymoron

There's an intrinsic contradiction between simplification and flexibility when it comes down to the regulation of public procurement. The system can be optimised either for one or the other, but not both at the same time. Let's look at the current Public Contracts Regulations 2015 for example.

The introduction of the ESPD and associated rules on information retrieval about economic operators simplified their life and reduced their transaction costs. They no longer have to provide all the documentary evidence about their capacity or technical capability at the beginning, only later in the procedure. But this does only constitutes a partial simplification: the workload associated was shifted to the contracting authority which is now under the obligation of fishing for this information in national and foreign databases (in first instance). In a sense, this is only right since contracting authorities have long indulged in asking for significant amounts of qualifying information "just in case" without considering the implications of such requirement. Nonetheless, the simplification achieved for one side implied an increase in complication for the other.

As for flexibility, the profusion of different procedures in the last 13 years - particularly those with negotiation involved - provides contracting authorities with ever more specific "tools" to do its job. First, came competitive dialogue. But that was not flexible enough (that is, it did not include the magic n-word), so we can now find on Directive 2014/24/EU competitive procedure with negotiation, innovation partnership and competitive dialogue - all three overlapping like a nice Venn diagram.

No surprise then that we can now find contracting authorities using the competitive procedure with negotiation to award innovation partnerships (here and here) when the latter is supposed to be used by itself. But at least we got flexibility, meaning it is up for the economic operators to adapt and get used to multiple different ways to do the same thing. Guess who will support the cost of all that flexibility?

It is ironic as well that at least in the practice with innovation partnerships contracting authorities are basing themselves on a procedure with more prescriptive rules (the competitive procedure with negotiation) instead of embracing the full flexibility offered by the innovation partnership rules.

One final word about introducing more flexibility in procurement regulation in the UK. The Directives provide ample of space for additional national rules - or national solutions for issues not solved by the Directives themselves. Case in point, how to run the innovation partnership. However, the UK has always preferred the copy paste (sorry, copy out) approach to transposition of EU Directives and refusing to introduce further rules. No surprise then that even the regulation of contracts below EU thresholds is so sparse and restrained. Why would it change with Brexit? Other than the EU Directives no longer being a scapegoat for "we cannot do that" or bad practice, that is.

 

PS: This is not to say simplification for both sides cannot happen - it can - but is very hard to achieve in practice. When done well, electronic procurement might be an example. When done well.

Links I Liked [Public Procurement]

1.  Government of Western Australia shows Minimum Viable Product version of its new online procurement portal. Great to see a Government taking up on cheaper, more agile ways of developing services instead of building the whole widget without external feedback. Well done.

2. Is raising the micro-purchase threshold from $3,500 to $10,000 in the USA a good idea? In general, I am against raising thresholds for the reasons highlighted in the article, but allowing 18F to expand its micro-transaction platform would not be a bad outcome.

3.  Albert publishes an article about blacklisting.

4. Chicago has an hands on approach to innovation accelerators. Now, if only anyone in Europe would use the innovation partnership for the same purpose... 

5. Speaking of innovation accelerators, the Omidyar Network invested in CityMart. 

Denmark is first out of the gates with a Innovation Partnership

The innovation partnership is finally getting some use. The first tender (call?) was published only a couple of days ago on the Tenders Electronic Daily. The project is for a partnership looking to develop innovative means for overcoming elderly dehydration. The tender is being launched by the Market Development Fund in conjunction with a number of different Danish local authorities.

I look forward to see the developments on this project. It is interesting that although the Innovation Partnership was transposed into England, Wales and Northern Ireland almost 18 months ago it is yet to be used here. So much for the UK Government mantra of "making sure contracting authorities can use the novelties straight away."

As I said many times before, this procedure (as the competitive procedure with negotiation) is going to be used sparingly and in reality most of its use cases would fit on a generous interpretation of competitive dialogue.

Hat tip to Willem for mentioning the launch on Twitter.

 

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!

Preliminary thoughts on a very detailed implementation of the innovation partnership

Although Portugal is yet to transpose Directive 2014/24/EU into national law, the Azores, one of its autonomous regions decided to go ahead and transpose it nonetheless into regional law via the Regional Decree 27/2015/A from December 31st.

Its structure is very different from that of the Directive, something that can be explained by the cross-referencing it does to the Portuguese Public Contracts Code 2008 (Portuguese only) in itself very different as well from both Directives 2004/18/EC and 2014/24/EU/. There is much to say (and critique) about the new Regional Decree, but I am focusing this post on the detailed structure adopted for the innovation partnership. And by detailed, I mean really detailed - the whole innovation partnership legal framework spans 25 articles out of a total of 104. As for the drafting, it is uninspiring and at stages confusing as epigraphs do not match content and the same epigraph ("Serving the conclusion of the partnership") appears in two different articles meaning completely different things. As another example, Article 47(2) bans negotiations in the innovation partnership procedure, but Article 70 establishes a stage for tenders to be negotiated.

As an introductory point this approach reminds me of what happened with competitive dialogue in the Public Contracts Code 2008. Whereas the Directive left gaps in the regulation of competitive dialogue, the national legislator decided to try and plug them. The end result was that the procedure was barely used in the country.

As for the innovation partnership, the regulation is to be found in two sections of the Regional Decree: Article 22 (choice of procedure) and Articles 47 - 71. As for Article 22, the epigraph is misleading as there is more in such Article than simply the choice of procedure. For example, the purpose of the procedure and tender documents contents are all described there. The meat of the substance, however, is on Articles 47-71. These articles are divided into various subsections which I will be following for readability purposes:

General clauses (Arts 47-51)

Article 47 establishes that the subsidiary rules applicable to the innovation partnership are the those contained in the Public Contracts Code 2008 for the restricted procedure, subject to the specific rules contained in the Regional Decree. For an idea of the characteristics in terms ofselection and qualification of candidates in Portugal, feel free to check this paper.

Articles 48 and 49 define a structure for the innovation partnership which is both similar to that of Article 31 of Directive 2014/24/EU (successive stages, preliminary objectives etc) and different. As for the differences, Article 49 sets three distinct phases for the procedure: (1) selection/qualification; (2) partnership(s); (3) final tenders and award. Looking in detail into the actual subsequent articles it is easy to understand that in reality there are four different phases as the partnership is divided into "establishing the partnership" (Subsection III - Articles 54-59) and "presenting solutions" (Subsection IV - Arts 60-65).

Articles 50 and 51 on tender documents follow a similar approach to that of the Public Contracts Code 2008 for the restricted procedure and impose a duty to provide significant detail to potential participants right at the start of the procedure. Some of those requirements are quite reasonable. For example, the value of the payments needs to be set in advance and this is something I tend to agree with as it can be necessary for a go/no go decision by economic operators. However, others such as the objectives to be achieved on each successive stage are frankly too much detail to require at the start of a procedure where the end product is unknown. This is probably a good example of the law maker(s) not knowing what the innovation partnership will be used for and establishing rules based on traditional mental models ("this is how we've done procurement before, so all procedures need to look like this") and perhaps a consequence of using the restricted procedure as subsidiary rules.

This is a marked difference from the Directive but one that can be explained by cultural factors. In a country where procurement equates to "painting by numbers", following religiously what the law says and steering away from areas that are not regulated in detail, it is expectable law makers would provide as much detail as possible via legal regulation. If that is conducive to lead to a good procurement procedure where flexibility is needed, that's a different story.

Selection and Qualification (Arts 52-53)

Nothing really relevant in here other than the procedure needs to be announced on the Regional Government Official Journal and certainly on the OJEU/National Journals if the partnership's value is above the EU thresholds. Article 53 establishes a minimum timelimit of 30 days for receiving requests for participation.

Partnership stage(s) (Arts 54-59)

This is where things start to get really interesting. According to Article 54 and 55, the candidates invited to the following stage are effectively being invited to sign a partnership contract with the clauses established by Article 51 (the ones which were included in the original tender documents). The partnership stages will be monitored by the procedure's jury (Article 56, another Portuguese staple) which has the power to mandate the partner to produce the innovation it is suppose to. Reading this, frankly, I have the impression that the legislators do not really understand how innovation works and as we are effectively talking about a contract here we might as well just leave its performance to contract law.

The logical conclusion of the antagonistic approach taken in Article 56 is to be found in Article 59, whereby the innovation partnership may be "terminated". Whomever drafted Article 59 did not mince his/her words: a serious and consistent (repeated?) breach of the obligations to develop the innovative product or service will lead to the termination of the partnership. Article 59 provides two extra grounds for termination, in case the objectives have not been achieved or deadlines have not been met. As above, I think we would be better off if only regular contract law applied here. Article 59 is drafted in a way where apparently only the grounds mentioned can be used to terminate the partnership.

As for the technical solutions that are supposed to be developed, well, those just come into play in the following sub-section.

Solution stage(s) (Arts 60-65)

This stage starts and ends with two articles including the "Serving the conclusion of the partnership" epigraph. I am very puzzled by why the same words would be used to mean different things. The first means the partnership is established and second that it ended.

Furthermore, one would have expected that the quality of the solutions would be relevant for the termination mentioned above. But as we are talking about different subsections it appears not.

As for the rest, each candidate can only work on a single solution (Art 61), yet another limitation imposed by the law maker which was unnecessary and could be left for the contracting authority to decide at the start of the procedure. All documents pertaining to the solutions need to be presented in Portuguese (Art 62, with some exceptions).

Art 63 is focused on the successive stages but does so on very unclear terms. This is an area where the drafting could be much improved and I certainly hope the national law heeds a different direction. Paragraph 63(1) states that the procedure is automatically concluded if there are no participants in a subsequent stage. Not only that is obvious, but starting the Article with that specific paragraph referring to the conclusion is not really logical. Paragraph 2 is not entirely clear either. It appears that once the procedure is down to a single economic operator his solution will constitute the technical specifications for the award stage. In other words, it appears that the development is to stop when there is only one economic operator standing. I am not sure that this was the intention...

Paragraph 3 foresees that multiple technical solutions may be presented (obviously, by multiple partners due to the one solution per partner mentioned earlier) and if that is the case, there will be no technical specifications for the award stage but only the minimum requirements and elements not subject to competition are to be set.

Articles 64 and 65 deal with the conclusion of the partnership (well, the conclusion of the this stage). Articles 57 and 59 are to be applied here as well, thus once more apparently only the reasons set forth in Article 59 are to be used to conclude the solution stage.

Tender and award stage (Arts 66-71)

The final stage of the procedure is focused with awarding the contract. I say contract and not contracts as the whole procedure (including this stage) appear to be designed with the aim of ending with a single contract at the end. This is consistent with the restrictive approaches taken earlier for example when restricting partners to a single solution. It is not consistent, however, with the overall objective of the innovation partnership as it is contained in Article 31 of Directive 2014/24/EU. It may well be that in specific circumstances the contracting authority may start an innovation partnership assuming there will be only one solution for its needs and reach the end wanting to deploy two different solutions (perhaps because the requirements could be split during the successive stages) by awarding two contracts. Again, I find this approach overly restrictive.

As for this final stage, there are two points worth mentioning. First, 40 days is the time limit for final tenders to be submitted. I think this is overly long as a good development cycle should have flushed out all the issues and the final tender should be easy to assemble.

Second, although Article 47 prohibits a negotiation stage in the innovation partnership procedure, Article 70 mandates one. This contradiction was completely avoidable and should have been avoided by the legislator. It can, however, be set aside if we read Article 47 as a general rule (prohibition) and Article 70 as a specific one (authorisation in specific cases). As for the purposes of having a negotiation stage so late in the procedure, it may make sense if there are multiple economic operators in play. However, in the situations where there is only one, I will make the same comments I have been doing for the last 6 years regarding the competitive dialogue: it's a very bad idea. It leads to longer procedures, to the previous stages not be taken seriously enough (less of a problem in this case) and more importantly to a complete change on the power relationships between the economic operator and the contracting authority.

What was left out (intellectual property)

The legislator was very proactive when it came down to imposing rigid administrative processes of what needs to be done. One would have expected a similar level of attention to intellectual property, for me the critical issue with the innovation partnership. Not so. Intellectual property demands care and attention and it got none from the legislator, absent in this instance. The only mention of intellectual property comes in Article 49(5) where it is said that said rights need to be dealt with "in accordance with applicable law."

In other areas of the law, the legislator had no problem in identifying the applicable law. In fact, there are plenty of cross-references to the Public Contracts Code for example. So why not pointing out what is the "applicable law" relevant to deal with intellectual property? A cop out if there ever was one.

General comment

In "traditional" Portuguese style, the way the innovation partnership was transposed into this regional law is too prescriptive, based on pre-conceptions of what procurement should be and look like (running on rails and with limited flexibility) and making assumptions of what the usage should look like.

The national Government is yet to transpose Directive 2014/24/EU. I have the bad feeling that this regional law is probably based on the working drafts of the transposition which already exist (but are not public and I have not seen them). I sincerely hope to be wrong and that the national law follows a less prescriptive and detailed blueprint.

 

 

 

 

 

How many candidates must a innovation partnership have?

One of my former student's from Bangor pinged me on Facebook yesterday, inquiring how many candidates were needed for a innovation partnership. He pointed out that in my commentary to Regulation 31 I argued that only a single supplier is needed for the procedure to run from start to finish, but Regulation 65 on the other hand mandates that the minimum number of candidates on an innovation partnership is at least 3. Roman, you have a point...

My original argument was based on paragraph 4 of Regulation 31 and paragraph 1 of Article 31 of Directive 2014/24/EU. Both read as follows:

"The contracting authority may decide to set up the innovation partnership with one partner or with several partners conducting separate research and development activities."

The way I interpreted this paragraph was that "to set up the innovation partnership" meant "setting up the innovation partnership procedure" although this last word is not present there. My reasoning was compounded by last bit of the paragraph "conducting [...] research and development activities" which I interpreted (and still do) as referring to the procedure and not the outcome. The outcome of the innovation partnership is the procurement of the goods/services developed during the innovation partnership procedure.

Furthering my conviction that the innovation partnership procedure could be done with a single provider from the start, on Directive 2014/24/EU the sentence cited above is part of paragraph 1. In addition to that bit, paragraph 1 covers a number of different elements relevant at the start of the innovation partnership procedure:

- How economic operators can take part in the procedure;

- Information  that needs to go into the procurement documents;

- Minimum time limits for request to participate;

None of these is relevant for the outcome of the procedure. It is true however, that the final sub-paragraph of paragraph 1 states that "Contracting authorities may limit the number of suitable candidates to be invited to participate in the procedure in accordance with Article 65"

Regulation 65 (and Article 65, albeit with a slightly different drafting) establishes:

(1) In [...] innovation partnerships, contracting authorities may limit the number of candidates meeting the selection criteria that they will invite to tender or to conduct a dialogue [...].

(4) In the [...] innovation partnership procedure, the minimum number of candidates shall be 3.

Regulation/Article 65 is clear about the need to have at least 3 candidates in innovation partnerships.

How can we render compatible both provisions then? From the top of my head the only solution coming to mind is to consider that Regulation/Article 31 does not refer to the innovation partnership procedure but only to its outcome. But if that is the case, the drafting is slightly odd and looking into the French version did not leave me any more convinced. Furthermore, if the purpose of that sentence was to refer to the innovation partnership outcome, why on earth would it come in the middle of various other sentences all of them referring to the start of the innovation partnership procedure?

Neither my original solution or this proposal feel right to me. Any thoughts?

 

Links I Liked [Public Procurement]

1. Nice podcast about public procurement, from 2014. And no, it's not mine. Speaking of which, episode #3 with Frank Brunetta (Canadian Procurement Ombudsman) is now up.

2. The weird and wonderful world of local authority procurement. My Society looks like a very interesting project.

3. New Mistery Shopper results. And more importantly, apparently compliance is now mandatory for some (all?) contracting authorities in England and Wales since the Small Business Enterprise and Employment act came into force (Regulation 41). Also known as "assisting investigations." Oh, the euphemisms...

4. The World Bank is finally disclosing the identity of procurement contract winners. Say what you may about disclosing too much information after a tendering procedure, but not even disclosing the identity of the winning bidder smells beyond fishy. More about public contracts awardees information here (speculative).

5. Porto jumped into the bandwagon of "procurement infused" design contests. I am a sucker for innovation initiatives like this, but my usual concerns remain: i) intellectual property; ii) lock in; iii) design contests are not the right approach as they split R&D from procurement. Website for project here (Portuguese only).

Public Contracts Regulations 2015 - Regulation 31

Regulation 31 - Innovation Partnership

In Regulation 31 we can find the new innovation partnership "procedure" introduced in Article 31 of Directive 2014/24/EU. The purpose of this new "procedure" is to allow for the public and private sector to establish partnerships with the aim of developing an innovative solution. The contracting authority sets what it wants to solve and then works with partners to develop the innovative solution(s).

The innovation partnership raises a number of issues (grounds, structure, intellectual property, confidentiality and state aid) that need to be addressed, but these are too far and too many to touch here today. For a detailed overview of the procedure, please see the chapter myself and Luke Butler wrote about the public procurement procedures under the Directive 2014/24/EU. You should also check two articles published by Marta Andrecka and Pedro Cerqueira Gomes, both in the Public Procurement Law Review over the last few months. Albert's entry for today is also full of valuable insight, so if you are interested to know more about the intricacies of the innovation partnership, start here. My commentary today will focus instead on the rationale behind why the procedure exists and why I view this procedure as a Trojan horse.

The unknown unknowns of the innovation partnership

I have to confess that I was very puzzled when I saw the procedure for the first time and honestly could not see a way for it to be used in practice, but I can say I was (naively) wrong. As Donald Rumsfeld would have said, I fell into a "unknown unknown" trap.

With the information I had then available, the procedure made no sense. Probably all you can do with it related to innovation, can be done with competitive dialogue or the competitive procedure with negotiation. Why creating a third procedure for this then? It does not seem to add much value in comparison with the other tools on the toolkit. When I see a legal rule out of the ordinary (such as the confidentiality I mentioned yesterday) I try to identify who had an interest in getting such rule into the law. With the innovation partnership I simply could not find a logical reason for a constituency to push hard for this to be included. Who could have spent political capital and/or lobbying money to get the innovation partnership in?

This was my view about the procedure until a couple of months ago when someone much smarter than me showed me the obvious answer: this procedure is tailored for the private sector. It is the private sector who tends to benefit the most from this procedure. How may you ask?

#1 - It can run with a single supplier

The first piece of the Trojan horse puzzle is that the innovation partnership is the only procedure where it is stated from the start that it can be run from start to finish with a single supplier. Yes, technically you can run a competitive dialogue or a restricted procedure with less than 3 or 5 suppliers, but you need to set out from the start with at least those numbers are a ballpark figure. And if 3 or 5 good enough suppliers turn up, they are entitled to participate.

Not so with the innovation partnership as Regulation 31(4) clearly states that the innovation partnership may be set up with one or more participants. Although para. 7 refers to the rules of Regulation 65 in terms of limiting candidates, the damage is already done: Regulation 31(4) is a special rule whereas Regulation 65 is a general one. It is probably no coincidence either that Regulation 65 addresses specifically the cases of restricted procedure, competitive dialogue and competitive procedure with negotiation but not the innovation partnership. Why?

Picture this: a supplier with access to a contracting authority offers an innovative solution for a problem and hey the contracting authority does not even have to waste money doing a competitive dialogue or a restricted procedure. They can use this cool new thing call innovation partnership legally from the start with a single supplier. It is even transparent as a call is made, it is not as seedy as the negotiated procedure, oh no. (Remember that this procedure can be used for anything falling under the definition of innovation under Regulation 1 and that is, in my view, a very low threshold.)

Never underestimate the market's ability, interest or incentive in restricting competition.

#2 - It can last for years

The second Trojan horse leg is what the Regulation 31 says about the duration of the partnership. Well, it does not say anything about the duration. In other words, a resulting partnership can last for a long time before anyone can start asking question. Although effectively only framework agreements are technically limited in time to four years, even in that case whatever the procedure used to create the framework implies the possibility of more than one supplier being qualified at the selection stage.

Truth be told, Regulation 31(26) includes a limitation on value (already prevalent in the Directive): the value of the contract cannot be disproportionate to the investment required for its development. Whomever wrote this either understands nothing of R&D costs or, conversely, knows a lot about it.

At face value, this looks like a reasonable limitation imposed by the Directive. However, the language is vague enough so that a lot of costs can be attributed to the "investment required for its development". Case in point: adapting the tooling of a factory for a slightly modified product to be produced for a client implies that the "investment cost" will include not only the adaptation but also the original tooling and eventually the capital costs for the factory. No original tool, no adaptation. No factory, no product.

Another potential exploit of the "investment required for its development" is intellectual property. It is no secret that many companies are internally organised so that their intellectual property sits on a low-tax jurisdiction and is licensed to subsidiaries elsewhere. Let's look at software for example: a multinational company takes part in a software development innovation partnership, with the contracting authority agreeing to pay £1M/year for the innovative solution. By coincidence the underlying IP is owned by a subsidiary based in Ireland which licenses it to the English subsidiary for the purposes of this contract for £5M. Presto, we have just easily justified 6-8 years of a contract to cover for the "investment cost".

Even a tighter definition of R&D costs would not provide full respite, although it would certainly make the financial shenanigans more difficult to pull of. The reason for my scepticism is that the fair development costs   can be multiple times bigger than the price a single client will be paying for a product. Do you think Microsoft charges the full Windows development cost to a single customer? Of course it does not.

Innovation Partnership's redeeming quality: flexibility

After all the negativity and concerns about how the procedure can be used, I want to finish on a higher note. The innovation partnership has a redeeming quality and it is its flexibility. The kernel of enabling potential change in a few procurement processes is actually there, and as with the competitive dialogue 10 years ago, the innovation partnership will be what the leading contracting authorities make of it.

I have long argued that whatever you can do with the innovation partnership, you can do with competitive dialogue or even the competitive procedure with negotiation. I am not yet ready to change the spots on this particular leopard, but have been able to reconsider at least a scenario where the innovation partnership actually can lead to something completely new.

My idea (hopefully the basis for a research project or something more sustainable, hint hint) is that it can solve a particular problem tech based startups have in public procurement: access to public contracts and also the ability to develop their products hand in hand with what the customer wants.

My road to Damascus moment was looking into the work being done in Philadelphia to develop a local startup ecosystem AND connect it to the needs the city have as a client with the Fast FWD project. Something that matches an acceleration programme for startups with a procurement process was not possible under the old rules, but in my view it is entirely possible with the innovation partnership. I am not sure larger companies would like it, but that is a different story. Anyone interested in doing this in Europe?