Why the tender for 117 new trains in Portugal is illegal

It was announced yesterday that the Portuguese train company (CP) chose a consortium headed by Alstom as the preferred bidder for its first major train procurement contract in many decades. In total, we're talking 117 new trains at a cost close to €800M.

The procurement procedure was launched in December 2021 and  adopted a MEAT approach for the award criteria. It included a specific criterion worth 15% of the marks available for "Manufacturing/assembly bonus in Portugal using sheltered workshops." This criterion was then further refined with sub-criteria and a 0-100 scaling system.

Back in December 2021, when officially launching the procedure the then Minister responsible for the transport sector said to the media that:

"We are investing more than €800 million so we want it to have an effect in our [national] industry"

"The time when Portugal and the Portuguese were good students on this has ended" and,

"The train manufacturing industry is starting to blossom in Portugal and this tender for 117 trains is a stimulant so that Portugal can join the train manufacturers club"

In March 2023 the current Minister stated that:

"CP will improve its offering with 117 new trains, ensuring at the same time a new factory in Portugal. We can say, confidently, that in a worst case scenario we will have a train factory in Portugal. And in the best case, a better one."

For the most part the sheltered workshop claim is a red herring since the contract was not reserved as per Article 38 of Directive 2014/25/EU, nor was it a condition of performance since there were marks available to be obtained by economic operators. This was evident when looking at the sub-criteria for the criterion and the 0-100 scaling system employed.

What matters, of course, is the manufacturing or assemby in Portugal.

Both the objective and subjective vectors indicate that the sole purpose of the criterion is to steer the construction or assembly work to be done in Portugal and not elsewhere. This is, self-evidently, illegal on two main counts. First, it breaches art 34 TFEU. Second, it also breaches the general principles of non discrimination and competition as included in art 36 of Directive 2014/25/EU. I have a feeling that even by applying national law only, that is the Portuguese Public Contracts Code, the criterion is also illegal, but let's look at it from the EU law angle.

Art 34 TFEU (free movement of goods)

Art 34 TFEU establishes the general prohibition for measures having an equivalent effect to a quantitative restriction for the free movement of goods. The configuration of this obligation is well known and has been covered many times by the CJUE over the years, from Dassonville, to Keck, to Commission v Italy {Trailers} to Deutsche Parkinson Vereinigung. In short, any measure taken by a member State to have an equivalent effect on free movement of goods to a quantitative restriction is considered to be contrary to EU law and as such illegal. Moreover, the CJEU in COS.MET para 58 also concluded that even statement by public officials to the media could consist a measure having an equivalent effect.

In addition, specifically in the field of public Procurement  in Medisanus at para 68, the CJEU held as well that "[i]n the present case, clearly, the national origin requirement is inherently discriminatory. Indeed, the requirement that supplies must be obtained as a matter of priority from medicinal products derived from Slovenian plasma precludes any undertaking with medicinal products derived from plasma collected in another Member State of the European Union from tendering effectively in response to calls for tenders such as that issued by the hospital."

Looking at the both the award criterion and the statement(s) of the Minister(s) responsible for the transport sector in Portugal it is obvious the intention is to shoehorn to the train purchase the construction of a train factory in Portugal that would allow the country to develop a local train manufacturing industry. As such, it is once more evident that such criterion is thus illegal due to the deterrent effect it has on trains manufactured and assembled elsewhere in the EU or third countries party to the GPA or with which the EU has a free trade agreement covering procurement.

A potential economic operator that wanted to bid by using its manufacturing capacity based elsewhere in the EU for example could only compete in 85% of the total marks available since it would be classified as a zero on the manufacturing criterion. More so, it would still be classified with a zero even it if complied with the sheltered workshop requirement, for example, by creating apprenticeships for disadvantaged groups in such factory.

Bear in mind the test of legality is applied in general terms, irrespective of the actual economic operators who presented themselves to the tender and decided to comply with the illegal criterion. This is for two reasons. First, to protect those that could have presented themselves but did not due to the national manufacturing criterion. Second, because those which presented themselves and complied with the criterion did so while being constrained in their decision making of what industrial capacity to use.

As such, the award criterion establishing the 15% bonus for manufacturing/assembly in Portugal is illegal since its sole purpose is to ensure the economic activity associated with the contract is developed in Portugal at the expense of the other member States.

Art 36(1) of Directive 2014/25/EU

Like art 18(1) of Directive 2014/25/EU, art 36(1) of Directive 2014/25/EU establishes the general principles applicable to public procurement. Two are relevant for the case at hand.

First, the criterion breaches the principle of non-discrimination. The principle of non-discrimination establishes that individuals (that is natural and legal persons) cannot be discriminated based on their origin. Now, at face value the criterion does not discriminate between national and non-national economic operators. It just states a preference for the construction to be done in Portugal. However, the real effect is discriminatory nonetheless since an economic operator established elsewhere in the EU, GPA states or those countries with a free trade agreement with the EU covering procurement will not be able to use their installed capacity and therefore have to build it from scratch in Portugal to be competitive.

Naturally if you already have industrial connections in Portugal - after all Alstom is leading a consortium including at least one local manufacturing firm - then you are at an advantage in comparison with those who do not have such connections. If the national manufacturing criterion were to be excluded from the equation, then obviously such connections would not be advantageous as they are, ergo proving the discriminatory effect.

Second, the criterion breaches the principle of competition. Now, even if we were to conclude that competition is not a really procurement principle but simply an outcome of other principles being deployed, nonetheless it is explicitly included in art 36(1) where it is stated that: "The design of the procurement shall not be made with the intention of excluding it from the scope of this Directive or of artificially narrowing competition. Competition shall be considered to be artificially narrowed where the design of the procurement is made with the intention of unduly favouring or disadvantaging certain economic operators." (emphasis mine)

Well, the procurement procedure was designed to artificially narrow competition, that is, its intention is to make competitive only those bids including a degree of manufacturing done in Portugal. This 'bonus' is done at the expense of manufacturing done elsewhere and the economic operators which could have drawn on such capacity had the criterion not existed in the first place.

The Directive is relevant here as a source of indirect effect, that is by imposing an interpretation of national law in accordance with EU law due to the supremacy of the latter. This effectively means national review bodies or courts have to interpret national law in accordance with applicable EU law. Again, this is pretty much well settled in the jurisprudence of the CJEU.

Both principles are included in art 1-A(1) of the Portuguese Public Contracts Code, but the principle of competition has been truncated with the elaboration on what it means to artificially narrowing competition being excluded. In any event their configuration in national law is subject to how the principles are established at EU level.

In this particular case, it is once more evident that an award criterion rewarding the manufacturing of trains in Portugal is illegal.

In conclusion, even without delving into national law, just by applying EU law the procedure for the purchase of the 117 trains is illegal and as such any award decision will be illegal as well.