THE PURPOSE AND FUTURE DIRECTION OF PUBLIC PROCUREMENT REGULATION
This article looks at the purpose of public procurement legislation and considers some important trends in EU public procurement regulation that will be of importance in the Ukrainian process of further alignment with EU standards in the coming years.
Author: Steen Bruun-Nielsen, Senior Public Procurement Expert, EU Project
The purpose of public procurement rules – Best quality at lowest Price
While public procurement regulation is often mistakenly seen as motivated by anti-corruption considerations, the essential reason for public procurement regulation is to create a competitive process in public sector purchasing in order to achieve best value for tax payers money. In short, public procurement procedures are necessary because the public sector cannot always be presumed to behave as a normal customer in the market with a focus on choosing best quality at lowest price. Accordingly, the public procurement rules establish a structured competitive process to ensure best quality at the lowest price in public sector purchasing of goods, services and works.
The lack of commercial focus on the part of the public sector that a public procurement system aims to remedy may have several reasons. The public sector purchaser may out of habit favour its usual supplier even though that supplier may not be the most competitive in the market. A second tendency may be to limit the choice of suppliers to local enterprises in order to promote local employment and tax revenue. As in other cases of public sector activity, a further factor can involve the risk that decisions, including procurement decisions, are not commercially focussed because of corruption.
Corruption is merely one of several possible reasons why competition in public contracting does not happen by itself and why a structured competitive process is required. However, the public procurement rules are not specifically aimed at addressing or preventing corruption. This is an important point because exaggerated expectations would otherwise be vested in public procurement regulation as an anti-corruption tool.
It is often being said that the public procurement rules open up public sector demand to market competition. It is this aspect that was of interest from the perspective of the EU; as part of its overall purpose of promoting economic integration within Europe. The EU has, therefore, used the harmonisation of public procurement legislation as an important element in the so-called Single Market strategy from the 1980’s to date.
Historically, the obligation put public contracts to competition has been seen as one aspect of good administration in the public sector. In fact, the first public procurement legislations in Europe from the 1930’es were introduced long before the European integration process in the late 1950’es. These first public procurement laws were based on specific principles of prudent spending and good public financial management. While the EU placed the emphasis on the competitive aspects of public procurement regulation, the original basic logic remains the same: by putting public contracts to competition best value for money is ensured for the public sector.
Following the logic of the EU Directives
In Ukraine, the various stages of the development of relations with the EU since the 1990s have provided a backdrop for the legislative development of public procurement in Ukraine. The alignment of Ukrainian legislation with the EU public procurement rules has been on the agenda, to varying degrees. However, with the signing last year of the EU-Ukraine Association Agreement, there are now very specific commitments to align Ukrainian law with the key EU public procurement directives and to apply them fully. These commitments are accompanied by specific phases, timelines and targets defined for this alignment.
The new political context that allowed for the Agreement to be signed also made it possible last year to adopt amendments to the Ukrainian Law on Public Procurement (PPL) which signified further EU alignment on various important points; not least a significant reduction in the number of exemptions – thus preventing the PPL from being completely undermined.
The EU directives essentially lay down an obligation for the public sector to award larger contracts by means of competitive and transparent procedures based on objective and verifiable criteria set in advance. For this purpose, the directives include notably provisions addressing:
- publication requirements,
- various competitive procedures suitable for different types of contracts,
- requirements concerning types of criteria and specifications to be used during the public procurement process.
- Requirements for institutions and procedures to ensure that the award of contracts can be effectively reviewed (complaints review mechanism).
There are some elements that distinguish the EU procurement rules and which will be of key importance to Ukraine’s alignment with EU standards in the coming years. These constitute some fundamental lines of thinking which will need appropriate application in the Ukrainian public procurement legislation.
Specific elements of EU public procurement rules to be applied in Ukraine
First, the EU directives only apply to contracts above a certain size; mainly because it is only such contracts that are assumed to be of interest in the context of cross-border trade. It is a primary purpose of the directives to promote such cross-border trade rather than to regulate public contracting in general. However, this does not mean that the directives allow national law complete discretion below the thresholds.
The Case law of the Court of Justice of the European Union (CJEU) makes it clear that certain basic principles of EU law apply in all public contracting. Thus, for public procurement contracts below the general thresholds of the directives, there must be basic obligations to publish the intention to make procurement contract and to use objective criteria defined in advance as the basis for the award decision. However, the CJEU case law also makes it clear that there can be contracts to which EU law does not apply at all – mainly because of their modest size and the reasonable assumption that they would not be of any interest to suppliers from other EU Member States.
The judgments of the CJEU on public procurement related issues emphasise the close link between the directives and European integration. They also makes it clear that the thresholds of the directives are not to be understood as allowing complete freedom for national legislation to lay down whatever regulation it wishes for public contracting below the threshold levels. On the other hand, it is also clear that more flexible procedures may be applied to smaller contracts.
Against this background, many EU Member States have introduced procedures for smaller contracts allow for greater flexibility as regards, for example, time-limits in procedures and simplified documentation requirements.
This raises the question whether there is a lower limit below which no rules apply.
As noted above, some contracts are so small that they will never be covered by the directives or by the CJEU principles covering many contracts below the directive threshold levels. Even in such cases, however, there are requirements of good administration and public finance management in most countries that would apply and prevent the most blatant cases of favouritism and corruption and, in principle, cover even the smallest contracts.
Entities covered by the EU Directives
Another characteristic of the EU directives is their scope in terms of the procuring or contracting entities covered. Prior to the PPL changes in 2014, Ukrainian legislation essentially defined the scope of the law according to the origin of the funding of the contract. This meant, in particular, that State owned enterprises were covered by the law.
In comparison, the EU public procurement directives are only aimed at public authorities and other parts of the public sector. What matters is what the entities are doing. For that purpose, the EU directives draw a distinction between commercial activities and activities in the general public interest. The essential approach is that, if an entity is commercially oriented, the public procurement rules would not be necessary because the entity would in that case be commercially focused on purchasing on the basis of best quality at lowest price.
While this distinction can be difficult to apply in some cases, it also means that it is not crucial whether the entity is publicly funded or not. Public funding will be present in most cases but what ultimately matters is whether the entity is supervised or otherwise influenced by public sector authorities. Due to the public interest/commercial distinction no public or for that matter private enterprise is covered by the EU rules.
However, no rule is without some exceptions. There is a special situation for enterprises operating within utilities sectors, such as gas, electricity, water supply and transport. These are sectors that are organised quite differently in various countries – for example in relation to private sector involvement – but where it is clearly recognised that it is a public sector responsibility to ensure that the population is amply serviced.
In privatised environments (where for example the operation of electricity grids is outsourced to private enterprises), such enterprises are often placed in a monopoly position within a certain geographical area that takes them beyond normal competitive conditions. The outsourcing and the monopoly is typically based on a special or exclusive right granted by the relevant public authorities and this is seen as creating a special loyalty in relation to the public sector that will influence market behaviour. For these reasons public enterprises and private enterprises with special and exclusive rights are covered by the EU directives, albeit subject to more flexible rules.
The special rules on public procurement by utilities operators have required the introduction of the legal notion of special and exclusive rights. It is a concept of EU law and is, in fact, the equivalent of concessions. Such concessions were historically awarded by royal decision and at the complete discretion of the monarch. In such cases, there is clearly a privilege established for a certain enterprise which is not attainable by other enterprises. The situation is different if the concession is awarded by a competitive process open to other enterprises. The winner in these cases does not receive a special privilege in the same way and this is why the directives exempt such cases from what is considered special and exclusive rights.
The third characteristic concerns the requirements of the EU directives related to technical specifications, which are the descriptions of the minimum technical requirements of what must be delivered or supplied under an envisaged public procurement contract. The technical specification is an important element of the tender dossier that is given to the bidders and on the basis of which they develop their bids. It is a natural requirement that such specifications must be objective in the sense that they do not give advantages to any bidder and also sufficiently clear in order to ensure that they are understood in the same way by all bidders. It is only such common understanding that can lead to submission of bids that are comparable and where the competition will, as a result, be meaningful.
The EU directives go further by requiring that procuring entities, as a matter of priority, must use European or international standards in the specifications. The aim here is to ensure the highest degree of market interest, including cross-border interest, in the bid. For the convenience of bidders and to encourage their participation, they are also allowed to use alternative standards in their bids provided that their equivalence with the European/international standard can be documented.
There are other situations where, instead of specifying carefully a particular technical solution, a procuring entity may find it desirable or necessary to simply describe the problem that needs to be solved and desired results via the procurement contract. In these instances, the bidders can be given the possibility of using their technical know-how and innovative capacities to design the optimal technical approach.
For these reasons, the use of functional and performance requirements is allowed as an alternative to technical specifications in the traditional sense. In such cases, the tender evaluation may involve bids with different technical approaches which are only comparable in terms of what they produce. The design of award criteria must, of course, take account of this in the sense that such criteria should not presume a specific technical solution.
A fourth important characteristic relates to the criteria for selection of the best bid. The Ukrainian legislation requires the extensive use of price as the fundamental award criterion and, in an environment of uncertainty coupled with the risk of administrative fines, price is often being used as the sole criterion because of its relative objectivity and simplicity.
An entirely different trend is to be found in the EU directives. The directives take the approach that, for competition to be effective and attractive to the market, it will be important in the case of many contracts to ensure competition not just on price but also on functionality, cost-effectiveness, after-sales services and other qualitative aspects. This again requires that procuring entities are able to define and use award criteria concerning qualitative aspects.
On this issue, there is a degree of belief among some in Ukraine that the use of qualitative criteria automatically leads to abuse. There is indeed a risk of abuse if quality criteria are formulated in too general a manner (the extremes being the use of terms such as “quality”, “functionality” etc.). In such cases, the procuring entity leaves too much room for its own eventual discretion in making the final award. More importantly, there is no guidance for the bidders and the result of the competition may very well be bids that are not really comparable because, for example, bidders have understood terms such as “functionality” quite differently. This can be seen in the EU case law which is full of examples of Member State’s tenders being challenged (and often annulled) due to the use of criteria that are too vague.
This explains why more specific criteria must be used in setting out qualitative considerations and this does not necessarily require great technical knowledge. For example, in the case of the purchase of printers, it is clearly sensible to allow competition on criteria other than price. One reason is that the cheapest printer may very well be the most expensive solution in the long run due to higher prices of cartridges. In this case, a relevant quality criterion, in addition to the price of the printer, could be the amount of pages per cartridge and the price of cartridges. The winning bid would then be the one with the best relation between price and quality; in other words the best value for money.
In this respect, there are particular challenges in cases where environmental sustainability is included as a parameter of competition and where it is required to identify the bid that is less costly in environmental impact terms. In the example of purchasing printers, such criteria can be about energy consumption and recyclability and specific requirements as regards the composition of toners (e.g. that they should not contain toxic metals such as mercury, cadmium, lead or nickel). Related to this, the EU has done considerable work in recent years to define so called “green procurement criteria” and performance requirements for the use of procuring entities that wish to pursue environmental goals in their procurement policy.
Environmental protection and other policies
Another characteristic of EU procurement worth highlighting here is the emphasis on public procurement as an instrument for the pursuit of environmental and other policies, such as labour protection.
As the fundamental purpose of public procurement regulation is to oblige the public sector to behave commercially, the question can be raised whether the inclusion of a focus on these additional policies does not distort the purpose of regulation and the focus on price and quality. In certain respects it can be argued that green procurement is in fact of key relevance to the core purpose of regulation. The CJEU case-law includes many examples of environmental requirements (e.g. on emissions, energy saving and recyclability) that have been recognised as being relevant as requirements in the public procurement process.
The most recent reform of the directives in 2014 places a distinct emphasis on these additional purposes by clarifying how environmental requirements can be included; not only in the award phase but also in other stages of the procurement process (including pre-qualification, technical specifications and contractual performance requirements). However, the purpose is not to prescribe the use of such criteria, which is largely dependent on the political strategies of countries and regions within Europe. Rather, the purpose is to regulate how such policies like green procurement can be promoted as part of public procurement activity without creating the barriers to trade which the directives essentially seek to prevent.
The incorporation of environmental objectives in the public procurement process is at various stages of development in Europe. In addition, several initiatives have been taken globally, at EU level and by individual EU Member States to assist procuring entities with the development of suitable tender conditions and approaches.
Especially as a result of the latest reform last year, the EU public procurement directives include more regulation of electronic procurement – or “e-procurement”. This deserves some attention because, in Ukraine, there has been a tendency in recent years to see e-procurement as an entirely different procurement procedure that should be subject to special rules and focussed on the use of reverse e-auctions with the lowest price as the sole award criterion.
The directives take a broader approach to the general application of electronic communications; involving the use of electronic means and devices in the public procurement system as a whole. The idea is to arrive at a substitution of traditional paper based processes by the processing of standard electronic documents, the exchange of electronic messages and the support of automated document processing at every stage of the public procurement process.
This requires that there are electronic equivalents to, for example, signed bids, sealed envelopes and the safe storage of such sealed envelopes until the opening of bids. Furthermore, the advantages of e-procurement can only be fully realised if the system is based on generally used software solutions that allow easy access for all interested bidders. These aspects are therefore given priority in the EU directives.
The general use of e-procurement has many advantages in terms of saving both time and costs and facilitating business access, provided of course that the system is sufficiently open. In addition, the use of e-procurement can help control the effective application of the legislative requirements; thereby improving transparency and contributing to reducing corruption. Thus, electronic bid submission can eliminate all questions as to whether bids have been submitted on time and electronic communication procedures can ensure that dialogue between procuring entities and bidders is traceable for the purpose of preventing abuse. The use of electronic templates can also ensure that all necessary information is included in bids and prevent undue changes in such bids.
The introduction of e-procurement allows the opportunity for establishing interfaces with public financial management in general, in order to coordinate the public procurement activities with the budgetary system. For example, this can lead to automated systems for preventing situations where procurements are planned and commenced without any basis in appropriate budget allocations.
Beyond financial management, the e-procurement system can also be linked up to public registers for the purpose of allowing the e-procurement system to identify and provide the various standard documentation concerning the bidder and in this way relieve the bidder of the task of collecting such documentation in connection with each tender.
The EU Member States are at different stages in the development of e-procurement. This development and the lessons learned will increase especially over the coming years because the new directives now make e-procurement mandatory from 2018.
This article has addressed the purpose and future direction of public procurement regulation with a focus on some misconceptions as to what a public procurement system aims to achieve and on certain important topics and problematic areas (e.g. the design of award criteria and the choice of approach as regards technical specifications). In overall terms, there are no easy answers in the complex areas of public procurement and no country can be said to have developed perfect overall solutions that can be readily adopted by other countries. However, as Ukraine continues to develop its public procurement system in the coming years, with a view to ensuring best value for tax-payers’ money and alignment with EU standards, it can benefit from a continuous consideration and analysis of experiences from different parts of the EU as to how to deal with individual aspects, and especially examples addressing the more complex dimensions of public procurement.
In this way, the further modernisation of the Ukrainian Public Procurement System will remain on track to:
- improve conditions for competition in the significant market for public contracts by increasing the fairness of the process of awarding public procurement contracts;
- help to ensure better value for money in the public contracts awarded;
- reduce the potential for corruption in public contracting by increasing integrity and accountability on the part of Ukrainian public authorities;
- contribute to improved public finance management, including the avoidance of excessive spending;
- improve the ability of Ukraine to take on and comply with international obligations (esp. with international trading partners, donors and lenders), thereby reinforcing the position of Ukraine internationally.
- improve the competitiveness and export capacity of Ukrainian businesses in international markets, resulting from their capability to work with modern public contracting requirements.
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