Algorithmic pricing raises concerns for EU competition law enforcement
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Out-Law Analysis | 22 Jan 2014 | 3:24 pm | 13 min. read
The changes are not as radical as those that were introduced in 2004 but they do introduce a number of welcome measures designed to cut the cost of bidding, heralded as a boon for SMEs but of benefit to all size of bidders.
The current directives covering the public sector and utilities sectors will be repealed and replaced by new directives similar in structure and style. There will be a new concessions directive to try to level the playing field for works and services concessions in the public and utilities sectors, but not water, across the EU.
The adopted directives have been published in a near final form that only requires European Council approval, which is a formality scheduled for late February. The final version of the directives will be published in the EU's Official Journal and will come into force in EU law 20 days later. Member states will then have 24 months in which to implement them into national law.
Here are the 10 most important things that anyone supplying or buying services should know about the changes.
1. Public services concessions will be regulated in same way as works
Until now public works concession contracts have been regulated by the procurement directives but services concessions in the public and utilities sectors, as well as works concessions in the utilities sector, have not. Procurement of these exempt concessions has been governed only by general EU Treaty principles such as equal treatment and transparency. That will now change.
A new concessions regime will mean that all concessions above €5,186,000, which will be the same threshold as for works contracts in the public and utilities sector, will have to be advertised in the EU's Official Journal. Purchasers will still be able to determine how their tender procedure runs, subject to certain minimum rules on mandatory/discretionary grounds for bidder exclusion, time limits for expressions of interest and tenders, and award criteria.
Until now not all concessions have been untouched by regulation. Following the 2000 Telaustria judgment, in many cases their high value has meant that they still need to be advertised and that there still needs to be a competitive tender process. But it will bring consistency to the process and depending on your perspective more rigour or regulation.
2. There is a new process to promote innovation
The reforms introduce the concept of innovation partnerships to both the public and utilities sector directives with the aim of encouraging public procurement to be used to "spur innovation".
It is not a new tender procedure but a new route to market that is based on the competitive negotiated procedure. Under it a buyer will go to the market for one or more partners to assist in the development of an innovative product or service, or even works, and the subsequent purchase of the innovative results. This will be an innovation partnership, and the 'innovative' part need not be entirely new, it can be a significantly improved product or service.
The process is very like the competitive dialogue (CD) that already exists, and there probably was not a need for a new process. A purchaser can go to the market now for a partner to undertake research and development (R&D) and deliver the resulting product. The European Commission has already established innovation partnerships (IPs) without this new directive, such as the EU IP on active and healthy ageing.
The CD continues to be available under the new public sector directive and is provided for, for the first time, in the utilities sector directive. It will be available under amended and expanded grounds, including where the services, works or products required include "innovative solutions" or the needs of the purchaser "cannot be met without adaptation of readily available solutions".
Where they differ is that under the CD solutions are developed in dialogue, whereas under the IP this development happens once a partner has been identified. The IP tender process will probably be more focused on selecting the right partner at the PQQ stage and testing ideas or project scopes at the tender stage.
What IPs do is provide a little more flexibility to award on the basis of a more ideas-based proposal than getting into the detail of what that proposal looks like. IPs may well be useful to purchasers involved in 'blue sky thinking' such as new ways of working within a business to bring together social and digital agendas. However, if a buyer's goal is adapting current services to improve service levels, the CD is likely to remain a more appropriate and efficient procedure.
3. It should prompt you to update your tender procedures manual
With the exception of the introduction of IPs, the main available tender processes in the public sector remain the same: open; restricted; competitive procedure with negotiation, the re-titled negotiated procedure with prior advertisement; competitive dialogue, and negotiated procedure without prior publication.
In the utilities sector the procedure choice remains the same: free choice to use the open, restricted or competitive negotiated procedure, with the addition of the IP and CD routes, which are also available to utilities to use without prior justification.
More substantive changes to the procedures include:
in the case of both the public and utilities sectors:
4. Use of a new MEAT formula is compulsory
Under the current public sector directive contracting authorities have a choice to award contracts on the basis of lowest price or most economically advantageous tender (MEAT). This choice has now been removed and under all three of the new directives authorities must award on the basis of MEAT.
The European Commission has been at pains to stress that this is not MEAT as we knew it, but a new form of MEAT that encourages evaluation of the bids offering the best price-quality ratio.
In practice the change appears to be more one of emphasis than a complete removal of the ability to award on the basis of price or cost alone. While member states have a choice to restrict the ability of authorities to award on this basis alone, the UK Cabinet Office's discussion paper on award criteria recognises that making this choice could tie the hands of public purchasers unnecessarily.
The new MEAT still provides scope for price and cost to be considered, alongside other qualitative criteria. 'Best price-quality ratio' would also allow an authority to award to the bidder submitting the lowest priced bid provided that that bidder meets minimum quality standards established by the authority. Perhaps, though, it points to a greater interrogation by authorities of the real price of bids being offered.
The new directives make other changes to award criteria:
5. A new 'light touch' regime will take over from Part B services
The Part A/Part B services distinction has been removed in the new public and utilities procurement directives. Instead there is a more limited carve out for certain services that will be subject to the new 'light touch' regime.
This development is especially relevant to the health sector and providers of other social services, or services to the person, such as prison services.
The main differences between this new regime and the Part B one are:
In large part, however, the detail of this new regime has yet to be determined as the EU has left that up to member states which must put in place national rules for the award of these contracts to ensure compliance with obligations of equal treatment and transparency.
Some issues will need to be clarified by the UK Government. There is a special procurement regime already applicable to clinical services - the NHS (Procurement, Patient Choice and Competition) Regulations 2013 - but what about other health services, and the other services subject to this 'light touch' regime? Will there be a series of new, service specific regulations?
A more flexible, one size fits all approach would seem more likely, particularly if the Cabinet Office is targeting UK implementation in autumn this year. More specific regulations could be developed in future as and when a need is identified.
6. The system is designed to encourage more SME participation
Cutting red tape to facilitate SME participation is one of the aims of these reforms. The changes include the shortening of timeframes to cut procurement costs and introduce less onerous PQQ requirements.
As a general rule authorities must not require organisations to have a minimum annual turnover of more than two times the estimated contract value. Organisations must also be allowed to rely on self-declarations to demonstrate they prequalify, for example that they do not satisfy any of the grounds for mandatory/discretionary exclusion, that they fulfil economic or technical selection criteria. The European Commission will now develop a standard form self-declaration for this purpose, called the European Single Procurement Document. Where information can be verified through accessing national databases, authorities are compelled to conduct follow up investigations themselves, thus reducing, at least initially, the burden on organisations.
Authorities are being encouraged to think about SMEs from the outset in their tender processes and to consider whether contracts can be divided into lots and explain why they do not subdivide contracts on a case by case basis.
Member states may make award by lots mandatory, but the UK would be placing new, unnecessary risks on buyers were it to do so. Buyers forced down the lots route may face increased technical issues if exceptions are not carefully defined to allow buyers a way out in all the right cases. Alternatively, it is not inconceivable that buyers may be forced to construct arguments to rely on exceptions from the need to use lots which could expose them to the risk of a procurement challenge. Lots are already being successfully promoted through Government policy initiatives, such as the move to several towers in the context of IT projects away from a single large supplier. It has also been happening for some time in other areas, such as the Highways Agency regional lots approach for its managing agent contracts, to reduce over-reliance on one or a small number of suppliers.
7. The changes will encourage public to public cooperation
The shared services agenda is promoted in the new package of reforms by explicit recognition of the rules on public to public cooperation. This was considered necessary by the EU as this is an area that has been guided by case law only since the 1999 EU Teckal case and therefore has been subject to varying interpretations.
That may continue to be the case, but the new directives at least confirm that an authority may contract with another public body, quasi-public body or other supplier, such as a shared services company if:
Interestingly, the directives go further than case law in allowing the other body the ability to derive up to 20% of its turnover from activities with entities other than the controlling authority. Previously this had been understood to be limited to 10%.
This exception does not extend to the direct award of contracts to employee-owned mutuals as the employees, not the awarding authority, will have the control of their spin-out organisation. The UK was unable to obtain this concession to support its mutuals agenda, however, competitions for certain cultural, health and social services may be limited to mutuals and social enterprises as defined in the directives.
8. Bidders can be excluded for past poor performance
One of the more talked about developments in the latest EU reforms is the ability for a purchaser to exclude a bidder that has performed poorly on a previous public contract where that contract has been subject to early termination or the bidder has had to pay compensation or comply with similar sanctions. This is only permitted in the case of significant or persistent deficiencies in performance of a substantive requirement.
This would appear to tie in neatly with UK policy on the treatment of organisations that have let down purchasers in their performance of important contracts. How it is applied in practice will depend on the UK's implementation of the directives and associated guidance. For example, will there be a central register of organisations falling within this ground, will the UK make this a mandatory ground for bidder exclusion or leave it up to individual authorities to decide based on the relevance of that failure to the contract in question?
Additional grounds for bidder exclusion will include:
Bidders will be able to take steps to 'self-cleanse' to avoid exclusion from public tenders, provided their exclusion does not stem from a final judicial or administrative decision. This will provide extra impetus for firms to stay on top of their compliance with these grounds in order to be able to take steps in advance of tender processes to ensure continued inclusion. Steps could include payment of compensation to harmed parties, organisational changes and implementation of new control systems.
9. The new rules clear up past confusion
The new public and utilities directives are helpful in that they collate together a number of procedural clarifications. While a number of these were already known to us, whether by virtue of case law or accepted practice, it's nevertheless helpful to have the directives develop in this practical direction. Points of note include:
10. Changes to framework agreements are minor
Public authorities are frequently concerned about changes to rules on framework agreements. The good news is that this time around the changes in this area are relatively minor. The maximum duration is still four years. There are some helpful clarifications which assist in aligning the directive to current practice.
In the case of multi-supplier framework agreements there is clarification that the two present methods for the award of call-off contracts are not mutually exclusive. Snuck away in the recitals is also confirmation that the duration of call-off contracts is not limited to the same four year duration as frameworks themselves. Less helpfully, the new utilities directive now imposes an eight year maximum on framework agreements.
What happens next in the UK?
We can expect to see some further UK consultation on policy issues, such as the PQQ exclusionary grounds, and draft implementing regulations. The Cabinet Office remains keen to fast-track implementation in the UK. The Scottish Government will consult and implement separately to allow differing policy views to be factored in. Some concerns have been voiced about the speed of the proposed UK implementation. The Cabinet Office itself recognises that a speedy implementation could bring about practical issues, such as the new EU standard forms not being ready. Work-arounds are always possible, however, particularly if the cost savings and efficiencies under the new regime can be delivered sooner rather than later.
Jennifer Robinson is a procurement and competition law expert at Pinsent Masons, the law firm behind Out-Law.com
Algorithmic pricing raises concerns for EU competition law enforcement
Legal DirectorView Profile