Adapting to a Changing World, not without Difficulties: Kolin (C-652/22) -- Guest post by Prof Roberto Caranta

Untitled (Entry) (c.1917) - Amadeo Souza Cardoso (1887-1918).

It is pleasure to host the views of Prof Roberto Caranta on the controversial Kolin case. Over the years, I have learned a lot and developed my thinking thanks to debates with Roberto. When we agree, his views always have interesting nuance and, when we disagree, his views offer strong intellectual challenge for me. This is a case where we have quite different views on the big picture, but also converging views on the challenges ahead. I hope reading Roberto’s thoughts and contrasting them with mine (here) will help push the debate more generally. Roberto’s views were first published as an Op-Ed for EU Law Live on 7 Nov 2024.

Adapting to a Changing World,
not without Difficulties: Kolin (C-652/22)

Trade has been an essential component in the international economic and legal order built following the fall of the Berlin Wall, but it cannot be taken for granted anymore. As recently indicated by D.L. Sloss, the ‘rules-based international order confronts significant challenges, but it is not unravelling—at least, not yet’. A few days ago, the Centre for International Governance Innovation indicated that ‘The global order is under strain, propelled by the complex interplay of numerous trends and impacts. Converging factors are redefining the contours of the international system, necessitating significant adaptation by states.’ (Scenarios of Evolving Global Order).

This Op-Ed is based on the assumption that public procurement law is not and cannot be insulated from these changes – veritable seismic shifts – and from recent policy and normative actions taken by EU institutions. What was ‘historically’ the position of those same institutions may indeed be passé.

The Court of Justice judgment in Kolin Inşaat Turizm Sanayi ve Ticaret (C-652/22) (‘Kolin’), which addresses  for the first time the legal position of third country economic operators wishing to bid for a procurement contract in one of the Member States, must in my view be read in this changing context.

This assumption leads me to diverge on some points from the assessment of the Kolin judgment by Albert Sanchez-Graells.

Is the Court of Justice running wild?

Before going into the merits of the judgment, a few words are warranted in relation to Albert Sanchez-Graells’ assertion that the Court of Justice went out of its way to ‘answer a question it had not been asked’. In my view, the Court of Justice did not answer a different question but, following the Opinion of Advocate General Collins, declared the question inadmissible. With reference to this specific procedural aspect – as is the case with other aspects – EU law follows the French approach, considering questions of admissibility as moyens d’ordre public. As a consequence, as indicated by Lasok in his European Court Practice and Procedure, ‘The Court’s lack of jurisdiction is something which the Court must raise of its own motion’.

The Advocate General having raised an issue of inadmissibility, in my opinion, the Court of Justice had no choice but to address it. Not that the Court of Justice has never been accused – in a more or less veiled way – of running wild. In the past, however, the indictment targeted the Court of Justice for its assumed power grabbing to the detriment of the Member States. Just think of Hjalte Rasmussen On Law and Policy in the European Court of Justice. The competence of the EU with reference to international trade law is not so much disputed in this case, even if some of the Member States engaged in arguments claiming some residual powers that were so disparate as to  point only to much legal uncertainty.

This uncertainty is further compounded by a shift in policy preferences at EU level that was made manifest with the adoption of both the International Procurement Instrument (IPI) and the Foreign Subsidies Regulation (FSR). Needless to recall that this shift in policy was called for by the Council – i.e. the Member States. In 2019, it was indeed the Council deciding that ‘the EU must also safeguard its interests in the light of unfair practices of third countries, making full use of trade defence instruments and our public procurement rules, as well as ensuring effective reciprocity for public procurement with third countries’. The Council also called ‘for resuming discussions on the EU’s international procurement instrument’ (see here). ‘Reciprocity’ is the key word in the present EU approach to the international dimension of public procurement markets.

Of course, one might question the wisdom of this policy shift. But a power grab must be excluded here, and having a judgment on the matter cannot, in and of itself, be a bad thing. Of course, the problem may be the quality of the judgment, which  may be measured by the number and gravity of issues that a judicial decision leaves open – or opens and leaves unanswered.

No EU rights for economic operators from third countries which are not party to a trade agreement with the EU

To assess whether economic operators from third countries not benefiting from reciprocal trade agreements may participate in public procurement procedures in EU Member States, the reasoning of the Court of Justice first analyses  the relevant legal provisions in Directive 2014/25/EU, and then the competence concerning international trade (commerce in EU parlance rooted in a time when English was not dominant).

According to the Court of Justice, Article 43 of Directive 2014/25/EU ‘reflects’ the EU’s international commitments to give equal participation rights to economic operators hailing from third countries benefiting from international commitments signed by the EU (paragraph 43, referring to Recital 27 of the Directive). The Court’s reference is first and foremost to the GPA. This understanding is in line with the existing literature (Annamaria La Chimia) and, as pointed out by Albert Sanchez-Graells, does not add anything to the already pre-existing international obligations. However, the Court of Justice reads more into Directive 2014/25/EU. According to the Court, in the absence of exclusion measures adopted by the EU, although the Directive does not preclude third country economic operators not benefiting from market access rights

from being allowed to participate in a public procurement procedure governed by Directive 2014/25, it does, however, preclude those economic operators from being able, in the context of their participation in such a procedure, to rely on that directive and thus to require that their tender be treated equally to those submitted by tenderers from Member States and by the tenderers from third countries referred to in Article 43 of that directive (para. 45).

Reasoning otherwise would indeed mean that the same benefits reflected in Article 43 would be accorded to economic operators from all third countries, regardless of whether they are covered by an international agreement (paras. 46 and 47). The reasoning is further supported by reference to the IPI Regulation, which confirms that economic operators not benefiting from international commitment may be excluded for public procurement procedures in the EU (para. 49). This conclusion is hardly disputable. There would be no incentive for third countries to negotiate agreements to gain reciprocal access if participation was already allowed (Annamaria La Chimia).

To rebut the argument advanced from some of the Member States to the effect that Directive 2014/25/EU does not stand in the way of national law according access to economic operators from all third countries, even those not bound by international agreements, the Court of Justice widened the reasoning to include the EU exclusive competence in matters of international trade. The Court held that only the EU is competent to decide which economic operators have access to the European procurement markets. These decisions take place through the negotiation and conclusion of international agreements. This exclusive competence of the EU is grounded on Article 3 TFEU, wherein Article 3(1)(e) lists ‘common commercial policy’ among the areas of EU exclusive competence. Article 3(2) further indicates that ‘The Union shall also have exclusive competence for the conclusion of an international agreement when its conclusion is provided for in a legislative act of the Union or is necessary to enable the Union to exercise its internal competence, or in so far as its conclusion may affect common rules or alter their scope’. This policy is further articulated in Articles 206 and 207 TFEU. According to the Court of Justice,

Any act of general application specifically intended to determine the arrangements under which economic operators from a third country may participate in public procurement procedures in the European Union is such as to have direct and immediate effects on trade in goods and services between that third country and the European Union, with the result that it falls within the exclusive competence of the European Union (…) (para. 57).

The Court again refers to the IPI Regulation to strengthen its conclusion about the exclusive competence of the EU  in relation to the adoption of ‘measures of general application that may be taken with regard to economic operators of a third country which has not concluded an international agreement with the European Union’ (para. 59).

Here again the lack of competence of the Member States to legislate on the matter can hardly be disputed, as the IPI gives  the Commission, and  the Commission alone, the power to take measures to exclude participation of economic operators from specific third countries in order to force their hand in negotiating reciprocal access to the respective procurement markets.

An unavoidable limitation

Some critics argue that there is incoherence in the reasoning of the Court of Justice where it stops short of simply declaring that economic operators of a third country which has not concluded an international agreement with the EU cannot participate in public procurement procedures in the Member States.

Indeed, the Court of Justice restricts the competence of the EU – and the correlative lack of competence of the Member States – to the adoption of ‘acts of general application’ concerning participation in public procurement procedures in at least three paragraphs of the judgment (paras. 57, 59 and 61). Instead, the Court of Justice concedes that individual contracting authorities and entities may well allow the participation of third country economic operators not benefiting from market access agreements in individual procurement procedures (e.g. paras. 45, 47 and 63 ff).

Here again it is in my view doubtful whether the Court could have gone further than it went. The possible participation in public procurement procedures of such economic operators is implied in both in Article 86 of Directive 2014/25/EU and in the IPI Regulation (paras. 58 and 59). The latter would be made moot if no participation at all was possible. It would make no sense to exclude them if they had no possibility to participate in the first place.

Additionally, under Article 2(1) TFEU, ‘When the Treaties confer on the Union exclusive competence in a specific area, only the Union may legislate and adopt legally binding acts, the Member States being able to do so themselves only if so empowered by the Union or for the implementation of Union acts’. This clearly applies to ‘acts of general application’. The decision to allow participation in individual procurement procedures is not such an act and arguably does not even amount to a ‘legally binding decision’. There is some similarity here with the distinction between ‘regulation’ and ‘buying decision’ (or between ‘market regulator’ and ‘market participant’) that defines and limits the application of the US Commerce Clause in the area of public procurement as discussed by Jason Czarnezki in his comparison of EU and US procurement law.

A total exclusion might be problematic in case no EU or other economic operator benefiting from the right to market access is available. Unavoidably, contracting authorities or entities are left to

assess whether economic operators of a third country which has not concluded an international agreement with the European Union guaranteeing equal and reciprocal access to public procurement should be admitted to a public procurement procedure and, if it decides to admit them, whether provision should be made for an adjustment of the result arising from a comparison between the tenders submitted by those operators and those submitted by other operators (para. 63).

A patently insufficiently defined regime

Where I cannot but side with Albert Sanchez-Graells is in lamenting the gravely insufficient guidance given by the Court of Justice concerning the rules applicable to those individual cases of participation in public procurement of economic operators from third countries not benefiting from market access.

The Court of Justice places on individual contracting authorities and entities the heavy burden of designating the regime applicable to that participation. The indication is in any case to treat those economic operators differently. They may be excluded and if not, provisions might be made ‘for an adjustment of the result’ of the award procedure (paragraph 63). The choice between outright exclusion and ‘adjustment’ is consistent with Article 6(6) of the IPI Regulation, indicating that the Commission may decide to ‘restrict the access of economic operators, goods or services from a third country to public procurement procedures by requiring contracting authorities or contracting entities to:

(a) impose a score adjustment on tenders submitted by economic operators originating in that third country; or

(b) exclude tenders submitted by economic operators originating in that third country’.

It is, however, uncertain how delegating this power to individual contracting authorities and entities might be coordinated with the competence the IPI Regulation vests in the Commission. The risk of dissonance and confusion is big, and contracting authorities and entities will have to closely watch IPI measures taken to make sure that they make the necessary adjustments or exclude the relevant economic operators as the case might be.

Furthermore, the contracting authorities and entities are empowered to reflect, in the procurement documents, ‘the objective difference between the legal situation of those operators, on the one hand, and that of economic operators of the European Union and of third countries which have concluded such an agreement with the European Union’ (para. 64). So much so that ‘national provisions transposing Directive 2014/25’ cannot be applied to those economic operators (para. 65). The same is obviously true of national provisions implementing the other public procurement and concessions directives. In the end, ‘While it is conceivable that the arrangements for treatment of such operators should comply with certain requirements, such as transparency or proportionality, an action by one of those operators seeking to complain that the contracting entity has infringed such requirements can be examined only in the light of national law and not of EU law’ (para. 66).

The problem here is that in most Member States there are no public procurement provisions different from those implementing EU law. Contracting authorities and entities are thus left in a normative vacuum.  It is true that in many Member States somewhat different purely domestic provisions apply to contracts below the threshold and not having a cross-border interest as well as to other excluded contracts. However, these rules tend to set alternative and lighter procedures. It is mostly impossible to manage an award procedure following two discrete sets of rules depending on who is the tenderer. The option again is between some form of preference, along with its drawbacks, or a discrete regime concerning qualification, e.g. by limiting acceptable references for previous experience to contracts awarded in the EU.

Another potential difference might be on remedies. Some data – admittedly old data – indicates that in some Member States remedies do not apply to contracts below the thresholds or excluded contracts (see here). One possible option might be to extend this lack of remedies to economic operators from third countries which have not concluded an agreement with the EU, but as was shown by Albert Sanchez Graells, this is just one of four options, and possibly not the one most used so far.  Moreover, it is doubtful how this could be squared with the right to a fair trial and an effective remedy flowing from Article 6 and 13 of the ECHR. As argued by Pedro Telles, the applicable regime of remedies is thus left unclear.

Looking forward to the reform of the 2014 directives

In my view, the case could have hardly been decided differently.  That said, contracting authorities and entities are left in a legal limbo. The Court of Justice clearly leaves the door open to future EU legislation on the matter. Contracting authorities and entities may allow such participation only ‘In the absence of acts adopted by the European Union’ (para. 63).

Article 43 of Directive 2014/25/EU – and its corresponding provisions in other texts such as Article 25 of Directive 2014/24/EU – needs being reformed to clearly reflect the fact that EU public procurement markets not only must be opened in some cases, but that they might be closed as well.

One option is complete closure. This, however, might leave us without sellers in some cases and would severely curtail the margin of manoeuvre the Commission currently enjoys under the IPI Regulation. This leaves us with a provision that better defines the power of ‘adjustment’ of contracting authorities and entities. The changes that lead to the adoption of the Net Zero Industry Act (NZIA) provide a cautionary tale. Article 19(2)(d) of the Commission Proposal provided for adjustments linked to ‘the tender’s contribution to resilience, taking into account the proportion of the products originating from a single source of supply’. This approach did not survive the trilogue. The use of contract clauses for the outright limitation of supplies from third countries has instead been preferred in what has become Article 25 NZIA.

On the occasion of the reform, to avoid economic operators not benefiting from a market access regime dodging the bullet by simply opening a shop in one EU country, extending the provision of Article 85(5) Directive 2014/25/EU across  all the directives could also be considered.

In the meantime, a revision of the Guidance on the participation of third-country bidders and goods in the EU procurement market would be welcome to help struggling contracting authorities and entities.

A missed opportunity to provide meaningful clarification on state aid analysis of procurement compliance and some problematic ‘obiter dicta’ (C-28/23)

By Arne Müseler / www.arne-mueseler.com, CC BY-SA 3.0 de, https://commons.wikimedia.org/w/index.php?curid=149888646.

On 17 October 2024, the European Court of Justice (ECJ) delivered its preliminary ruling in NFŠ (C-28/23, EU:C:2024:893). The case was very interesting in three respects. First, in addressing some aspects of the definition of public works contracts that keep coming up in litigation in relation to relatively complex real estate transactions. Second, in addressing the effects of a State aid decision on the assessment of compliance with procurement law of the legal structure used to implement the aid package (including the treatment from a procurement perspective of put options as State aid measures). Third, in addressing some limits on the ‘strategic’ use of remedies by contracting authorities that have breached procurement law. Moreover, the case raised questions on the extent to which the parties to a dispute leading to a request for a preliminary reference can seek to clarify in front of the ECJ the underlying circumstances of the dispute, where the referring court has presented an incorrect or biased fact pattern.

The case indeed raised interesting issues and AG Campos Sánchez-Bordona delivered a promising Opinion that would have enabled the ECJ to provide helpful clarifications in those respects. However, in its NFŠ Judgment, the ECJ has not only missed that opportunity but also made some sweeping statements that could be problematic from the perspective of the interaction between State aid and procurement law.

I should from the outset disclose again that I was involved in the case. At the request of NFŠ, I wrote an expert statement addressing some of the issues before the ECJ. This may, of course, have affected my view of the case. However, I hope the comments below will help put the case in perspective and highlight the need to take some of the statements made by the Court with more than a pinch of salt. Actually, given the peculiar circumstances of the NFŠ case, I argue that they need to be considered as mere ‘obiter dicta’.

Background

I detailed the background of the case in my earlier comment on the AG Opinion, but it is helpful to restate the key issues here.

In 2013 the Slovak Government granted State aid to NFŠ to support the construction of the national football stadium in Bratislava. However, that State aid package was not considered sufficient and work did not start. The State aid measure was then revised in 2016 (the ‘grant agreement’), and the Slovak Government also granted NFŠ a unilateral put option to sell the stadium to the State, under certain conditions, during the five years following its completion (the ‘agreement to enter into a future sales agreement’ or ‘AFSA’).

Upon notification of the revised aid package, the Commission declared those measures to be compatible with the internal market by State aid Decision SA.46530. The State aid Decision made two important explicit points. First, it confirmed that the put option allowed NFŠ ‘to sell the Stadium back to the State in case it wishes to do so. Should the beneficiary decide to exercise the option, the Stadium would become a property of the State’ (para 22). The State aid Decision also explicitly stated that ‘The construction works financed through the grant … will be subject to a competitive process, respecting the applicable procurement rules’ (para 8).

Once the stadium was built, NFŠ exercised the put option. The Slovak Government decided not to purchase the stadium and it instead challenged the compatibility with EU law of the State aid package due to a fundamental breach of procurement law. The Slovak Government argued that the agreements were null and void because, combined and from the outset, the grant agreement and AFSA would have had the unavoidable effect of getting the stadium built and transferred to the State, and thus covered up the illegal direct award of a public works contract to NFŠ. This part of the dispute concerned the definition of ‘public works contracts’ under Directive 2014/24/EU (issue 1).

Relatedly, the Slovak Government stated that despite containing explicit references to the tendering of the construction of the stadium, the State aid Decision cannot preempt a fresh assessment of the compliance of this legal structure with EU procurement rules. Perhaps surprisingly, this position was supported by the European Commission in its submissions and at the hearing, where the Commission denied that the explicit mention of compliance with procurement law formed an integral part of its assessment of the compatibility of the set of agreements with EU internal market law. This was a crucial issue and the outcome of this case could have provided much needed clarity on the extent to which the Commission does, and indeed must, take procurement law into account in the assessment of State aid measures that involve the award of public contracts. This part of the dispute thus concerns the effect of State aid decisions relating to aid packages with a procurement element (issue 2).

Finally, the Slovak State sought confirmation of the possibility of having the ineffectiveness of the grant agreement and AFSA recognised ex tunc under domestic law, without this being a breach of the Remedies Directive. This relates to the ‘strategic’ use of procurement remedies by contracting authorities that have breached procurement law (issue 3).

In this post, I will focus on issues 1 and 2.

Framing: Directive 2004/18/EC, Directive 2014/24/EU, or it does not matter?

One preliminary issue worth highlighting is that the timeline of the case created the issue whether the 2004 or the 2014 procurement Directive applied. The initial grant agreement was signed in 2013, but the final grant agreement and AFSA were signed in 2016. On this point, despite taking opposite views (AG Campos focused on the 2014 Directive, whereas the ECJ reasoned and decided in relation to the 2004 Directive), both the AG Opinion and the Judgment are aligned in considering that the choice of one Directive over the other would have limited significance because the ‘definitions of “public contract” and “public work contracts” are equivalent in the two directives’ (Opinion, para 42) and ‘the content of Article 1(2)(b) of Directive 2004/18 corresponds in substance, as regards the execution of a work corresponding to the requirements expressed by the contracting authority, to the content of Article 2(1)(6)(c) of Directive 2014/24’ (Judgment, para 36).

However, this could mask disagreement on the (implicit) relevance of the new definition of procurement inserted in Art 1(2) of Directive 2014/24, which defines it as ‘the acquisition by means of a public contract of works, supplies or services by one or more contracting authorities from economic operators chosen by those contracting authorities, whether or not the works, supplies or services are intended for a public purpose’ (emphasis added). AG Campos explicitly reasoned in terms of the need for their to be an enforceable right to acquire the works (issue 1 below), whereas the ECJ decided not to use the words acquisition or acquire in its Judgment. This could signal a potentially problematic inconsistency in the interpretation of the extent to which the requirement for there to be an ‘acquisition’ modulates the scope of application of the procurement rules. This can be particularly relevant in relation to the delineation of the scope of application of the procurement and State aid rules, in particular in relation to the ‘de-risking’ of development projects, as further discussed below.

Issue 1: ‘acquisition’ and legally enforceable rights

As mentioned above, the first issue before the Court concerned the threshold to consider that a set or collection of agreements constitute an ‘acquisition’ and are thus covered by the scope of application of the EU public procurement rules, in particular where a contractor which is also a State aid beneficiary has a put option to transfer the works to the contracting authority.

In his Opinion, AG Campos provided a summary of the relevant case law (paras 52-54) and established that, ultimately,

… in order for there to be a genuine works contract, it is essential that the successful tenderer should specifically take on the obligation to carry out the works forming the subject of the acquisition and that that obligation should be legally enforceable. The contracting authority … must acquire the immovable property on which the works are carried out and, if necessary, take legal action to compel the tenderer awarded the contract to hand the property over to it, if it holds over the use of the works a legal right enabling it to ensure that they are made available to the public’ (para 60).

AG Campos had significant concerns about the way the factual pattern of the case had been presented to the ECJ. He made it explicit that ‘a reading of the order for reference and the subsequent course of the preliminary ruling proceedings [did not allow] to form a categorical opinion on the nature of the “collection of agreements” at issue’ (para 57), and pointed out at significant difficulties to determine what legally enforceable rights derived for the Slovak State, and that ‘it is not clear what performance the Slovak State may claim from NFŠ under the grant agreement and the agreement to enter into a future sales agreement, this being a premiss which it is for the referring court to determine’ (para 58). AG Campos also stressed that nothing in the written or oral submissions ‘support the inference that the Slovak State would have any right to take legal action against NFŠ to compel it to build the stadium should that undertaking ultimately decide not to do so. The difference is that, in that event, NFŠ would not have received the grant, or would have lost it, or would be obliged to pay it back. This in itself, however, has nothing to do with the performance of a works contract.’ (para 59), and that ‘all the indications are that the agreement to enter into a future sales agreement gave NFŠ the option either to remain the owner of the stadium and continue to operate it (or assign its operation to third parties), or to transfer it the Slovak State, if it suited it to do so’ (para 62).

This led AG Campos to conclude, on this issue, that

… there are many reservations to raise as against the classification of the “collection of agreements” at issue as a genuine public works contract within the meaning of Article 2(1)(6) of Directive 2014/24. Its classification as such or otherwise will be contingent upon the referring court’s final assessment of a number of factors informing the adjudication of the case which it has itself failed to mention with sufficient clarity (para 70).

The Court took a markedly different approach.

The ECJ considered that it ‘must take account, under the division of jurisdiction between the Court and the national courts, of the factual and legislative context, as described in the order for reference, in which the questions put to it are set’ (para 31). And, in relation to establishing the existence of the elements required for there to be a “public contract”, that ‘it will be for the referring court to rule on that matter, having made the relevant findings in that regard’ (para 39). This was probably to be expected and aligns with the general case law on the matter.

However, given the concerns on the lack of clarity of the evidentiary material before the ECJ, the absence of evidence of the existence of a legally enforceable obligation to build the stadium, the admission at the hearing by the Slovak Government that the put option was unilateral and discretionary (‘both NFŠ and the Ministry of Education expressed the same view in this regard, recognising that the (unilateral) option to sell was available for NFŠ to exercise if it wished to do so’ fn 44 in AG Opinion), and the broader indications, including in the State aid Decision, that there was no enforceable obligation against NFŠ because the exercise of the put option was entirely at its discretion, as stressed in the AG Opinion and as explicitly recognised by the ECJ too (‘Decision SA.46530 states that NFŠ will remain the owner of the Slovak national football stadium after its construction, without there being any obligation to transfer ownership of that stadium to the Slovak State’, para 58), the more specific reasoning of the ECJ is surprising.

The Court focuses in particular on whether the collection of contracts were concluded ‘for pecuniary interest’. It stresses that ‘the expression “for pecuniary interest” refers to a contract by which each of the parties undertakes to provide one form of consideration in exchange for another. The synallagmatic nature of the contract is thus an essential characteristic of a public contract, which necessarily results in the creation of legally binding obligations for each of the parties to the contract, the performance of which must be legally enforceable’ (para 44). This is another restatement of the case law and, given the framing of the issues above, one would have expected the ECJ to stress at this point that the referring court is the one that needs to establish whether there are such legally enforceable obligations, perhaps stressing the elements that question such a finding as laid out in the AG Opinion.

This is not what the ECJ wrote in its Judgment. The Court said

… where a contract includes an obligation to purchase by a contracting authority without an obligation to sell devolving on the other contracting party, that absence of an obligation to sell is not necessarily sufficient to rule out the synallagmatic nature of that contract and, therefore, the existence of a public contract, since such a conclusion may, as the case may be, be reached only after an examination of all the relevant factors para 45, emphasis added).

In the present case, the referring court mentions the existence of reciprocal obligations between the Ministry of Education and NFŠ. In addition, that court states, inter alia, that the grant agreement imposes an obligation on the State to award the grant and the obligations [for NFŠ] to construct the Slovak national football stadium in accordance with the conditions specified by the Ministry of Education, to finance at least 60% of the construction costs … (para 46).

…

a collection of agreements binding a Member State to an economic operator and including a grant agreement and an undertaking to purchase, concluded with a view to building a football stadium, constitutes a ‘public works contract’ within the meaning of that provision, where that collection of agreements creates reciprocal obligations between that State and that economic operator, which include the obligation to construct that stadium in accordance with the conditions specified by that State and a unilateral option in favour of that economic operator corresponding to an obligation on the part of that State to purchase that stadium, and grants the same economic operator State aid recognised by the Commission as being compatible with the internal market (para 61, emphasis added).

Crucially, this conclusion of the ECJ fails to explicitly stress that ‘It is for the referring court to determine whether those circumstances are present in this case’, which the AG Opinion did include (para 96). Although the Court does mention in passing that its considerations are based on elements that are ‘subject to the verifications to be carried out by the referring court’ (para 55), by not making this explicit in the answer to the question, the ECJ raises significant questions and potential difficulties once the litigation proceeds at the domestic level.

It is also notable that the ECJ, despite fundamentally saying the same as the AG once it is clear that all relevant findings of fact and their legal implications need to be ascertained at domestic level, chose to phrase its overall conclusion as the opposite default as AG Campos.

AG Campos had proposed that the Court should find that the relevant rules

must be interpreted as meaning that a grant agreement and an agreement to enter into a future sales agreement which are concluded between a State body and a private undertaking and in which the private undertaking is granted public funds for the purpose of the construction of a sports infrastructure and is given the unilateral option of selling it to the State, respectively, cannot be classified as a public works contract if they do not give rise to a legally enforceable obligation for the State to purchase the infrastructure and if the State does not derive a direct economic benefit or has not had a decisive influence on the design of the work. It is for the referring court to determine whether those circumstances are present in this case.

This formulation created the default rule that put options are not presumptively covered by the procurement rules, and stressed the need for the domestic court to positively find application of the three cumulative criteria determinative of an acquisition covered by the procurement rules (enforceable obligations, direct economic benefit and decisive influence in the design).

Conversely, as mentioned above, at para 61 the Court found that the concept of ‘public works contract’  extended to a ‘collection of agreements creates reciprocal obligations between that State and that economic operator, which include the obligation to construct that stadium in accordance with the conditions specified by that State and a unilateral option in favour of that economic operator corresponding to an obligation on the part of that State to purchase that stadium …’.

This can create the impression that put options are presumptively covered by the procurement rules. However, in my view, this would not be an adequate reading of the case. For three reasons.

First, because the answer given by the Court in relation to the enforceable obligations is in part tainted by its failure to stress that this is subject to verification (as above).

Second, because the ECJ also made quite a peculiar distinction between the presumed obligation to build the stadium and the discretionality of the put option when it stressed, in relation to the State aid Decision, that ‘although Decision SA.46530 states that NFŠ will remain the owner of the Slovak national football stadium after its construction, without there being any obligation to transfer ownership of that stadium to the Slovak State, that decision does not mention the absence of an obligation to construct that stadium’ (para 58, emphasis added). This strongly suggests that the answer of the Court is primarily focused on the presumed obligation to build the stadium.

Third, because the ECJ’s approach to assessing the extent to which a put option creates a direct economic benefit for the contracting authority also raises some questions, as discussed below.

Issue 1: Direct economic benefit

An issue that had not featured prominently in AG Campos’ Opinion is whether the “collection of agreements” would have been to the direct economic benefit of the contracting authority. The Opinion simply stressed that it was unclear whether ‘the Slovak State obtained a direct economic benefit from the two agreements at issue … The State’s interest (and subsequent indirect benefit) seems to be confined to the generic promotion of the national sport’ (para 64).

By contrast, the Court engaged in a more detailed discussion, which it is worth reflecting in full:

… in a public works contract, the contracting authority receives a service consisting of the realisation of works which it seeks to obtain and which has a direct economic benefit for it. Such an economic benefit may be established not only where it is provided that the contracting authority is to become owner of the works or work which is the subject of the contract, but also in other situations, in particular where it is provided that the contracting authority is to hold the legal right over the use of those works, in order that they can be made available to the public.

It is apparent from the documents before the Court that, although the Slovak national football stadium belongs to NFŠ, the grant agreement limits the right to transfer ownership of that stadium to third parties, in particular by requiring prior written consent from the Slovak State in order to do so. Therefore, that State has, with regard to this stadium, in essence, a right of pre-emption with an intrinsic economic value.

The economic benefit may also lie in the economic advantages which the contracting authority may derive from the future use or transfer of the work, in the fact that it contributed financially to the realisation of the work, or in the assumption of the risks were the work to be an economic failure (see … Helmut Müller, C‑451/08, EU:C:2010:168, paragraph 52 and the case-law cited).

In the present case, as NFŠ stated in its written observations and at the hearing, the option available to it under the undertaking to purchase constitutes a guarantee against the commercial risk in the event that the Slovak national football stadium proves to be commercially unviable for it. Thus, by undertaking to purchase that stadium at the request of NFŠ, the contracting authority assumed all the risks were the work to be an economic failure (paras 47-50, emphases added).

There are two points worth discussing here. The first one concerns the pre-emption right. The second one concerns the issue of the assumption of risks. Both are relevant from the perspective of the interaction between State aid and procurement law.

First, a right of written authorization for a transfer does not amount to a pre-emption right. The State could have the right to veto a transfer without this giving it priority to acquire the asset. It could simply be that the State has the right to screen for a suitable owner of the stadium, but that the legal consequences of denying the authorization do not immediately amount to the right to acquire instead of the proposed buyer. Rejection of authorisation may solely result in NFŠ having to put forward an alternative buyer, or deciding to keep the stadium. Moreover, the ECJ does not engage in the possible logic of the pre-emption right from an economic viewpoint, which can have more to do with the State’s interest in having a say over the transfer of the stadium in potentially heavily subsidised conditions, eg to ensure that there is no circumvention of relevant sets of fiscal rules, than in relation to a potential direct acquisition of the stadium. An absence of any such reasoning by the ECJ raises significant questions on the treatment of a (presumed) pre-emption right as a direct economic benefit.

Second, the way the Court engages with Helmut Müller is in itself problematic. Not least because there seems to have been a deformation of the ‘Auroux formula’ as it has migrated through the case law of the Court. It is worth recalling that Auroux (C-220/05, EU:C:2007:31) concerned a case involving the signing of an agreement between a municipality and a special purpose vehicle with separate balance sheet to run a re-generation programme. That re-generation programme expected to make profits from the sale of real estate to third parties. The agreement foresaw that, at the end of the project, ‘Any excess on that balance sheet is to be paid to the municipality. Furthermore, the municipality automatically becomes owner of all the land and works to be transferred to third parties not yet sold’ (para 18). This is the context in which the ‘Auroux formula’ as enunciated in Helmut Müller needs to be understood. Nothing in Helmut Müller itself questions the proper understanding that there has to be a direct positive economic benefit arising for the contracting authority—if anything, the opposite is true.

However, in NFŠ, paras 49 and 50 of the Judgment seem to suggest that ‘the assumption of the risks were the work to be an economic failure’ can in itself amount to an economic benefit. This makes no plain sense, as the assumption of such risks is clearly an economic disbenefit or liability for the State. Moreover, it does not make sense in the context of Auroux itself, where the economic benefit consisted of ‘the economic advantages which the contracting authority may derive from the future use or transfer of the work’, as the municipality was indeed entitled to potential profits of the sales to third parties, as well as in line to immediately acquire any unsold real estate. The reason why the municipality could obtain such benefits or, in other words, the consideration given to the developer consisted in its financing and the de-risking the project—but that did not turn the financing or de-risking themselves into economic benefits!

It is thus important to stress that the State has to derive a positive economic benefit or advantage, such as sharing in the revenues of the transfer of assets, or getting to use them. In the NFŠ case, the Slovak State would neither participate in the proceeds from the sale of the stadium to a third party, nor have the right to use the stadium. Quite which economic benefit the Court identified is thus also unclear—if not plainly incorrect. This is important from the perspective of the substantive interaction of procurement and State aid rules, especially bearing in mind that State aid related to infrastructure tends to imply a mix of measures concerning the financing and de-risking of development projects. If taking risks was by itself to be considered as obtaining an economic advantage, the potential subjection of a significant number of State aid measures to procurement would be a clear risk. It would, however, be at odds with the general approach of Directive 2014/24/EU. We should not lose sight from the fact that, as AG Campos stressed in his Opinion ‘the mere grant of a State subsidy involving the movement of public funds … does not in itself amount to the conclusion of a public works contract. As recital 4 of Directive 2014/24 states, “the Union rules on public procurement are not intended to cover all forms of disbursement of public funds, but only those aimed at the acquisition of works, supplies or services for consideration by means of a public contract”’ (para 48, emphasis in the original). By the same token, not all forms of de-risking of infrastructure projects are necessarily covered by public procurement law.

Issue 2: Prior approval of the State aid measure

The second relevant issue on which the Judgment could have provided clarity concerns the extent to which the prior approval by the European Commission of a State aid measure explicitly detailing a strategy to comply with EU public procurement law should bind future assessments of compliance with those rules. In that regard, the Opinion had been clear and ambitious, when AG Campos stated that

The Commission can actively intervene in defence of competition where public procurement does not comply with the rules laid down in, inter alia, Directive 2014/24 in order to safeguard this objective. I do not see any reason why it should not do so when faced with an examination of the viability of State aid measures resulting from agreements concluded by public authorities with private entities.

In particular, it is my view that the Commission could not have failed to examine whether the form in which the public aid granted to NFŠ was structured masked the existence of a public contract which should have been put out to tender. To my mind, it did so implicitly, which explains paragraph 8 of its Decision SA.46530.

In short, Decision SA.46530 is based on the premiss that there was no obligation to transfer ownership of the stadium to the Slovak Republic. That assumption, to which I have already referred, cannot be called into question by the referring court, which must respect the Commission’s assessment of the factors determining the existence of State aid (paras 77-79, emphasis added but underlined emphasis in the original).

By contrast, the ECJ fudged the issue by stating that

… it should be noted that it is true that national courts must refrain from taking decisions running counter to a Commission decision on the compatibility of State aid with the internal market, the assessment of which falls within the exclusive competence of that institution, subject to review by the Courts of the European Union … However, assessments which might implicitly follow from a decision of that institution relating to State aid cannot, in principle, be binding on the national courts in a dispute, such as that in the main proceedings, which is unrelated to the compatibility of that aid with the internal market (para 59, emphasis added).

This deserves some comments.

First, the suggestion by the ECJ that the fact that the assessment of the compatibility with EU law would arise only implicitly from the State aid decision and thus could not be relied on is problematic. Mainly, because it is at odds with previous case law and, in particular, with the position that the Commission can discharge its obligations to assess State aid measure’s compatibility with other fundamental provisions of EU internal market law, including secondary EU law, by implication. For example, in Castelnou Energía, the General Court accepted that the consideration of those rules can be implicit if the reasoning of the Commission refers to those other rules of secondary EU law and they feature in its analysis (T-57/11, EU:T:2014:1021, at para 185). Therefore, an implicit assessment would suffice where compliance with EU procurement rules include a reference to those rules and it features in the Commission’s State aid analysis. This was the case in NFŠ, where the Commission had explicitly stated that ‘The construction works financed through the grant … will be subject to a competitive process, respecting the applicable procurement rules’ (SA.46530, at para 8).

Second, this statement comes to create problems in domestic litigation where an argument is made that a dispute in a case concerning State aid concerns issues ‘unrelated to the compatibility of that aid with the internal market’, as it will many times be the case that compatibility is not primary reason why the measure is challenged, but the Commission will have taken it into account in its assessment. If anything, limiting the bindingness of Commission State aid decisions in this way erodes the monopoly of application of State aid rules given to the Commission in Art 108(3) TFEU.

Final thoughts: obiter dicta?

The analysis above has hopefully shown how the NFŠ Judgment can be problematic. However, I submit that, on a proper interpretation of the case and relevant precedent in their circumstances, most of the problematic statements need to be taken as obiter dicta because they are not backed by the facts of the case and, therefore, constitute general statements made in passing by the Court that cannot alter the relevant position of these issues under EU law.

First, I have highlighted how it is problematic for the NFŠ Judgment to suggest that put options are presumptively covered by the procurement rules (para 61). This is because such suggestion is in reality mixed up with a presumption of an obligation to build the infrastructure over which (at the very least) significant questions loom large. To me, it seems clear that the Judgment accepts that it is not the position under EU procurement law that a purely unilateral option to sell that is not enforceable by the contracting authority does not meet the requirement to establish legal obligations. However, the formulation used by the ECJ and the omission of the precision that establishing whether any legal obligations were created in the case is for the national courts, is confusing in this regard.

Second, and still on the issue of NFŠ’s transfer rights, I have also highlighted how the suggestion that a requirement for written authorisation of a sale to a third party implies a pre-emption right that has intrinsic economic value (para 48) is also problematic. On this, much more detailed legal analysis of the specific content of rights arising from the requirement for such authorization would be required. And, once again, this would be for the national courts.

Third, I have highlighted how a maximalistic and de-contextualised approach to understanding that de-risking infrastructure projects (para 50) could in itself constitute an economic benefit would also very problematic. I have suggested that a proper understanding of the ‘Auroux formula’ as enunciated in Helmut Müller must always imply the existence of a positive economic benefit, and that it cannot be conflated with the disbenefit or liability accepted by the contracting authority or State aid grantor as potential consideration for such (future) economic benefit.

Finally, I have highlighted how the suggestion that implicit assessments of compatibility with EU procurement law contained in State aid decisions cannot be relied on (para 59) is also problematic and at odds with existing case law. More generally, a partitioning or limitation of the types of disputes over which a Commission State aid decision has binding effects is undesirable.

How to get out of these potential problems, then?

The way forward requires paying close attention to the circumstances of the NFŠ case.

On the first issue, the ECJ itself was clear that the Commission had accepted that ‘Decision SA.46530 states that NFŠ will remain the owner of the Slovak national football stadium after its construction, without there being any obligation to transfer ownership of that stadium to the Slovak State’ (para 58) and the AG had documented that ‘both NFŠ and the Ministry of Education expressed the same view in this regard, recognising that the (unilateral) option to sell was available for NFŠ to exercise if it wished to do so’ (AG at fn 44). It is thus not in dispute that the put option did not create any legally enforceable obligation. Therefore, a suggestion that a put option could presumptively create legal obligations and thus be caught by the procurement rules has no relation to the facts of the case and needs to be taken as obiter dictum.

In NFŠ, the core obligation the Court takes issue with concerns the primary obligation to build the stadium. However, on that issue, even if not clearly, the ECJ has not deviated from the EU law position that ascertaining the existence of legal obligations is a matter for the domestic courts (para 31).

The second issue goes away on the basis of the same principle. Simply put, the ECJ has no jurisdiction to assess that by virtue of NFŠ’s obligation to require prior written consent from the Slovak State to transfer ownership of that stadium to third parties ‘that State has, with regard to this stadium, in essence, a right of pre-emption with an intrinsic economic value’ (para 48). This is a matter for the national courts and, consequently and at most, the ECJ statement can only be seen as an obiter dictum.

The third issue also concerns an obiter dictum approach by the Court. At its core, the Auroux line of case law is irrelevant to NFŠ to the extent that both cases can be clearly distinguished. In Auroux, the contracting authority was in line to share in the above agreed balance sheet benefits and/or to acquire unsold real estate. In NFŠ, there was no right to participate in the future transfer of the stadium to third parties. Therefore, all other statements as to how the precedent would apply to the case hand if the case at hand was different must also be considered an obiter dictum.

Finally, the position that implicit assessments of compatibility with EU law in State aid decisions cannot be relied on in relation to disputes about anything other than the compatibility of the aid is also not of relevance of the case because, in reality, the “collection of agreements” constituted the State aid measure and challenging it for breach of fundamental rules of internal market law is nothing else than challenging its compatibility with the internal market. Therefore, this statement is also obiter dictum.

Overall, it seems to me that the NFŠ Judgment is problematic in the ways in fails to provide clarity on the interaction between State aid control and public procurement law. At the same time, its legal value is limited because it does not really deviate from established precedent and, in the areas where it would suggest it does, it would do so in deviation from the facts of the case at hand. It is regrettable that the Court decided not to follow the much clearer and productive proposals advanced by AG Campos in this instance.

A good excuse? Delaying the Procurement Act 2023 to make procurement mission-oriented

The UK has been in a long process of procurement law reform that was due to kick in on 28 October 2024, following a 6-month ‘go live’ notice for the Procurement Act 2023. Today, a 4-month delay has been announced and the new UK procurement rules will only enter into force on 24 February 2025 (barring any further delays).

This announcement follows speculation (on LinkedIn) that a delay was necessary because the digital platform underpinning the new system would not have been ready on time. However, the reasons given by Cabinet Office point in a different direction. In the statement, the UK Government has indicated that, under the Procurement Act 2023,

… the previous administration (the Conservative government) published a National Procurement Policy Statement [this one] to which contracting authorities will have to have regard. But this Statement does not meet the challenge of applying the full potential of public procurement to deliver value for money, economic growth, and social value. [The Government has] therefore taken the decision to begin the vital work of producing a new National Procurement Policy Statement that clearly sets out this Government’s priorities for public procurement in support of our missions.

It is crucial that the new regime in the Procurement Act goes live with a bold and ambitious Statement that drives delivery of the Government’s missions, and therefore, I am proposing a short delay to the commencement of the Act to February 2025 so this work can be completed.

To be honest, I do not find this justification very convincing — whether it is a curtain to cover problems with the digital platform or not. This is because the National Procurement Policy Statement (NPPS) is bound to play a very minor role in procurement practice, given the awkward position it has within the set of duties arising from the Procurement Act 2023—as I explore in detail here. Moreover, the NPPS is by design bound to change in the future (especially when there is a change of government), but future changes to the NPPS will not trigger the sort of pause that is being implemented now. And, finally, pushing back the entry into force of the Procurement Act 2023 and the associated NPPS leaves is in the current default, where the previous iteration of the NPPS (this one, also by a Conservative government—I know, confusing, so let’s call it the ‘old’ NPPS) is supposed to be guiding procurement decisions. So, stopping the entry into force of the new NPPS to leave the old NPPS is not precisely going to create any change in policy and practice between now and February 2025 (even assuming the NPPS has policy delivery potential).

For me, this move and delay is concerning because it shows how the incoming Government places excessive hopes on procurement, and the NPPS in particular, as a policy delivery tool. More than ever, this stresses the need to have a serious conversation about the limits of procurement law and the need for hard law in many areas (starting with tackling climate change and supporting a just environmental transition) if we are to unlock the change we need at the required pace.

Articulating the public interest in procurement law and policy

Earlier this year, I had some very interesting conversations with Bristol colleagues about the relationship between law, regulation, and the public interest. These conversations led to a series of blog posts that are being published in our Law School blog.

This prompted me to think a bit more in detail about how the public interest is articulated in public procurement law and policy. Eventually, I wrote a draft paper based on the review of procurement goals embedded in the UK’s new Procurement Act 2023, which will enter into force next month (on 28 October 2023).

I presented the paper at the SLS conference today (the slides are available here) and had some initial positive feedback. I would be interested in additional feedback before I submit it for peer review.

As always, comments warmly welcome: a.sanchez-graells@bristol.ac.uk. The abstract is as follows:

In this paper, I explore the notion of public interest embedded in the Procurement Act 2023. I use this new piece of legislation as a contemporary example of the difficulty in designing a 'public interest centred' system of public procurement regulation. I show how a mix of explicit, referential, and implicit public interest objectives results in a situation where there are multiple sources of objectives contracting authorities need to consider in their decision-making, but there is no prioritisation of sources or objectives. I also show that, despite this proliferation of sources and objectives and due to the unavailability of effective means of judicial challenge or administrative oversight, contracting authorities retain almost unlimited discretion to shape the public interest and 'what it looks like' in relation to the award of each public contract. I conclude with a reflection the need to reconsider the ways in which public procurement can foster the public interest, in light of its limitations as a regulatory tool.

Creating (positive) friction in AI procurement

I had the opportunity to participate in the Inaugural AI Commercial Lifecycle and Procurement Summit 2024 hosted by Curshaw. This was a very interesting ‘unconference’ where participants offered to lead sessions on topics they wanted to talk about. I led a session on ‘Creating friction in AI procurement’.

This was clearly a counterintuitive way of thinking about AI and procurement, given that the ‘big promise’ of AI is that it will reduce friction (eg through automation, and/or delegation of ‘non-value-added’ tasks). Why would I want to create friction in this context?

The first clarification I was thus asked for was whether this was about ‘good friction’ (as opposed to old bad ‘red tape’ kind of friction), which of course it was (?!), and the second, what do I mean by friction.

My recent research on AI procurement (eg here and here for the book-long treatment) has led me to conclude that we need to slow down the process of public sector AI adoption and to create mechanisms that bring back to the table the ‘non-AI’ option and several ‘stop project’ or ‘deal breaker’ trumps to push back against the tidal wave of unavoidability that seems to dominate all discussions on public sector digitalisation. My preferred solution is to do so through a system of permissioning or licencing administered by an independent authority—but I am aware and willing to concede that there is no political will for it. I thus started thinking about second-best approaches to slowing public sector AI procurement. This is how I got to the idea of friction.

By creating friction, I mean the need for a structured decision-making process that allows for collective deliberation within and around the adopting institution, and which is supported by rigorous impact assessments that tease out second and third order implications from AI adoption, as well as thoroughly interrogating first order issues around data quality and governance, technological governance and organisational capability, in particular around risk management and mitigation. This is complementary—but hopefully goes beyond—emerging frameworks to determine organisational ‘risk appetite’ for AI procurement, such as that developed by the AI Procurement Lab and the Centre for Inclusive Change.

The conversations the focus on ‘good friction’ moved in different directions, but there are some takeaways and ideas that stuck with me (or I managed to jot down in my notes while chatting to others), such as (in no particular order of importance or potential):

  • the potential for ‘AI minimisation’ or ‘non-AI equivalence’ to test the need for (specific) AI solutions—if you can sufficiently approximate, or replicate, the same functional outcome without AI, or with a simpler type of AI, why not do it that way?;

  • the need for a structured catalogue of solutions (and components of solutions) that are already available (sometimes in open access, where there is lots of duplication) to inform such considerations;

  • the importance of asking whether procuring AI is driven by considerations such as availability of funding (is this funded if done with AI but not funded, or hard to fund at the same level, if done in other ways?), which can clearly skew decision-making—the importance of considering the effects of ‘digital industrial policy’ on decision-making;

  • the power (and relevance) of the deceptively simple question ‘is there an interdisciplinary team to be dedicated to this, and exclusively to this’?;

  • the importance of knowledge and understanding of the tech and its implications from the beginning, and of expertise in the translation of technical and governance requirements into procurement requirements, to avoid ‘games of chance’ whereby the use of ‘trendy terms’ (such as ‘agile’ or ‘responsible’) may or may not lead to the award of the contract to the best-placed and best-fitting (tech) provider;

  • the possibility to adapt civic monitoring or social witnessing mechanisms used in other contexts, such as large infrastructure projects, to be embedded in contract performance and auditing phases;

  • the importance of understanding displacement effects and whether deploying a solution (AI or automation, or similar) to deal with a bottleneck will simply displace the issue to another (new) bottleneck somewhere along the process;

  • the importance of understanding the broader organisational changes required to capture the hoped for (productivity) gains arising from the tech deployment;

  • the importance of carefully considering and resourcing the much needed engagement of the ‘intelligent person’ that needs to check the design and outputs of the AI, including frontline workers and those at the receiving end of the relevant decisions or processes and the affected communities—the importance of creating meaningful and effective deliberative engagement mechanisms;

  • relatedly, the need to ensure organisational engagement and alignment at every level and every step of the AI (pre)procurement process (on which I would recommend reading this recent piece by Kawakami and colleagues);

  • the need to assess the impacts of changes in scale, complexity, and error exposure;

  • the need to create adequate circuit-breakers throughout the process.

Certainly lots to reflect on and try to embed in future research and outreach efforts. Thanks to all those who participated in the conversation, and to those interested in joining it. A structured way to do so is through this LinkedIn group.

'Pro bono' or 'land and expand'? -- problematic 'zero-value' or 'free' contracts for digital innovation

Max Gruber / Better Images of AI / Banana / Plant / Flask / CC-BY 4.0.

The UK’s Ministry of Justice recently held an 8-day competition to select a software and programming consultancy to carry out a ‘pro-bono proof-of-concept process to explore methods for human-in-the-loop triage through GenAI’ (let’s not get bogged down on the technical details…).

This opportunity was not advertised under public procurement rules because the Ministry of Justice estimated the value of the contract at £0, as there would be no (direct, monetary) payments to the consultancy; it was clear that this would be ‘a pro bono contract. The [proof-of-concept] is expected to be completed in a 6 to 8 week period.’

Although the notice made it clear that the Ministry of Justice does ‘not anticipate that this project will be followed by further procurement on future development using the AI human in the loop triage’, because the main purpose is to ‘help accelerate existing work, test and prove different solutions/tools, share learning to help inform future work and designs, and transfer skills back into the [in-house] team throughout’—this approach seems problematic, in at least two ways.

First, it raises questions on whether, even as a ‘non-procurement’ opportunity, this was carried out in a proper way aligned with best practice. An 8-day window to express interest seems very short, especially as potentially interested consultants/consultancies were given very limited information to estimate the scope of works and understand the cost (to them) of supporting the development of the proof-of-concept on a pro bono basis.

At the same time, meeting the ‘minimalistic’ selection criteria and technical requirements could have been tricky, especially in such short time scale, as they contained some aspects that would have been difficult or impossible to meet other than by entities that already met the requirements at the time of the notice (eg obtaining BPSS security clearance is presumably not instantaneous) and were very familiar with the open source and other design standards referred to.

It does not seem unreasonable to suspect that the Ministry of Justice may have been in prior talks with some company/ies potentially interested in providing those pro bono services and that this created an insider advantage in making sense of the otherwise seemingly insufficient details given in the notice. This would make a mockery of the advertisement of the opportunity, even if not under procurement rules.

Cynically, it is also not clear what would happen if the current view changed and the Ministry later decided to procure the further stages of development — for seeking external input already at proof-of-concept stage (strongly) suggests that the in-house teams do not have (confidence in their) digital skills as required to carry out such digital innovation work.

In that case, an argument could be made that only the consultancy that participated in the proof-of-concept could provide the services for some specific technical / know how reason and that could seek to be used as justification for a direct award. This is a non-trivial risk. Even if this was not the case, a further procurement would create significant issues of prior involvement and would require deploying complicated solutions to try to neutralise the advantage gained by the consultancy. Overall, this does not seem like a fool-proof way of managing early collaborations in digital innovation projects.

Second, and perhaps more controversially, it is also not entirely clear to me that the contract would actually have ‘zero-value’ for the consultancy and was thus not really covered by the procurement rules.

The notice makes it clear that the Ministry of Justice would seek to retain the knowledge arising from the pilot by sharing it ‘within internal teams who can carry on building on top of the deliverables, but also with the wider teams that that are interested in using these new tools.’ However, this does not mean that the consultancy will not acquire potentially (almost) exclusive rights over the knowledge vis-à-vis third parties. There is no indication that the Ministry of Justice will publish the outcome of the project and, consequently, there seems to be no obstacle to the contribution of the Ministry being appropriated and incorporated into the consultancy’s know how (or future IP).

On close analysis of the terms of the ‘opportunity’ advertised by the Ministry of Justice, it is also clear that the Ministry would make available ‘A limited number of redacted example cases [to] be used for experimentation’ and that the consultant would be given access to the Ministry’s then current thinking and expertise on the project. These can also be valuable non-monetary assets on their own.

All in all, this is in itself worrying and raises questions on whether this was actually a £0 contract (from the perspective of the consultancy). Two legal aspects are relevant here. First, (partly pre-Brexit) ECJ case law distinguishes between pecuniary interest and monetary payments (IBA Molecular Italy and Tax-Fin-Lex), and stresses that ‘It is clear from the usual legal meaning of “for pecuniary interest” that those terms designate a contract by which each of the parties undertakes to provide a service in exchange for another’ (IBA Molecular Italy, C‑606/17, EU:C:2018:843, para 28). Whether this case—through the mix of access to anonymised examples, access to in-house know-how and possibility to retain know-how over the proof-of-concept and related learning vis-à-vis third parties—crosses the threshold and would have required advertising as a ‘procurement’ opportunity is at least arguable.

Second, this was clearly always going to be a ‘loss’ contract for the ‘pro bono volunteer’, and the fact that it is advertised as ‘pro bono’ solely masks the fact that the Ministry (a contracting authority in general terms) imposed on tenderers a requirement to submit abnormally low tenders. This raises questions on ‘mixed pro bono’ justifications that could be put forward in other cases to justify that a very low-cost tender is not actually abnormally low, but in the context of a procurement estimated at a value above the relevant threshold. Such justifications would in principle seem impermissible and, more generally, there are very big questions as to why the public sector should be seeking to obtain ‘free consultancy’—other than through fully open mechanisms, such as eg hackatons (is that still a thing) or other sorts of non-procurement competitions.

Which leads to the related question why would anyone willingly enter into such a contract? At least a partial explanation is that the ‘pro bono volunteer’ would most likely see a possible market advantage—for there are endless possibilities to carry out pro bono work otherwise. If not in this case, in most cases where similar conditions arise, there is a clear ‘marketing’ drive that can be masked as pro bono generosity. This can easily become an embedded element of strategies to ‘land and conquer’, or to build a portfolio of pro bono projects that is later used eg to demonstrate technical capability for qualitative selection purposes in future procurement processes (with other contracting authorities).

Overall, I think this is an example of worrying trends in the (side-stepping of) ‘procurement’ of digital innovation support services, and that such trends should be resisted. Only proper procurement processes and robust guardrails to safeguard from the risks of capture, competitive distortion and more generally long-term difficulties in ensuring competitive tension for digital innovation contracts, can minimise the consequences of arrangements that seem too good to be true.

Meaning, AI, and procurement -- some thoughts

©Ausrine Kuze, Distorted Reality, 2021.

James McKinney and Volodymyr Tarnay of the Open Contracting Partnership have published ‘A gentle introduction to applying AI in procurement’. It is a very accessible and helpful primer on some of the most salient issues to be considered when exploring the possibility of using AI to extract insights from procurement big data.

The OCP introduction to AI in procurement provides helpful pointers in relation to task identification, method, input, and model selection. I would add that an initial exploration of the possibility to deploy AI also (and perhaps first and foremost) requires careful consideration of the level of precision and the type (and size) of errors that can be tolerated in the specific task, and ways to test and measure it.

One of the crucial and perhaps more difficult to understand issues covered by the introduction is how AI seeks to capture ‘meaning’ in order to extract insights from big data. This is also a controversial issue that keeps coming up in procurement data analysis contexts, and one that triggered some heated debate at the Public Procurement Data Superpowers Conference last week—where, in my view, companies selling procurement insight services were peddling hyped claims (see session on ‘Transparency in public procurement - Data readability’).

In this post, I venture some thoughts on meaning, AI, and public procurement big data. As always, I am very interested in feedback and opportunities for further discussion.

Meaning

Of course, the concept of meaning is complex and open to philosophical, linguistic, and other interpretations. Here I take a relatively pedestrian and pragmatic approach and, following the Cambridge dictionary, consider two ways in which ‘meaning’ is understood in plain English: ‘the meaning of something is what it expresses or represents’, and meaning as ‘importance or value’.

To put it simply, I will argue that AI cannot capture meaning proper. It can carry complex analysis of ‘content in context’, but we should not equate that with meaning. This will be important later on.

AI, meaning, embeddings, and ‘content in context’

The OCP introduction helpfully addresses this issue in relation to an example of ‘sentence similarity’, where the researchers are looking for phrases that are alike in tender notices and predefined green criteria, and therefore want to use AI to compare sentences and assign them a similarity score. Intuitively, ‘meaning’ would be important to the comparison.

The OCP introduction explains that:

Computers don’t understand human language. They need to operate on numbers. We can represent text and other information as numerical values with vector embeddings. A vector is a list of numbers that, in the context of AI, helps us express the meaning of information and its relationship to other information.

Text can be converted into vectors using a model. [A sentence transformer model] converts a sentence into a vector of 384 numbers. For example, the sentence “don’t panic and always carry a towel” becomes the numbers 0.425…, 0.385…, 0.072…, and so on.

These numbers represent the meaning of the sentence.

Let’s compare this sentence to another: “keep calm and never forget your towel” which has the vector (0.434…, 0.264…, 0.123…, …).

One way to determine their similarity score is to use cosine similarity to calculate the distance between the vectors of the two sentences. Put simply, the closer the vectors are, the more alike the sentences are. The result of this calculation will always be a number from -1 (the sentences have opposite meanings) to 1 (same meaning). You could also calculate this using other trigonometric measures such as Euclidean distance.

For our two sentences above, performing this mathematical operation returns a similarity score of 0.869.

Now let’s consider the sentence “do you like cheese?” which has the vector (-0.167…, -0.557…, 0.066…, …). It returns a similarity score of 0.199. Hooray! The computer is correct!

But, this method is not fool-proof. Let’s try another: “do panic and never bring a towel” (0.589…, 0.255…, 0.0884…, …). The similarity score is 0.857. The score is high, because the words are similar… but the logic is opposite!

I think there are two important observations in relation to the use of meaning here (highlighted above).

First, meaning can hardly be captured where sentences with opposite logic are considered very similar. This is because the method described above (vector embedding) does not capture meaning. It captures content (words) in context (around other words).

Second, it is not possible to fully express in numbers what text expresses or represents, or its importance or value. What the vectors capture is the representation or expression of such meaning, the representation of its value and importance through the use of those specific words in the particular order in which they are expresssed. The string of numbers is thus a second-degree representation of the meaning intended by the words; it is a numerical representation of the word representation, not a numerical representation of the meaning.

Unavoidably, there is plenty scope for loss, alteration or even inversion of meaning when it goes through multiple imperfect processes of representation. This means that the more open textured the expression in words and the less contextualised in its presentation, the more difficult it is to achieve good results.

It is important to bear in mind that the current techniques based on this or similar methods, such as those based on large language models, clearly fail on crucial aspects such as their factuality—which ultimately requires checking whether something with a given meaning is true or false.

This is a burgeoning area of technnical research but it seems that even the most accurate models tend to hover around 70% accuracy, save in highly contextual non-ambiguous contexts (see eg D Quelle and A Bovet, ‘The perils and promises of fact-checking with large language models’ (2024) 7 Front. Artif. Intell., Sec. Natural Language Processing). While this is an impressive feature of these tools, it can hardly be acceptable to extrapolate that these tools can be deployed for tasks that require precision and factuality.

Procurement big data and ‘content and context’

In some senses, the application of AI to extract insights from procurement big data is well suited to the fact that, by and large, existing procurement data is very precisely contextualised and increasingly concerns structured content—that is, that most of the procurement data that is (increasingly) available is captured in structured notices and tends to have a narrowly defined and highly contextual purpose.

From that perspective, there is potential to look for implementations of advanced comparisons of ‘content in context’. But this will most likely have a hard boundary where ‘meaning’ needs to be interpreted or analysed, as AI cannot perform that task. At most, it can help gather the information, but it cannot analyse it because it cannot ‘understand’ it.

Policy implications

In my view, the above shows that the possibility of using AI to extract insights from procurement big data needs to be approched with caution. For tasks where a ‘broad brush’ approach will do, these can be helpful tools. They can help mitigate the informational deficit procurement policy and practice tend to encounter. As put in the conference last week, these tools can help get a sense of broad trends or directions, and can thus inform policy and decision-making only in that regard and to that extent. Conversely, AI cannot be used in contexts where precision is important and where errors would affect important rights or interests.

This is important, for example, in relation to the fascination that AI ‘business insights’ seems to be triggering amongst public buyers. One of the issues that kept coming up concerns why contracting authorities cannot benefit from the same advances that are touted as being offered to (private) tenderers. The case at hand was that of identifying ‘business opportunities’.

A number of companies are using AI to support searches for contract notices to highlight potentially interesting tenders to their clients. They offer services such as ‘tender summaries’, whereby the AI creates a one-line summary on the basis of a contract notice or a tender description, and this summary can be automatically translated (eg into English). They also offer search services based on ‘capturing meaning’ from a company’s website and matching it to potentially interesting tender opportunities.

All these services, however, are at bottom a sophisticated comparison of content in context, not of meaning. And these are deployed to go from more to less information (summaries), which can reduce problems with factuality and precision except in extreme cases, and in a setting where getting it wrong has only a marginal cost (ie the company will set aside the non-interesting tender and move on). This is also an area where expectations can be managed and where results well below 100% accuracy can be interesting and have value.

The opposite does not apply from the perspective of the public buyer. For example, a summary of a tender is unlikely to have much value as, with all likelihood, the summary will simply confirm that the tender matches the advertised object of the contract (which has no value, differently from a summary suggesting a tender matches the business activities of an economic operator). Moreover, factuality is extremely important and only 100% accuracy will do in a context where decision-making is subject to good administration guarantees.

Therefore, we need to be very careful about how we think about using AI to extract insights from procurement (big) data and, as the OCP introduction highlights, one of the most important things is to clearly define the task for which AI would be used. In my view, there are much more limited tasks than one could dream up if we let our collective imagination run high on hype.

Interesting AG Opinion on State aid analysis of procurement compliance, definition of public works contracts, and ‘strategic’ use of remedies by contracting authorities (C-28/23)

On 11 April 2024, AG Campos Sánchez-Bordona delivered his Opinion in NFŠ (C-28/23, EU:C:2024:306). The NFŠ Opinion is very interesting in three respects. First, in addressing some aspects of the definition of public works contracts that keep coming up in litigation in relation to relatively complex real estate transactions. Second, in addressing the effects of a State aid decision on the assessment of compliance with procurement law of the legal structure used to implement the aid package. Third, in addressing some limits on the ‘strategic’ use of remedies by contracting authorities that have breached procurement law. Before providing some comments on the Opinion, I need to make two disclaimers.

The first one is that, exceptionally, I have been involved in the legal proceedings before the ECJ. At the request of NFŠ, I wrote an expert statement addressing some of the issues raised by the case. I am very pleased to see that my own legal analysis coincides with that of AG Campos Sánchez-Bordona, and I hope the Court will also share it in the forthcoming Judgment.

Second, it is worth stressing that this is not a bread and butter procurement case and referring to the legal structure can be cumbersome or confusing if not done precisely. Unfortunately, this has happened in the English translation of the AG Opinion, which is rather poor in some areas. In particular, crucial paragraphs 81 and 96 are incorrectly translated and convey a confusing position. To avoid those issues, I rely on my own translation of the Spanish and French versions of the Opinion (and highlight it where my own translation deviates from the ECJ’s one by placing the relevant parts in [square brackets and italics]).

Background

In short, the case arises from a dispute between the Slovak Government and NFŠ in relation to the Slovak national football stadium. Despite having provided State aid for the construction of the stadium, the State is now unwilling to purchase it from NFŠ in the terms of the aid package. This has resulted in domestic litigation. The request from a preliminary reference emerges in this context.

In 2013, the Slovak Government entered into a grant agreement with NFŠ to support the construction of the national football stadium in Bratislava. However, construction did not immediately proceed and the level of financial support was in need of review. The grant agreement was revised in 2016 (the ‘grant agreement’). In addition to the grant for the construction of the stadium, the Slovak Government also granted NFŠ a unilateral put option to sell the stadium to the State, under certain conditions, during the five years following its completion (the ‘agreement to enter into a future sales agreement’ or ‘AFSA’).

Slovakia notified this set of agreements to the European Commission as State aid. In 2017, the Commission declared those measures to be compatible with the internal market by Decision State Aid SA.46530. The State aid Decision made it clear that the total volume of aid comprised the direct grant plus the value of the put option, and that those modalities and that level of aid were justified in view of the need to provide sufficient financial incentives to get the stadium developed. In relation to the put option, the Commission stated that ‘The option given to the beneficiary allows it to sell the Stadium back to the State in case it wishes to do so. Should the beneficiary decide to exercise the option, the Stadium would become a property of the State’ (para 22). In relation to the obligation to subject the construction of the stadium to competitive public procurement, the State aid Decision also explicitly stated that ‘The construction works financed through the grant … will be subject to a competitive process, respecting the applicable procurement rules’ (para 8).

NFŠ undertook the development of the stadium and awarded contracts for different parts of the works under competitive tender procedures compliant with the Slovak transposition of EU law. All tenders were advertised in the Official Journal of the European Union and in the Slovak official journal. Once the stadium was completed and in operation, NFŠ decided to exercise the put option and called on the Slovak Government to purchase the stadium in the terms foreseen in AFSA.

Simply put, in order to try to avoid the obligation to purchase the football stadium in the terms set out in AFSA, the Slovak Government is arguing that the agreements are null and void because, combined and from the outset, the grant agreement and AFSA would have had the unavoidable effect of getting the stadium built and transferred to the State, and thus cover up the illegal direct award of a public works contract to NFŠ. This part of the dispute concerns the definition of ‘public works contracts’ under Directive 2014/24/EU (section 1 below).

Relatedly, the Slovak Government states that despite containing explicit references to the tendering of the construction of the stadium, the State aid Decision cannot preempt a fresh assessment of the compliance of this legal structure with EU procurement rules. Perhaps surprisingly, this position has been supported by the European Commission, which denied that the explicit mention of compliance with procurement law formed an integral part of its assessment of the compatibility of the set of agreements with EU internal market law. This is a crucial issue and the outcome of this case can provide much needed clarity on the extent to which the Commission does, and indeed must, take procurement law into account in the assessment of State aid measures that involve the award of public contracts. This part of the dispute thus concerns the effect of State aid decisions relating to aid packages with a procurement element (section 2 below).

Finally, it is also important in the case that the State seeks confirmation of the possibility of having the ineffectiveness of the grant agreement and AFSA recognised ex tunc under domestic law, without this being a breach of the Remedies Directive. This relates to the ‘strategic’ use of procurement remedies by contracting authorities that have breached procurement law (section 3 below).

The AG Opinion deals with these issues and is interesting in all respects, but specially the latter two, where it breaks new ground.

1. Definition of a ‘public works contract’

The first issue addressed in the AG Opinion concerns whether the grant agreement and AFSA create such a set of obligations on NFŠ as beneficiary of the aid and developer of the stadium that, in reality, they amount to the illegal direct award of a public works contract for the construction of the stadium. There are three main issues that require detailed consideration:

  • whether the contractor had assumed a legally enforceable direct or indirect obligation to carry out the works;

  • whether the works should be executed in accordance with the requirements specified by the contracting authority, which thus had decisive influence over the project; and

  • whether the contracting authority would obtain a direct economic benefit.

The AG Opinion provides a helpful summary of the case law on these issues (see paras 52-54) and additional guidance on how to apply them in the case, raising significant questions on whether these criteria were met—although the final assessment must be carried out by the referring court.

Legally Enforceable Obligation

First, the Opinion stresses that it is unclear that NFŠ was placed under a legally enforceable obligation to build and transfer the stadium as a result of the grant agreement and AFSA. Importantly, the AG distinguishes the existence of an enforceable obligation to carry out the works from the existence of legal consequences from deciding not to do so. As the Opinion makes clear, the simple existence of the agreements to subsidise the development of the stadium does not ‘support the inference that the Slovak State would have any right to take legal action against NFŠ to compel it to build the stadium should that undertaking ultimately decide not to do so. [A different issue is whether], in that event, NFŠ would not have received the grant, or would have lost it, or would [have been] obliged to pay it back. This in itself, however, has nothing to do with the performance of a works contract’ (para 59).

This is important because it sets the threshold at which a ‘commitment’ to carry out works becomes a legally enforceable obligation for the purposes of EU public procurement law. It reflects an understanding that there has to be a right (in principle) to require specific performance (performance in natura), not solely the existence of legal consequences arising from a decision not to follow through with such a commitment. This is further supported in the fact that ‘the mere grant of a State subsidy involving the [disbursement] of public funds (in the present case, for the purpose of constructing a stadium) does not in itself amount to the conclusion of a public works contract. As recital 4 of Directive 2014/24 states, “the Union rules on public procurement are not intended to cover all forms of disbursement of public funds, but only those aimed at the acquisition of works, supplies or services for consideration by means of a public contract”’ (para 48, underline emphasis in the original).

The Opinion further stresses that:

in order for there to be a genuine works contract, it is essential that the successful tenderer should specifically take on the obligation to carry out the works forming the subject of the acquisition and that that obligation should be legally enforceable [in court]. The contracting authority … must acquire the [building] on which the works are carried out and, [where applicable], [be able to] take legal action [in court] to compel the tenderer awarded the contract to [transfer it], if it holds [legal title covering the encumbrance of the works for the purposes of public use] (para 60, underline emphasis in the original).

This concerns the legal enforceability of the put option from the perspective of the State. In that regard, it will be necessary for the referring court to establish ‘whether NFŠ, once the sports infrastructure had been built, had a legally enforceable obligation to transfer it to the Slovak State, which the latter could assert’ (para 61). The Opinion suggests that this is highly implausible, given that ‘all the indications are that the agreement to enter into a future sales agreement gave NFŠ the option either to remain the owner of the stadium and continue to operate it (or assign its operation to third parties), or to transfer it [to] the Slovak State, if [doing so suited that undertaking]’ (para 62).

Moreover, and this is a crucially interesting aspect of the case, the Opinion stresses that the assessment of the legal enforceability of the put option had already been the object of analysis by the European Commission in its State aid decision and that the Commission had confirmed that it enabled NFŠ ‘ (but does not oblige it) to sell the infrastructure to the Slovak State if that undertaking wishes to do so’ (para 63). This will be particularly relevant in view of the effects of the State aid Decision discussed in section 2 below.

Specifications by the Contracting Authority

A second issue of relevance in the case is that the aid package required for the stadium to meet ‘UEFA Regulations on the construction of category 4 stadiums and those contained in the general Slovak rules on sports infrastructure projects’ (para 65). This raises the question whether the contracting authority could exercise ‘decisive influence over the construction project’ by requiring compliance with those requirements (ibid) and participating in a monitoring committee. The Opinion focuses on the material impact of those circumstances on the development of the project.

Interestingly, the Opinion stresses that ‘UEFA criteria … consist of a number of mandatory parameters in relation to the minimum structural requirements which a stadium must meet in order to be classified in a certain category. However, those criteria are amenable to a variety of architectural solutions that can be developed within very broad margins of professional creativity’; and that ‘The design of football stadiums that comply with the UEFA criteria allows for an extensive range of creative alternatives, both in the external configuration of the stadium and in the structuring of its internal amenities. Those criteria do not … contain the detailed technical solutions which a true proprietor of the work could impose on the tenderer awarded the contract’ (paras 66-67, reference omitted).

This part of the Opinion is interesting in the context of drawing the boundaries between real estate transactions that will be caught or not by the procurement rules because it comes to develop the guidance offered by previous case law (recently C‑537/19, EU:C:2021:319) on the extent to which the specifications need to be sufficiently detailed to exceed the usual requirements of a tenant (C‑536/07, EU:C:2009:664). The further clarification is, in my view, that the specifications should be such as to significantly constrain or predetermine architectural solutions in the design of the works.

Direct Economic Benefit to the Contracting Authority

The Opinion directly refers to the case law on the need that ‘In a public works contract, the contracting authority receives a service consisting of the realisation of works which it seeks to obtain and which has a direct economic benefit for it’ (para 52). In that regard, the Opinion stresses that it is not sufficient for the Slovak State to have an ‘interest (and subsequent indirect benefit) … confined to the generic promotion of the national sport’ (para 64). This is also important because it clarifies the threshold of ‘directness’ and magnitude of the interest that must arise for a legal transaction to be classed as a public contract.

2. Effect of State aid decisions relating to aid packages with a procurement element

Perhaps the most interesting issue that the AG Opinion deals with is the extent to which a State aid Decision declaring a legal structure with explicit procurement implications compatible with the internal market pre-empts a separate assessment of its compliance with EU public procurement law.

As mentioned above, in the NFŠ case, the State aid notification had provided details on the grant agreement and AFSA, and made it explicit that the beneficiary of the aid would run public tenders for the competitive award of contracts for the subsidized works. The Commission explicitly referred to this in the Decision, indicating that ‘The construction works financed through the grant … will be subject to a competitive process, respecting the applicable procurement rules’.

As a starting point, AG Campos stresses that, consequently, any assessment of compliance with EU law cannot ignore ‘the considerations set out by the Commission in Decision SA.46530 in connection with the content of the grant agreement and the agreement to enter into a future sales agreement, where it found that, through those agreements, the Slovak State had granted public aid compatible with the internal market’ (para 47).

In more detail, the AG stresses that ‘the Commission examined the grant agreement and the agreement to enter into a future sales agreement. In Decision SA.46530, it evaluated the public aid associated with those agreements and declared it to be compatible with the internal market’ and that ‘A reading of paragraph 8 shows that what mattered to the Commission was that the construction of the stadium (which represents the very essence of a works contract, whether public or private) should be [subjected to] a competitive process respecting the rules applicable to public contracts’ (para 72, reference omitted, and para 74, underline emphasis in the original).

The AG stressed that the Commission confirmed that this was ‘an essential condition for the compatibility of the aid with the internal market’ (para 73). This led the AG to find that the State aid Decision had the effect of triggering the application of the EU procurement rules by NFŠ, ‘which was put in a situation analogous to that of a contracting authority’ (para 75) and, implicitly, that compliance with EU procurement law concerned the contract/s for the works to be tendered by NFŠ, not the award of the State aid to NFŠ.

Crucially, AG Campos spelled out the implications of such consideration by the Commission of the procurement implications of the State aid package within the procedure for State aid control. In his view:

The Commission can actively intervene in defence of competition where public procurement does not comply with the rules laid down in, inter alia, Directive 2014/24 in order to safeguard this objective [to ensure that “public procurement is opened up to competition”]. I do not see any reason why it should not do so when faced with an examination of the viability of State aid measures resulting from agreements concluded by public authorities with private entities.

In particular, it is my view that the Commission could not have failed to examine whether the form in which the public aid granted to NFŠ was structured masked the existence of a public contract which should have been put out to tender. To my mind, it did so implicitly, which explains paragraph 8 of its Decision SA.46530.

In short, Decision SA.46530 is based on the premiss that there was no obligation to transfer ownership of the stadium to the Slovak Republic. That assumption, to which I have already referred, cannot be called into question by the referring court, which must respect the Commission’s assessment of the factors determining the existence of State aid (paras 77-79, underline emphasis in the original, other emphasis added).

This sets out two important implications. The first one, of relatively more limited scope but crucial practical importance, is that as an implicit effect of the Commission’s monopoly of enforcement of the State aid rules, a previous State aid decision does preclude a fresh assessment of a legal structure for the purposes of its compliance with public procurement law. A national court called upon to assess such legal structure cannot call the Commission’s assessment and must respect the Commission’s assessment of the factors determining the existence of State aid. In the NFŠ case, given that the Commission had clearly assessed the put option as entirely discretionary for NFŠ, it is not now possible for the referring court to deviate from that assessment and consider that it established an obligation legally enforceable by the Slovak Government. This carries the additional implication that the legal structure cannot be classed as a public works contract for the purposes of Directive 2014/24/EU.

Therefore, on this point, the AG could have been clearer and made it explicit that, even if the referring court is in principle tasked with the clarification of the relevant circumstances and their legal classification, in this case and given the prior binding assessment of the Commission, it is not possible to rely on the put option under AFSA to class the legal structure as a public works contract because there was no legally binding obligation concerning the transfer of the stadium. However, this conclusion is plain from the joint reading of paras 63 and 79 of the Opinion.

The second implication is that, by way of principle, there is a general obligation for the Commission to assess the compatibility with the EU public procurement law of State aid measures that have procurement implications. I think this is a clarification of the existing case law on the duty on the Commission to assess State aid measures for compliance with other sets of EU internal market law and a very welcome development given the very close connection between State aid and procurement, as evidenced amongst other sources in the Commission’s guidance on the notion of State aid.

3. ‘Strategic’ use of procurement remedies by contracting authorities

A final issue which is also very interesting is that the case provides a very uncommon set of circumstances whereby the same authority that had granted State aid and accepted the legality of the legal structure creating the put option under which it would be purchasing the stadium is later on (under different political circumstances) trying to get out of its obligations and, in doing so, seeks to gain support for its position from the rules on contractual ineffectiveness in the Remedies Directive—with any such effectiveness arising from its own alleged circumvention of EU procurement law.

Of the treatment of this issue in the AG Opinion, I think the following passages are particularly relevant:

Directive 89/665 is not designed to protect the public authorities from infringements which they themselves have committed, but to allow those who have been harmed by the actions of those contracting authorities to challenge them.

Article 2d of Directive 89/665 presupposes that a person entitled to challenge the conduct of the contracting authority has made use of the relevant review procedure. If, at the end of that review, the body adjudicating on it declares the contract in question to be ineffective, the provisions contained in the various paragraphs of that article will be triggered. As I have already said, however, Directive 89/665 does not make provision for the contracting authority to challenge its own decisions.

[A different issue is whether] national law provides ways for a public authority (or an administrative review body) to review the legality of its previous decisions. Such an eventuality is governed not by Directive 89/665 but by the relevant provisions of national law, in accordance with which it will fall to be determined to what extent an exception may be made to the classic rule venire contra factum propium nulli conceditur (paras 88-90, reference omitted, emphasis added).

I think this may have not needed spelling out except in a bizarre case such as NFŠ. However, I also think that this clarification can have broader implications in relation to the (separate) trend to recognize ‘subjective rights’ to contracting authorities under EU public procurement law (see eg in relation to exclusion decisions in (C-66/22, EU:C:2023:1016; for discussion see here).

Final thoughts

I think NFŠ will be an important case and I very much hope that the Court will follow AG Campos in this case. I also hope that the clarification of the aspects concerning the effect of State aid decisions and, more importantly, the general duty for the Commission to assess compliance of State aid measures with EU public procurement law, will explicitly feature in the judgment of the Court. I also hope the remarks on the inaccessibility of procurement remedies for the contracting authorities that have infringed EU procurement law will feature in the judgment. All of this will provide helpful clarity on issues that should be uncontroversial under general EU law, but which seem to be susceptible of fueling litigation at domestic level.

The principle of competition is dead. Long live the principle of competition (recording)

Here is the recording for the first part of today’s seminar ‘The principle of competition is dead. Long live the principle of competition’, with renewed thanks to Roberto Caranta, Trygve Harlem Losnedahl and Dagne Sabockis for sharing their great insights. A transcript is available here, as well as the slides I used. As always, comments welcome and more than happy to continue the discussion!

Will the ECJ mandate protectionism in procurement -- comments on AG Collins' Kolin Opinion (C-652/22)

In the Opinion in Kolin Inşaat Turizm Sanayi ve Ticaret (C-652/22, EU:C:2024:212, hereafter ‘Kolin’), Advocate General Collins has argued that only economic operators established in countries party to international agreements on public contracts that bind the EU may rely on the provisions of Directive 2014/25/EU. This would imply that economic operators established in other countries are not entitled to participate in a public contract award procedure governed by Directive 2014/25/EU and, consequently, are unable to rely on the provisions of that Directive before Member State courts. In my view, this interpretation is both protectionist and problematic. The ECJ should not follow it. In this blog I sketch the reasons for this view.

Limited (international law) obligation of equal treatment does not imply a general (EU) obligation to exclude or discriminate

The Kolin Opinion concerns the interpretation of Art 43 of Directive 2014/25/EU, which could be relevant to the interpretation of Art 25 of Directive 2014/24/EU (on which see A La Chimia, ‘Article 25’ in R Caranta and A Sanchez-Graells (eds), European Public Procurement. Commentary on Directive 2014/24/EU (Edward Elgar 2021) 274-286. Art 43 of Dir 2014/25/EU establishes that:

In so far as they are covered by Annexes 3, 4 and 5 and the General Notes to the European Union’s Appendix I to the GPA and by the other international agreements by which the Union is bound, contracting entities within the meaning of Article 4(1)(a) shall accord to the works, supplies, services and economic operators of the signatories to those agreements treatment no less favourable than the treatment accorded to the works, supplies, services and economic operators of the Union.

AG Collins considers that

It follows that economic operators from non-covered third-countries do not fall within the scope ratione personae of Directive 2014/25 ... Since the applicant is not entitled to participate in a procedure for the award of a public contract governed by Directive 2014/25, it cannot seek to rely on the provisions thereof before a Member State court. The referring court therefore cannot obtain a response to a reference for a preliminary ruling on the interpretation of those provisions, since any answer that the Court might give to its request would not have binding effect. That reason suffices to justify a finding that this reference for a preliminary ruling is inadmissible (para 33, emphases added).

This position implies a logical jump in the reasoning. While it is plain that only economic operators from covered third-countries have a legally enforceable right to participate in public tenders on equal terms, it is by no means clear that other economic operators must necessarily be excluded from participation. If that was the plain interpretation and implication of that provision (and Art 25 Dir 2014/24/EU), the Commission would not have needed to develop the International Procurement Instrument (IPI) to establish circumstances in which exclusion of economic operators from non-covered third countries can be mandated. Along the same lines, AG Rantos argued in the Opinion in CRRC Qingdao Sifang and Others (C-266/22, EU:C:2023:399, not available in English) that ‘Member States can grant less favourable treatment to economic operators from non-covered third parties’ (para 65, own translation from Spanish).

In fact, as the Opinion reflects, ‘[a]lmost all of the parties to the procedure before the Court take the view that Member States may regulate the participation of economic operators from third-countries in procedures for the award of public contracts’ (para 35). In particular, the Croatian government submitted ‘that EU law contains no general prohibition on the participation of economic operators from third-countries in procedures for the award of public contracts in the European Union’ and provided sound arguments in support of that, as the ‘Commission’s Guidance on the participation of third-country bidders confirms that proposition where it states that economic operators from third-countries may be excluded from these procedures, without requiring their exclusion’ (para 36). Those arguments are also aligned with AG Rantos’ CRRC Opinion (paras 72-74). Estonia also submitted there is no obligation under EU law to limit participation by economic operators from non-covered third parties (para 38). Denmark, France, and Austria also considered that there is no ban stemming from EU law, even if the Union has exclusive competence in relation to the common commercial policy (paras 39-40). This should have given the AG pause.

Instead, as suggested by the Commission, AG Collins seeks to support the Opinion’s logical jump in an additional legal argument based on the remit of the EU’s competence to regulate the participation of economic operators from third-countries in procurement procedures in the European Union. The key issue here is not whether the EU has an exclusive or a shared competence in procurement, but that AG Collins considers that

… by adopting Article 43 of Directive 2014/25, the European Union has exercised its competence in relation to economic operators established in a country party to the GPA or to another international agreement on the award of public contracts by which the European Union is bound. … economic operators established in Türkiye do not come within that category. Although the European Union has not exercised its exclusive competence to establish whether economic operators from non-covered third-countries may participate in such procedures, Member States may not rely on that fact in order to regain competence to act in that area (para 50, emphases added).

Since the European Union does not appear to have exercised its exclusive competence to determine access by economic operators from non-covered third-countries to procedures for the award of public contracts, Member States wishing to take steps to that end may inform the competent EU institutions of their proposed course of action with a view to obtaining the requisite authorisation. Nothing in the Court’s file indicates that Croatia has taken such a step. Second, unilateral action by Member States could undermine the European Union’s bargaining position in the context of its efforts to open, on a reciprocal basis, markets for public contracts in third countries. Third, it could interfere with the uniform application of EU law, since in such circumstances the application of Directive 2014/25 ratione personae could vary from one Member State to another. (para 52, emphases added).

In my view, AG Collins is conflating normative and positive analysis. It is clear that dissimilar approaches in the Member States undermine the Commission’s bargaining position—thus the need to bring in the IPI as well as other instruments such as the Foreign Subsidies Regulation (FSR)—and can lead an absence of uniformity in the application of the Directive. However, these are normative issues. From a positive standpoint, it is in my view incorrect to state that the EU has exercised its competence in relation to GPA and other covered third country operators through Article 43 of Directive 2014/25/EU or, for that matter, Article 25 of Directive 2014/24/EU. The exercise of the relevant competence concerns the entering into those international treaties, not the internal legislative measures put in place to promote their effectiveness.

To me, it is clear that the obligation to grant equal treatment to GPA and other covered economic operators stems from the GPA or the relevant international treaty, not the Directive. Art 43 Dir 2014/25/EU (and Art 25 Dir 2014/24/EU are mere reminders of the obligations under international law and cannot alter them. Their omission would not have made any difference in covered third country economic operators’ legal position. By the same token, their inclusion cannot serve to prejudice the position of non-covered third country economic operators. As above, the whole process leading to the IPI and FSR would have been entirely superfluous. In my view, the Kolin Opinion follows too closely the dangerously protectionist policy approach pushed by the Commission, and does so in a way that is not legally persuasive (or accurate, in my view).

‘Tolerance’ of third country economic operators’ participation must engage legal protection under the CFR

Moreover, the Kolin Opinion would open a very dangerous path in terms of rule of law and upholding the effectiveness of the Charter of Fundamental Rights, especially Articles 41 and 47—and allow contracting authorities two bites of the cherry in relation to tenders submitted by economic operators from non-covered third countries. Contracting authorities could ‘tolerate’ participation of non-covered third country economic operators to see if those are the ones providing the most economically advantageous offer and, if not, or if other (industrial policy) considerations kicked in, they could simply reject or set aside the tender. This would happen in a context of insufficient guarantees.

Even assuming there was an obligation to exclude under Art 43 of Directive 2014/28/EU or Art 25 of Directive 2014/24/EU, which there is not, contracting authorities would be bound by the duties under Art 41 CFR in relation to EU and covered third-country economic operators. The relevant duty would require an immediate exclusion of the not covered economic operators to protect the (in that case) participation rights of those covered. A contracting authority that had not carried out such exclusion could seek to benefit from the advantages provided by the third country economic operator in breach of its duties, which is not permissible.

Conversely, a contracting authority that had not discharged its duty to exclude would be allowed to still benefit from its inaction by discriminating against and eventually excluding at a later stage the tender of the third-country economic operator without the latter having legal recourse. This would also not be in line with the effectiveness of Arts 41 and 47 CFR and certainly not in line with the doctrine of legitimate expectations. Once an economic operator or tenderer is not excluded or rejected at the first opportunity, there is a positive and very specific representation made by the contracting authority that the economic operator and/or its tender is in the run for the contract. This must trigger legal protection—although the specific form is likely to depend on domestic administrative law.

In the case at hand, like in many other cases in daily practice, despite Kolin not being eligible for equal treatment under Art 43 of Directive 2014/24/EU—and thus not having an enforceable right to participate in the tender and to equal treatment within it deriving from international law—the contracting authority had ‘tolerated’ its participation. The Opinion is plain that, following the receipt of tenders, the contracting authority ‘concluded that 6 out of the 15 tenders submitted fulfilled the selection criteria. [Kolin], a company established in Türkiye, submitted one of the tenders selected’ (para 16). However, the Opinion does not grant Kolin any rights because of such tolerance.

Contrary to the view held by AG Collins, ‘The Austrian Government contends that, although, in principle, Directive 2014/25 does not apply to economic operators from non-covered third-countries, such operators may rely on that directive once a contracting authority has permitted their participation in a procedure for the award of a public contract award’ (para 26). I share this view. Crucially, this is not an issue the Opinion explicitly addresses. But this is the main reason why the ECJ should not follow the Opinion.

The principle of competition is dead. Long live the principle of competition (Free webinar)

Free webinar: 22 March 2024 *revised time* 1pm UK / 2pm CET / 3pm EET. Registration here.

The role of competition in public procurement regulation continues to be debated. While it is generally accepted that the proper functioning of procurement markets requires some level of competition – and the European Court of Auditors has recently pointed out that current levels of competition for public contracts in the EU are not satisfactory – the 'legal ranking' and normative weight of competition concerns are much less settled.

This has been evidenced in a recent wave of academic discussion on whether there is a general principle of competition at all in Directive 2014/24/EU, what is its normative status and how it ranks vis-à-vis sustainability and environmental considerations, and what are its practical implications for the interpretation and application of EU public procurement law.

Bringing together voices representing a wide range of views, this webinar will explore these issues and provide a space for reflective discussion on competition and public procurement. The webinar won't settle the debate, but hopefully it will allow us to take stock and outline thoughts for the next wave of discussion. It will also provide an opportunity for an interactive Q&A.

Speakers:

  • Prof Roberto Caranta, Full Professor of Administrative Law, University of Turin.

  • Mr Trygve Harlem Losnedahl, PhD researcher, University of Oslo.

  • Dr Dagne Sabockis, Senior Associate, Vinge law firm; Stockholm School of Economics.

  • Prof Albert Sanchez-Graells, Professor of Economic Law, University of Bristol.

Pre- or post-reading:

Public Procurement of Artificial Intelligence: recent developments and remaining challenges in EU law

Now that the (more than likely) final of the EU AI Act is available, and building on the analysis of my now officially published new monograph Digital Technologies and Public Procurement (OUP 2024), I have put together my assessment of its impact for the procurement of AI under EU law and uploaded on SSRN the new paper: ‘Public Procurement of Artificial Intelligence: recent developments and remaining challenges in EU law’. The abstract is as follows:

EU Member States are increasingly experimenting with Artificial Intelligence (AI), but the acquisition and deployment of AI by the public sector is currently largely unregulated. This puts public procurement in the awkward position of a regulatory gatekeeper—a role it cannot effectively carry out. This article provides an overview of recent EU developments on the public procurement of AI. It reflects on the narrow scope of application and questionable effectiveness of tools linked to the EU AI Act, such as technical standards or model contractual clauses, and highlights broader challenges in the use of procurement law and practice to regulate the adoption and use of ‘trustworthy’ AI by the public sector. The paper stresses the need for an alternative regulatory approach.

The paper can be freely downloaded: A Sanchez-Graells, ‘Public Procurement of Artificial Intelligence: recent developments and remaining challenges in EU law’ (January 25, 2024). To be published in LTZ (Legal Tech Journal) 2/2024: https://ssrn.com/abstract=4706400.

As this will be an area of contention and continuous developments, comments most welcome!

Source: h

Responsibly Buying Artificial Intelligence: A Regulatory Hallucination?

I look forward to delivering the lecture ‘Responsibly Buying Artificial Intelligence: A Regulatory Hallucination?’ as part of the Current Legal Problems Lecture Series 2023-24 organised by UCL Laws. The lecture will be this Thursday 23 November 2023 at 6pm GMT and you can still register to participate (either online or in person). These are the slides I will be using, in case you want to take a sneak peek. I will post a draft version of the paper after the lecture. Comments welcome!

Public procurement (entry for an Encyclopaedia)

I was invited to provide an entry on ‘public procurement’ for the forthcoming Elgar Encyclopedia of European Law co-edited by Andrea Biondi and Oana Stefan. I must say I struggled to decide what to write about, as the entry was limited to 4,000 words and there are so many (!!) things going on in procurement. Below is my draft entry with perhaps an eclectic choice of content. Comments most welcome!

The draft entry is also available on SSRN if you prefer a pdf version: A Sanchez-Graells, ‘Public procurement’ in A Biondi and O Stefan, Elgar Encyclopedia of European Law (forthcoming) available at https://ssrn.com/abstract=4621399.

Public Procurement

I. Introduction

From up close, public procurement law can be seen as the set of mostly procedural rules controlling the way in which the public sector buys goods, services, and works from the market. Procurement would thus be a set of administrative law requirements concerned with the design and advertisement of tenders for public contracts, the decision-making process leading to the award of those contracts, and the advertisement and potential challenge of such decisions. To a more limited extent, some requirements would extend to the contract execution phase, and control in particular the modification and eventual termination of public contracts. From this narrow perspective, procurement would be primarily concerned with ensuring the integrity and probity of decision-making processes involving the management of public funds, as well as fostering the generation of value for money through effective reliance on competition for public contracts.

The importance and positive contribution of public procurement law to the adequate management of public funds may seem difficult to appreciate in ordinary times, and there are recurrent calls for a reduction of the administrative burden and bureaucracy related to procurement procedures, checks and balances. However, as the pervasive abuses of direct awards under the emergency conditions generated by the covid pandemic evidenced in virtually all jurisdictions, dispensing with those requirements, checks and balances comes with a very high price tag for taxpayers in terms of corruption, favouritism, and wastage of public funds.

Even from this relatively narrow perspective of procurement as a process-based mechanism of public governance, procurement attracts a significant amount of attention from EU legislators and from the EU Courts and is an area of crucial importance in the development of the European administrative space. As procurement regulation has been developed through successive generations of directives, and as many Member States had long traditions on the regulation of public procurement prior to the emergence of EU law on the topic, procurement offers a fertile ground for comparative public law scholarship. More recently, as EU procurement policy increasingly seeks to promote cross-border collaboration, procurement is also becoming a driver (or an irritant) for the transnational regulation of administrative processes and a living lab for experimentation and legal innovation.

From a slightly broader perspective, public procurement can be seen as a tool for the self-organisation of the State and as a primary conduit for the privatisation and outsourcing of State functions. A decision preceding procurement concerns the size and shape of the State, especially in relation to which functions and activities the State carries out in-house (including through public-public collaboration mechanisms), and which other are contracted out to the market (‘make or buy’ decisions). Procurement then controls the design and award of contracts involving the exercise of public powers, or the direct provision of public services to citizens where market agents are called upon to do so (including in the context of quasi-markets). Procurement thus heavily influences the interaction between the State’s contractual agents and citizens, and becomes a tool for the regulation of public service delivery. The more the State relies on markets for the provision of public services, the larger the potential influence (both positive and negative) of procurement mechanisms on citizens’ experience of their (indirect) interaction with the State. On this view, procurement is a tool of public governance and a conduit for public-private cooperation, as well as a regulatory mechanism for delegated public-public and public-private interactions. From this perspective, procurement is often seen as a neoliberal tool closely linked to new public management (NPM), although it should be stressed that procurement rules only activate once the decision to resort to contracting out or outsourcing has been made, as EU law does not mandate ‘going to market’.

From an even broader perspective, public procurement represents a more complex and multi-layered regulatory instrument. Given the enormous amounts of public funds channelled through public procurement, and the market-shaping effects that can follow from the exercise of such buying power, procurement regulation is often used as a lever for the promotion of policies and goals well beyond the narrower confines of procurement as a regulated administrative process. In the EU, procurement has always been an instrument of internal market regulation and sought to dismantle barriers to cross-border competition for the award of public contracts. More recently, and in line with developments in other jurisdictions, procurement has been increasingly singled out as a tool to promote environmental and sustainability goals, as well as social goals, or as a tool to foster innovation. Procurement is also increasingly identified as a tool to foster compliance with human rights along increasingly complex supply chains, or to address social inequality, such as through gender responsive procurement. In the face of the challenges posed by the mainstreaming of digital technologies, and artificial intelligence in particular, procurement is also increasingly identified as a tool of digital regulation. And, against the background of rule of law challenges within the EU, procurement conditionality has added to the fiscal control effect traditionally linked to the use of EU funds to subsidise procurement projects at Member State level. From this perspective, procurement is either an enforcement (or reinforcement) mechanism, or a self-standing regulatory tool for the pursuit of an increasingly diverse array of horizontal policies seeking to steer market activities.

Relatedly, given the importance of procurement as an economic activity, its regulation is of crucial importance in the context of industrial and trade policies. The interaction between procurement and industrial policy is not entirely straightforward, and neither is the position of procurement in the context of trade liberalisation. While there have been waves of policy efforts seeking to minimise the use of procurement for industrial policy purposes (ie the award of public contracts to national champions), in particular given the State aid implications of such uses of public contracts under EU law, and while there is a general push for the liberalisation of international trade through procurement—there are also periodic waves of protectionism where procurement is used as a tool of international economic regulation or, more broadly, geopolitics. Most recently, the EU has aggressively (re)regulated access to its procurement markets on grounds of such considerations.

It would be impossible to address all the issues that arise from the regulation of public procurement in all these (and other potential) dimensions within a single entry. Here, I will touch upon some the issues highlighted by recent developments in EU law and policy, and in relation to contemporary debates around the salient grand challenges encapsulated in the need for procurement to support the ‘twin transition’ to green and digital. I will not focus on the detail of procurement rules, which is better left to in-depth analysis (eg Arrowsmith [2014] and [2018], Steinicke and Vesterdorf [2018], or Caranta and Sanchez-Graells [2021]). There are a few common threats in the developments discussed below, especially in relation to the increasing complexity of procurement policymaking and administration, or the crucial role of expertise and capability, as well as some challenges in coordinating them in a way that generates meaningful outcomes. I will briefly return to these issues in the conclusion.

II. Procurement, Trade, and Geopolitics

A constant tension in the regulation of procurement concerns the openness of procurement markets. On the one hand, procurement can be a catalyst for trade liberalisation and there are many economic advantages stemming from increased (international) competition for public contracts—as evidenced in the context of the World Trade Organisation Government Procurement Agreement (WTO GPA) (Georgopoulos et al [2017]). In the narrower context of the EU’s internal market, public procurement openness is taken to its logical extremes and barriers to cross-border tendering are systematically dismantled through legislation, such as the most recent 2014 Public Procurement Package, and its interpretation by the Court of Justice. While there is disparity in national practice, the (complete) openness of procurement markets in the EU tends to not only benefit EU tenderers, but also those of third countries, who tend to be treated equally with EU ‘domestic’ tenderers.

On the other hand, the same (international) competition that can bring economic advantages can also put pressure on (less competitive) domestic industries or create risks of uneven playing field—especially where (foreign national champion) tenderers are propped up by their States. In some industries and in relation to some critical infrastructure, the award of oftentimes large and sensitive public contracts to foreign undertakings also generates concerns around safety and sovereignty.

A mechanism to mediate this tension is to make procurement-related trade liberalisation conditional on reciprocity, which in turn leverages multilateral instruments such as the WTO GPA. This is an area where EU law has recently generated significant developments. After protracted negotiations, EU procurement law now comprises a set of three instruments seeking to rebalance the (complete) openness of EU procurement markets.

As a starting point, under EU law, only foreign economic operators covered by an existing international agreement (such as the WTO GPA, or bilateral or multilateral trade agreements concluded with the EU that include commitments on access to public procurement) are entitled to equal treatment. However, differential treatment or outright exclusion of economic operators not covered by such equal treatment obligation tends (or has historically tended to) be rare. This can be seen to weaken the hand of the European Commission in international negotiations, as EU procurement markets are de facto almost entirely open, regardless of the much more limited legal openness resulting from those international agreements.

To nudge contracting authorities to enforce differential treatment, in 2020, the European Commission issued guidance on the participation of third country bidders and goods in EU procurement markets, stressing the several ways in which public buyers could address concerns regarding unfair competitive advantages of foreign tenderers. This should be seen as a first step towards ramping up the ‘rebalancing’ of access to EU procurement markets, though it is a soft (law) step and one that would still hinge on coordinated decision-making by a very large number of public buyers making tender-by-tender decisions.

A second and crucial step was taken in 2022 with the adoption of the EU’s International Procurement Instrument (IPI), which empowers the European Commission to carry out investigations where there are concerns about measures or practices negatively affecting the access of EU businesses, goods and services to non-EU procurement markets and, eventually, to impose (centralised) IPI measures to restrict access to EU public procurement procedures for businesses, goods and services from the non-EU countries concerned. The main effect of the IPI can be expected to be twofold. Outwardly, the IPI will lead to the European Commission having ‘a stick’ to push for reciprocity in procurement liberalisation as a complement to ‘the carrot’ used to persuade more and more countries to enter into bilateral trade deals, or for them to join the WTO GPA. Internally, the IPI will allow the Commission to mandate Member States to implement the relevant restrictions or exclusions from the EU procurement markets in relation to the jurisdictions concerned. This is expected to address the issue of de facto openness beyond existing (international) legal requirements, and therefore galvanise the ability of the Commission to control access to ‘the EU procurement market’ and thus bolster its ability to use procurement reciprocity as a tool for trade liberalisation more effectively.

A third and final crucial step came with the adoption in 2023 of the Regulation on foreign subsidies distorting the internal market, which creates a mechanism for the control of potential foreign subsidies in tenders for contracts with an estimated value above EUR 250 million, and can also result in the imposition of (centralised) measures curving access to the relevant contracts by the beneficiaries of those foreign subsidies. This comes to somehow create an international functional equivalent to the State aid control in place for domestic tenders, as well as a mechanism for the EU to enforce international anti-dumping standards within its own jurisdiction.

This trend of evolution in EU public procurement regulation evidences that public buyers are increasingly constrained by geopolitical and international economic considerations administered by the European Commission in a centralised manner (Andhov and Kania [2023]). Whether this will create friction between the Commission and Member States, perhaps in relation to particularly critical or sensitive procurement projects, remains to be seen. In any case, this line of policy and legal developments generates increased complexity in the administration of procurement processes on a day-to-day basis, and will require public buyers to develop expertise in the assessment of the relevant trade-related instruments and associated documentation, which will be a theme in common with other developments discussed below.

III. Procurement and Sustainability

It is relatively uncontroversial that public expenditure has a crucial role to play in supporting (or driving) the transition towards a more sustainable economy, and most jurisdictions explicitly consider how to harness public expenditure to decarbonise their economy and achieve net zero targets—sometimes in the broader context of efforts to achieve interlinked sustainable development goals. However, the details on the specific sustainability goals to be pursued through procurement (as compared to other means of public finances, such as subsidies or tax incentives), and on how to design and implement sustainable procurement are more contested.

Green procurement has been a primary focus of EU public procurement policy for a long time now, and it has received even further increased attention in recent years, culminating in the attribution of a prominent role for the implementation of the EU’s Green Deal. EU procurement law has been increasingly permissive and facilitative of the inclusion of environmental considerations in procurement decision-making and the European Commission has developed sets of guidance and technical documentation that are kept under permanent review and update. Overall, EU procurement law offers a diverse toolkit for public buyers to embed sustainability requirements.

However, the uptake of green procurement is much lower than would be desirable and progress is very uneven across jurisdictions and in different sectors of the economy. There is a growing realisation that facilitative or permissive approaches will not result in the quick generalisation of sustainability concerns across procurement practice required to contribute to mitigating the devastating effects of climate change in a timely fashion, or with sufficient scale. Informational and skills barriers, difficult economic assessments and competing (political) priorities necessarily slow down the uptake of sustainable procurement. In this context, it seems clear that technical complexity in the administration of procurement on a day-to-day basis, and limited technical skills in relation to sustainability assessments, are the primary obstacle in the road to mainstreaming sustainable public procurement. It is hard for public buyers to identify the relevant sustainability requirements and to embed them in their decision-making, especially where the inclusion of such requirements is bound to be checked against its suitability, proportionality, and its effect on potential competition for the relevant public contract.

To overcome this obstacle, it seems clear that a more proactive or prescriptive approach is required and that sustainability requirements must be embedded in legislation that binds public buyers—so that their role becomes one of (reinforced) compliance assessment or indirect enforcement. The question that arises, and which reopens age old discussions, is whether such legislation should solely target public procurement (Janssen and Caranta [2023]) or rather be of general application across the economy (Halonen [2021]).

This controversy evidences different understandings of the role of procurement-specific legislation and different levels of concern with the partitioning of markets. While the passing of procurement-specific legislation could be easier and politically more palatable—as it would be perceived to ultimately impose the relevant burden on economic operators seeking to gain public business (and so embed a certain element of opt-in or balanced regulatory burden against the prospect of accessing public funds), and the cost would ultimately fall on public buyers as ‘responsible (sustainable) buyers’—it would partition markets and eg potentially prevent the generation of economies of scale where public demand is not majoritarian. Moreover, such market partitioning would raise entry barriers for entities new to bidding for public contracts, as well as facilitate the emergence of anticompetitive and collusive practices in the more concentrated and partly isolated from potential competition ‘public markets’ (Sanchez-Graells [2015]) in ways that general legislation would not. More generally, advances in mandating sustainable procurement could deactivate the pressure for developments in more general sustainability mandates, as policymakers could claim to already be doing significant efforts (in the narrow setting of procurement).

A narrow sectoral approach to legislating for public procurement only would probably also over-rely on the hopes that procurement practices can become best practices and thus disseminate themselves across the economy through some understanding of mimicking, or race to the top. This relates to discussions in other areas and to the broader expectation that procurement can be a trend setter and influence industry practice and standards. However, as the discussion on digitalisation will show, the direction of influence tends to be on reverse and there are very limited mechanisms to promote or force industry adaptation to procurement standards other than in relation to direct access to procurement.

IV. Procurement and the ‘Digital Transformation’ of the State

Another area of growing consensus is that public procurement has a key role to play in the ‘digital transformation’ of the State, as the process of digitalisation is bound to rely on the acquisition of technology from market providers to a large or sole extent (depending on each jurisdiction’s make or buy decisions). This can in turn facilitate the role of procurement as a tool of digital industrial policy, especially because procurement expenditure can be a way of ensuring demand for innovation, and because public sector technology adoption can be used as a domain for experimentation with new technologies and new forms of technology-enabled governance.

The European Union has set very high expectations in its Digital Agenda 2030, and the Commission has recently stressed that achieving them would require roughly doubling the predicted level of public procurement expenditure in digital technologies, and artificial intelligence (AI) in particular. It can thus be expected that the procurement of digital technologies will quickly gain practical importance even in jurisdictions that have been lagging so far.

However, echoing some of the issues concerning sustainable procurement, in this second stream of the ‘twin transition’, the uptake of procurement of digital technologies is slowed down by the complexity of procuring unregulated immature technologies, and the (digital) skills gaps in the public sector—which are exacerbated by the absence of a toolkit of regulatory and practical resources equivalent to that of green procurement. In such a context of technological fluidity and hype, given the skills and power imbalances between technology providers and public buyers, the shortcomings of the use of public procurement as a regulatory mechanism become stark and the flaws in the logic or expectation that procurement can be an effective tool of market steering are laid bare (Sanchez-Graells [2024]).

Public buyers are expected to act as responsible AI buyers and to ensure the ‘responsible use of AI’ in the public sector. The EU AI Act will soon establish specific requirements in that regard, although solely in relation to high-risk AI uses as defined therein. Implementing the requirements of the EU AI Act—and their extension to other types of uses of digital technology or algorithms as a matter of ‘best practice’—will leverage procurement processes and, in particular, the ensuing public contracts to impose the relevant obligations on technology providers. In that connection, the European Commission has promoted the development of model contractual AI clauses that seek to regulate the technology to be procured and their future use by the relevant public sector deployer.

However, an analysis of the model clauses and broader guidance on the procurement of AI shows that public buyers will still face a very steep knowledge gap as it will be difficult to set the detail of the relevant contracts, which will tend to be highly context dependent. In other words, the model clauses are not ‘plug and play’ and implementing meaningful safeguards in the procurement and use of AI and other digital technologies will require advanced digital skills and sufficient commercial leverage—which are not to be taken as a given. Crucially, all obligations under the model clauses (and the EU AI Act itself) hinge on (self-assessment) processes controlled by the technology provider and/or refer back to technical standards or the state-of-the-art, which are driven and heavily influenced (or entirely controlled) by the technology industry. Public buyers are at a significant disadvantage not only to set, but also to monitor compliance with relevant requirements.

This shows that, in the absence of mandatory requirements and binding (general) legislation, the use of procurement for regulatory purposes has a high risk of commercial determination and regulatory tunnelling as public buyers with limited skills and capabilities struggle to impose requirements on technology providers, and where references to standards also displace regulatory decision-making. This means that public procurement can no longer be expected to ‘monitor itself’, and that new forms of institutional oversight are required to ensure that the procurement of digital technologies works in the broader public interest.

V. Conclusion

Although the issues discussed above may seem rather disparate, they share a few common threads. First, in all areas, the regulatory use of procurement generates complexity and makes the day-to-day administration of procurement processes more complex. It can be hard for a public buyer to navigate socio-political, sustainability and digitalisation concerns—and these are only some of the ‘non-strictly procurement-related’ concerns and considerations to be taken into account. Such difficulty can be compounded by limited capabilities and by gaps in the required skills. While this is particularly clear in the digital context, the issue of limited (technical) capability is also highly relevant in relation to sustainable procurement. An imbalance in skills and commercial leverage between the public buyer and technology providers undermines the logic of using procurement as a regulatory tool. Implementation issues thus require much further thought and investment than they currently receive.

Ultimately, the effectiveness of the regulatory goals underpinning the leveraging of procurement hinges on the ability of public buyers to meaningfully implement them. This raises the further question whether all goals can be achieved at the same time, especially where there can be difficult trade-offs. And there can be many of those. For example, it can well be that the offeror of the most attractive technology comes from a ‘black-listed’ jurisdiction. It can also be that the most attractive technology is also the most polluting, or one that raises significant other risks or harms from a social perspective, etc. Navigating these risks and making the (implicit) political choices may be too taxing a task for public buyers, as well as raise issues of democratic accountability more generally. Moreover, enabling public buyers to deal with these issues and to exercise judgement and discretion reopens the door to risks of eg bias, capture or corruption, as well as maladministration and error, which are some of the core concerns in the narrow approach to the regulation of procurement as an administrative procedure to being with. Those trade-offs are also pervasive and hard to assess.

It is difficult to foresee the future, but my intuition is that the trend of piling up of regulatory goals on procurement’s shoulders will need to slow down or reverse if it is meant to remain operational, and that a return to a more paired down understanding of the role of procurement will need to be enabled by the emergence of (generally applicable) legislation and external oversight mechanisms that can discharge procurement of these regulatory roles. Or, at least, that is the way I would like to see the broader regulation and policymaking around procurement to evolve.

Bibliography

Andhov, Marta and Michal Andrzej Kania, ‘Restricting Freedom of Contract – the EU Foreign Subsidies Regulation and its Consequences for Public Procurement’ (2023) Journal of Public Procurement.

Arrowsmith, Sue, The Law of Public and Utilities Procurement. Regulation in the EU and the UK, vols 1 & 2 (3rd edn, Sweet & Maxwell 2014 and 2018).

Caranta, Roberto and Albert Sanchez-Graells (eds), European Public Procurement. Commentary on Directive 2014/24/EU (Edward Elgar 2021).

Georgopoulos, Aris, Bernard Hoekman and Petros C Mavroidis (eds), The Internationalization of Government Procurement Regulation (OUP 2017).

Halonen, Kirsi-Maria, ‘Is public procurement fit for reaching sustainability goals? A law and economics approach to green public procurement’ (2021) 28(4) Maastricht Journal of European and Comparative Law 535-555.

Janssen, Willem and Roberto Caranta (eds), Mandatory Sustainability Requirements in EU Public Procurement Law. Reflections on a Paradigm Shift (Hart 2023).

Sanchez-Graells, Albert, Public Procurement and the EU Competition rules (2nd end, Hart, 2015).

Sanchez-Graells, Albert, Digital Technologies and Public Procurement. Gatekeeping and Experimentation in Digital Public Governance (OUP 2024).

Steinicke, Michael and Peter L Vesterdorf (eds), Brussels Commentary on EU Public Procurement Law (C H Beck, Hart & Nomos 2018).

Innovation procurement under the Procurement Act 2023 -- changing procurement culture on the cheap?

On 13 November 2023, the UK Government published guidance setting out its ambitions for innovation procurement under the new Procurement Act 2023 (not yet in force, of which you can read a summary here). This further expands on the ambitions underpinning the Transforming Public Procurement project that started after Brexit. The Government’s expectation is that the ‘the new legislation will allow public procurement to be done in more flexible and innovative ways’, and that this will ‘enable public sector organisations to embrace innovation more’.

The innovation procurement guidance bases its expectation that the Procurement Act will unlock more procurement of innovation and more innovative procurement on the ambition that this will be an actively supported policy by all relevant policy- and decision-makers and that there will be advocacy for the development of commercial expertise. A first hurdle here is that unless such advocacy comes with the investment of significant funds in developing skills (and this relates to both commercial and technical skills, especially where the innovation relates to digital technologies), such high-level political buy-in may not translate into any meaningful changes. The guidance itself acknowledges that the ‘overall culture, expertise and incentive structure of the public sector has led to relatively low appetite for risk and experimentation’. Therefore, that greater investment in expertise needs to be coupled with a culture change. And we know this is a process that is very difficult to push forward.

The guidance also indicates that ‘Greater transparency of procurement data will make it easier to see what approaches have been successful and encourage use of those approaches more widely across the public sector.’ This potentially points to another hurdle in unlocking this policy because generic data is not enough to support innovation procurement or the procurement of innovation. Being able to successfully replicate innovation procurement practices requires a detailed understanding of how things were done, and how they need to be adapted when replicated. However, the new transparency regime does not necessarily guarantee that such granular and detailed information will be available, especially as the practical level of transparency that will stem from the new obligations crucially hinges on the treatment of commercially sensitive information (which is exempted from disclosure in s.94 PA 2023). Unless there is clear guidance on disclosure / withholding of sensitive commercial information, it can well be that the new regime does not generate additional meaningful (publicly accessible) data to push the knowledge stock and support innovative procurement. This is an important issue that may require further discussion in a separate post.

The guidance indicates that the changes in the Procurement Act will help public buyers in three ways:

  • ‘The new rules focus more on delivering outcomes (as opposed to ‘going through the motions’ of a rigid process). Contracting authorities will be able to design their own process, tailored to the unique circumstances of the requirement and, most importantly, those who are best placed to deliver the best solution.

  • There will be clearer rules overall and more flexibility for procurers to use their commercial skills to achieve the desired outcomes.

  • Procurers will be able to better communicate their particular problem to suppliers and work with them to come up with potential solutions. Using product demonstrations alongside written tenders will help buyers get a proper appreciation of solutions being offered by suppliers. That is particularly impactful for newer, more innovative solutions which the authority may not be familiar with.’

Although the guidance document indicates that the ‘new measures include general obligations, options for preliminary market engagement, and an important new mechanism, the Competitive Flexible Procedure’, in practice, there are limited changes to what was already allowed in terms of market consultation and the general obligations— to eg publish a pipeline notice (for contracting authorities with an annual spend over £100 million), or to ‘have regard to the fact that SMEs face barriers to participation and consider whether these barriers can be removed or reduced’—are also marginal (if at all) changes from the still current regime (see regs.48 and 46 PCR 2015). Therefore, it all boils down to the new ‘innovation-friendly procurement processes’ that are enabled by the flexible (under)regulation of the competitive flexible procedure (s.20 PA 2023).

The guidance stresses that the ‘objective is that the Competitive Flexible Procedure removes some of the existing barriers to procuring new and better solutions and gives contracting authorities freedom to enable them to achieve the best fit between the specific requirement and the best the market offers.’ The example provided in the guidance provides the skeleton structure of a 3-phase procedure involving an initial ideas and feasibility phase 1, an R&D and prototype phase 2 and a final tendering leading to the award of a production/service contract (phase 3). At this level of generality, there is little to distinguish this from a competitive dialogue under the current rules (reg.30 PCR 2015). Devil will be in the detail.

Moreover, as repeatedly highlighted from the initial consultations, the under-regulation of the competitive flexible procedure will raise the information costs and risks of engaging with innovation procurement as each new approach taken by a contracting authority will require significant investment of time in its design, as well as an unavoidable risk of challenge. The incentives are not particularly geared towards facilitating risk-taking. And any more detailed guidance on ‘how to'‘ carry out an innovative competitive flexible procedure will simply replace regulation and become a de facto standard through which contracting authorities may take the same ‘going through the motions’ approach as the process detailed in teh guidance rigidifies.

The guidance acknowledges this, at least partially, when it stresses that ‘Behavioural changes will make the biggest difference’. Such behavioural changes will be supported through training, which the guidance document also describes (and there is more detail here). The training offered will consist of:

  • Knowledge drops (open to everyone): An on-demand, watchable resource up to a maximum of 45 minutes in total, providing an overview of all of the changes in legislation.

  • E-learning (for skilled practitioners within the public sector only): a learning & development self-guided course consisting of ‘10 1-hour modules and concludes with a skilled practitioner certification’.

  • Advanced course deep dives (for public sector expert practitioners only): ‘3-day, interactive, instructor-led course. It consists of virtual ‘deep dive’ webinars, which allow learners to engage with subject matter experts. This level of interaction allows a deeper insight across the full spectrum of the legislative change and support ‘hearts and minds’ change amongst the learner population (creating ‘superusers’).’

  • Communities of practice (for skilled and expert practitioners only): ‘a system of collective critical inquiry and reflection into the regime changes. Supported by the central team and superusers, they will support individuals to embed what they have learned.’

As an educator and based on my experience of training expert professionals in complex procurement, I am skeptical that this amount of training can lead to meaningful changes. The 45-minute resource can hardly cover the entirety of changes in the Procurement Act, and even the 10 hour course for public buyers only will be quite limited in how far it can go. 3 days of training are also insufficient to go much further than exploring a few examples in meaningful detail. And this is relevant because that training is not only for innovation procurement, but for all types of ‘different’ procurement under the Procurement Act 2023 (ie green, social, more robustly anti-corruption, more focused on contract performance, etc). Shifting culture and practice would require a lot more than this.

It is also unclear why this (minimal) investment in public sector understanding of the procurement framework has not taken place earlier. As I already said in the consultation, all of this could have taken place years ago and a better understanding of the current regime would have led to improvements in the practice of innovative procurement in the UK.

All in all, it seems that the aspirations of more innovation procurement and more innovative procurement are pinned on a rather limited amount of training and in (largely voluntary, in addition to the day job) collaboration for super-user experienced practitioners (who will probably see their scarce skills in high demand). It is unclear to me how this will be a game changer. Especially as most of this (and in particular collaboration and voluntary knowledge exchange) could already take place. It may be that more structure and coordination will bring better outcomes, but this would require adequate and sufficient resourcing.

Whether there will be more innovation procurement then depends on whether more money will be put into procurement structures and support. From where I stand, this is by no means a given. I guess we’ll have to wait and see.

Thoughts on the AI Safety Summit from a public sector procurement & use of AI perspective

The UK Government hosted an AI Safety Summit on 1-2 November 2023. A summary of the targeted discussions in a set of 8 roundtables has been published for Day 1, as well as a set of Chair’s statements for Day 2, including considerations around safety testing, the state of the science, and a general summary of discussions. There is also, of course, the (flagship?) Bletchley Declaration, and an introduction to the announced AI Safety Institute (UK AISI).

In this post, I collect some of my thoughts on these outputs of the AI Safety Summit from the perspective of public sector procurement and use of AI.

What was said at the AI safety Summit?

Although the summit was narrowly targeted to discussion of ‘frontier AI’ as particularly advanced AI systems, some of the discussions seem to have involved issues also applicable to less advanced (ie currently in existence) AI systems, and even to non-AI algorithms used by the public sector. As the general summary reflects, ‘There was also substantive discussion of the impact of AI upon wider societal issues, and suggestions that such risks may themselves pose an urgent threat to democracy, human rights, and equality. Participants expressed a range of views as to which risks should be prioritised, noting that addressing frontier risks is not mutually exclusive from addressing existing AI risks and harms.’ Crucially, ‘participants across both days noted a range of current AI risks and harmful impacts, and reiterated the need for them to be tackled with the same energy, cross-disciplinary expertise, and urgency as risks at the frontier.’ Hopefully, then, some of the rather far-fetched discussions of future existential risks can be conducive to taking action on current harms and risks arising from the procurement and use of less advanced systems.

There seemed to be some recognition of the need for more State intervention through regulation, for more regulatory control of standard-setting, and for more attention to be paid to testing and evaluation in the procurement context. For example, the summary of Day 1 discussions indicates that participants agreed that

  • ‘We should invest in basic research, including in governments’ own systems. Public procurement is an opportunity to put into practice how we will evaluate and use technology.’ (Roundtable 4)

  • ‘Company policies are just the baseline and don’t replace the need for governments to set standards and regulate. In particular, standardised benchmarks will be required from trusted external third parties such as the recently announced UK and US AI Safety Institutes.’ (Roundtable 5)

In Day 2, in the context of safety testing, participants agreed that

  • Governments have a responsibility for the overall framework for AI in their countries, including in relation to standard setting. Governments recognise their increasing role for seeing that external evaluations are undertaken for frontier AI models developed within their countries in accordance with their locally applicable legal frameworks, working in collaboration with other governments with aligned interests and relevant capabilities as appropriate, and taking into account, where possible, any established international standards.

  • Governments plan, depending on their circumstances, to invest in public sector capability for testing and other safety research, including advancing the science of evaluating frontier AI models, and to work in partnership with the private sector and other relevant sectors, and other governments as appropriate to this end.

  • Governments will plan to collaborate with one another and promote consistent approaches in this effort, and to share the outcomes of these evaluations, where sharing can be done safely, securely and appropriately, with other countries where the frontier AI model will be deployed.

This could be a basis on which to build an international consensus on the need for more robust and decisive regulation of AI development and testing, as well as a consensus of the sets of considerations and constraints that should be applicable to the procurement and use of AI by the public sector in a way that is compliant with individual (human) rights and social interests. The general summary reflects that ‘Participants welcomed the exchange of ideas and evidence on current and upcoming initiatives, including individual countries’ efforts to utilise AI in public service delivery and elsewhere to improve human wellbeing. They also affirmed the need for the benefits of AI to be made widely available’.

However, some statements seem at first sight contradictory or problematic. While the excerpt above stresses that ‘Governments have a responsibility for the overall framework for AI in their countries, including in relation to standard setting’ (emphasis added), the general summary also stresses that ‘The UK and others recognised the importance of a global digital standards ecosystem which is open, transparent, multi-stakeholder and consensus-based and many standards bodies were noted, including the International Standards Organisation (ISO), International Electrotechnical Commission (IEC), Institute of Electrical and Electronics Engineers (IEEE) and relevant study groups of the International Telecommunication Union (ITU).’ Quite how State responsibility for standard setting fits with industry-led standard setting by such organisations is not only difficult to fathom, but also one of the potentially most problematic issues due to the risk of regulatory tunnelling that delegation of standard setting without a verification or certification mechanism entails.

Moreover, there seemed to be insufficient agreement around crucial issues, which are summarised as ‘a set of more ambitious policies to be returned to in future sessions’, including:

‘1. Multiple participants suggested that existing voluntary commitments would need to be put on a legal or regulatory footing in due course. There was agreement about the need to set common international standards for safety, which should be scientifically measurable.

2. It was suggested that there might be certain circumstances in which governments should apply the principle that models must be proven to be safe before they are deployed, with a presumption that they are otherwise dangerous. This principle could be applied to the current generation of models, or applied when certain capability thresholds were met. This would create certain ‘gates’ that a model had to pass through before it could be deployed.

3. It was suggested that governments should have a role in testing models not just pre- and post-deployment, but earlier in the lifecycle of the model, including early in training runs. There was a discussion about the ability of governments and companies to develop new tools to forecast the capabilities of models before they are trained.

4. The approach to safety should also consider the propensity for accidents and mistakes; governments could set standards relating to how often the machine could be allowed to fail or surprise, measured in an observable and reproducible way.

5. There was a discussion about the need for safety testing not just in the development of models, but in their deployment, since some risks would be contextual. For example, any AI used in critical infrastructure, or equivalent use cases, should have an infallible off-switch.

…

8. Finally, the participants also discussed the question of equity, and the need to make sure that the broadest spectrum was able to benefit from AI and was shielded from its harms.’

All of these are crucial considerations in relation to the regulation of AI development, (procurement) and use. A lack of consensus around these issues already indicates that there was a generic agreement that some regulation is necessary, but much more limited agreement on what regulation is necessary. This is clearly reflected in what was actually agreed at the summit.

What was agreed at the AI Safety Summit?

Despite all the discussions, little was actually agreed at the AI Safety Summit. The Blethcley Declaration includes a lengthy (but rather uncontroversial?) description of the potential benefits and actual risks of (frontier) AI, some rather generic agreement that ‘something needs to be done’ (eg welcoming ‘the recognition that the protection of human rights, transparency and explainability, fairness, accountability, regulation, safety, appropriate human oversight, ethics, bias mitigation, privacy and data protection needs to be addressed’) and very limited and unspecific commitments.

Indeed, signatories only ‘committed’ to a joint agenda, comprising:

  • ‘identifying AI safety risks of shared concern, building a shared scientific and evidence-based understanding of these risks, and sustaining that understanding as capabilities continue to increase, in the context of a wider global approach to understanding the impact of AI in our societies.

  • building respective risk-based policies across our countries to ensure safety in light of such risks, collaborating as appropriate while recognising our approaches may differ based on national circumstances and applicable legal frameworks. This includes, alongside increased transparency by private actors developing frontier AI capabilities, appropriate evaluation metrics, tools for safety testing, and developing relevant public sector capability and scientific research’ (emphases added).

This does not amount to much that would not happen anyway and, given that one of the UK Government’s objectives for the Summit was to create mechanisms for global collaboration (‘a forward process for international collaboration on frontier AI safety, including how best to support national and international frameworks’), this agreement for each jurisdiction to do things as they see fit in accordance to their own circumstances and collaborate ‘as appropriate’ in view of those seems like a very poor ‘win’.

In reality, there seems to be little coming out of the Summit other than a plan to continue the conversations in 2024. Given what had been said in one of the roundtables (num 5) in relation to the need to put in place adequate safeguards: ‘this work is urgent, and must be put in place in months, not years’; it looks like the ‘to be continued’ approach won’t do or, at least, cannot be claimed to have made much of a difference.

What did the UK Government promise in the AI Summit?

A more specific development announced with the occasion of the Summit (and overshadowed by the earlier US announcement) is that the UK will create the AI Safety Institute (UK AISI), a ‘state-backed organisation focused on advanced AI safety for the public interest. Its mission is to minimise surprise to the UK and humanity from rapid and unexpected advances in AI. It will work towards this by developing the sociotechnical infrastructure needed to understand the risks of advanced AI and enable its governance.’

Crucially, ‘The Institute will focus on the most advanced current AI capabilities and any future developments, aiming to ensure that the UK and the world are not caught off guard by progress at the frontier of AI in a field that is highly uncertain. It will consider open-source systems as well as those deployed with various forms of access controls. Both AI safety and security are in scope’ (emphasis added). This seems to carry forward the extremely narrow focus on ‘frontier AI’ and catastrophic risks that augured a failure of the Summit. It is also in clear contrast with the much more sensible and repeated assertions/consensus in that other types of AI cause very significant risks and that there is ‘a range of current AI risks and harmful impacts, and reiterated the need for them to be tackled with the same energy, cross-disciplinary expertise, and urgency as risks at the frontier.’

Also crucially, UK AISI ‘is not a regulator and will not determine government regulation. It will collaborate with existing organisations within government, academia, civil society, and the private sector to avoid duplication, ensuring that activity is both informing and complementing the UK’s regulatory approach to AI as set out in the AI Regulation white paper’.

According to initial plans, UK AISI ‘will initially perform 3 core functions:

  • Develop and conduct evaluations on advanced AI systems, aiming to characterise safety-relevant capabilities, understand the safety and security of systems, and assess their societal impacts

  • Drive foundational AI safety research, including through launching a range of exploratory research projects and convening external researchers

  • Facilitate information exchange, including by establishing – on a voluntary basis and subject to existing privacy and data regulation – clear information-sharing channels between the Institute and other national and international actors, such as policymakers, international partners, private companies, academia, civil society, and the broader public’

It is also stated that ‘We see a key role for government in providing external evaluations independent of commercial pressures and supporting greater standardisation and promotion of best practice in evaluation more broadly.’ However, the extent to which UK AISI will be able to do that will hinge on issues that are not currently clear (or publicly disclosed), such as the membership of UK AISI or its institutional set up (as ‘state-backed organisation’ does not say much about this).

On that very point, it is somewhat problematic that the UK AISI ‘is an evolution of the UK’s Frontier AI Taskforce. The Frontier AI Taskforce was announced by the Prime Minister and Technology Secretary in April 2023’ (ahem, as ‘Foundation Model Taskforce’—so this is the second rebranding of the same initiative in half a year). As is problematic that UK AISI ‘will continue the Taskforce’s safety research and evaluations. The other core parts of the Taskforce’s mission will remain in [the Department for Science, Innovation and Technology] as policy functions: identifying new uses for AI in the public sector; and strengthening the UK’s capabilities in AI.’ I find the retention of analysis pertaining to public sector AI use within government problematic and a clear indication of the UK’s Government unwillingness to put meaningful mechanisms in place to monitor the process of public sector digitalisation. UK AISI very much sounds like a research institute with a focus on a very narrow set of AI systems and with a remit that will hardly translate into relevant policymaking in areas in dire need of regulation. Finally, it is also very problematic that funding is not locked: ‘The Institute will be backed with a continuation of the Taskforce’s 2024 to 2025 funding as an annual amount for the rest of this decade, subject to it demonstrating the continued requirement for that level of public funds.’ In reality, this means that the Institute’s continued existence will depend on the Government’s satisfaction with its work and the direction of travel of its activities and outputs. This is not at all conducive to independence, in my view.

So, all in all, there is very little new in the announcement of the creation of the UK AISI and, while there is a (theoretical) possibility for the Institute to make a positive contribution to regulating AI procurement and use (in the public sector), this seems extremely remote and potentially undermined by the Institute’s institutional set up. This is probably in stark contrast with the US approach the UK is trying to mimic (though more on the US approach in a future entry).

AI in the public sector: can procurement promote trustworthy AI and avoid commercial capture?

The recording and slides of the public lecture on ‘AI in the public sector: can procurement promote trustworthy AI and avoid commercial capture?’ I gave at the University of Bristol Law School on 4 July 2023 are now available. As always, any further comments most warmly received at: a.sanchez-graells@bristol.ac.uk.

This lecture brought my research project to an end. I will now focus on finalising the manuscript and sending it off to the publisher, and then take a break for the rest of the summer. I will share details of the forthcoming monograph in a few months. I hope to restart blogging in September. in the meantime, I wish all HTCaN friends all the best. Albert