CJEU on solo bids by consortium member after partner's bankruptcy: a competition-friendly test? (C-396/14)

In its Judgment of 24 May 2016 in MT Højgaard and Züblin, C-396/14, EU:C:2016:347, the Court of Justice of the European Union (CJEU) ruled on whether the principle of equal treatment of economic operators must be interpreted as precluding a contracting entity from allowing an economic operator that is a member of a group of two undertakings which was pre-selected and which submitted the first tender in a negotiated procedure for the award of a public contract, to continue to take part in that procedure in its own name, after the dissolution of that group due to the bankruptcy of the other partner.

This case is important because, even if it is based on the 2004 EU utilities procurement rules (Dir 2004/17), it makes general statements that carry over to public procurement covered by any other set of EU rules (notably Dir 2014/24), or even simply covered by the EU general principle of equal treatment and non-discrimination--thus pervading (almost) all instances of procurement at Member State level. Also of note, the MT Højgaard and Züblin Judgment explores the implications of the application of the principle of equal treatment for intra-tender competition and supports a flexible approach to the modification of bidding consortia that seems to be clearly pro-competitive. However, the CJEU's reasoning in the specific case comes with some difficulties attached, particularly in terms of the desirability of bidding consortia beyond the specific tender and the compatibility of EU public procurement and competition law.

Findings of the Court

In MT Højgaard and Züblin, the CJEU was presented with a case where a contracting authority was running a negotiated procedure with a prior call for competition, and where the contracting authority indicated that it wanted to proceed to negotiations with between four and six candidates. It received expressions of interest from five candidates, which included both the group consisting of MT Højgaard and Züblin (‘the Højgaard and Züblin group’) and the group consisting of Per Aarsleff and E. Pihl og Søn A/S (‘the Aarsleff and Pihl group’). The contracting authority pre-selected all five candidates and invited them to submit tenders. One of the pre-selected candidates subsequently withdrew from the procedure. 

There are some procedural complications due to the parallel existence of the domestic bankruptcy proceedings but, for the purposes of our discussion, the relevant fact is that Pihl entered into bankruptcy prior to the submission of the tender, which de facto implied the dissolution of the Aarsleff and Pihl group, but Aarsleff decided to proceed as a solo tenderer. The contracting authority was thus left with two options: (a) to consider that Aarsleff was not qualified on its own merits and to carry on with the negotiated procedure with 'only' three tenders; or, conversely, (b) to consider that Aarsleff could benefit from the qualification of the group to which it initially belonged and go forward with its desired minimum of four tenders.

After some analysis, the contracting authority 'informed all the tenderers of its decision to allow Aarsleff to continue to take part, alone, in the procedure. [It] explained that decision by stating that Aarsleff, which was the leading contracting company in Denmark in terms of turnover for the financial years 2012 and 2013, satisfied the conditions required for participation in the negotiated procedure, even in the absence of the technical and financial capacities of Pihl . In addition, Aarsleff had taken over the contracts of more than 50 salaried staff of Pihl, including the individuals who were key to the implementation of the project concerned' (C-396/14, para 14). Aarsleff was thus allowed to submit a tender and, after a further round of best and final offers between the three better placed tenderers, it was awarded the contract. Unsurprisingly, the Højgaard and Züblin group challenged the award decision.

As we will see, allowing Aarsleff to progress to the negotiation phase as a solo tenderer raises two separate issues: 1) whether Aarsleff needed to team up with Pihl at all in order to participate in the negotiated procedure [notably because, as confirmed by the referring Danish public procurement complaints board, 'on the basis of the information provided concerning Aarsleff, that company would have been pre-selected if it had sought an invitation to take part in its own name instead of doing so through the intermediary of the Aarsleff and Pihl group', para 18]; and 2) whether Aarsleff's technical standing was being reassessed at a point where no other candidates or potentially interested undertakings were having their technical standing assessed, which would in itself be a competitive advantage. However, the CJEU does not really focus on either of these issues in detail and the test it creates seems to miss some important analytical issues--which assessment is too conveniently left to the referring authority.

Rather, the CJEU focuses on an analysis of the situation as a modification of the composition of the bidding consortium formed by Aarsleff and Pihl. In doing so, the CJEU resorts to its case law in Makedoniko Metro and Michaniki (C‑57/01, EU:C:2003:47) and considers that in the absence of EU and Danish rules on the composition of bidding consortia, 'the question of whether a contracting entity may allow such an alteration must be examined with regard to the general principles of EU law, in particular the principle of equal treatment and the duty of transparency that flows from it, and the objectives of that law in relation to public procurement' (para 36). It then carries on with such an assessment and, fundamentally, determines that

38 The principle of equal treatment of tenderers, the aim of which is to promote the development of healthy and effective competition between undertakings taking part in a public procurement procedure, requires that all tenderers must be afforded equality of opportunity when formulating their tenders, and therefore implies that the tenders of all competitors must be subject to the same conditions ...

41 ...  [the rules on qualitative selection] may be qualified in order to ensure, in a negotiated procedure, adequate competition ...

42 ... the contracting entity considered that there should be at least four candidates in order to ensure such competition.

43 If, however, an economic operator is to continue to participate in the negotiated procedure in its own name, following the dissolution of the group of which it formed part and which had been pre-selected by the contracting entity, that continued participation must take place in conditions which do not infringe the principle of equal treatment of the tenderers as a whole.

44 In that regard, a contracting entity is not in breach of that principle where it permits one of two economic operators, who formed part of a group of undertakings that had, as such, been invited to submit tenders by that contracting entity, to take the place of that group following the group’s dissolution, and to take part, in its own name, in the negotiated procedure for the award of a public contract, provided that it is established, first, that that economic operator by itself meets the requirements laid down by the contracting entity and, second, that the continuation of its participation in that procedure does not mean that the other tenderers are placed at a competitive disadvantage.

45      In the main proceedings, it must, first, be stated that it is apparent  that had Aarsleff, alone, made an application for an invitation to take part in the procedure, it would have been pre-selected ...

47      Last, as regards the fact that, after the dissolution of the Aarsleff and Pihl group, Aarsleff took on the contracts of 50 salaried staff of Pihl, including individuals who were key to the implementation of the construction project concerned, it is for the referring court to determine whether Aarsleff thereby acquired a competitive advantage at the expense of the other tenderers (C-396/14, paras 38-47, references omitted and emphasis added). 

There are some initial remarks to make in view of this. First, the CJEU continues to be largely captured by the trap of tender-specific reasoning when it indicates that 'the aim of [the principle of equal treatment of tenderers] is to promote the development of healthy and effective competition between undertakings taking part in a public procurement procedure' (para 38, emphasis added). This is so because the CJEU fails to take into account that modification of procedural requirements (such as qualitative selection) once the tender is on-going can have discriminatory effects against interested undertakings that decided not to participate in the tender due to the requirements now being modified.

More importantly, the CJEU seems to give great weight to the fact that the contracting authority had determined that, for there to be effective competition in that specific tender, 'there should be at least four candidates in order to ensure such competition' (para 42). This is troubling both because the establishment of a bracket of four to six candidates is an arbitrary decision and it is hard to accept that having three offers is insufficient in the specific tender while the contracting authority decided to have a round of final and best offers precisely with three tenderers only.

Thus, from a material point of view, the way the CJEU conceptualises the relevant competitive framework (as intra-tender, and subject to the minimum participation of four candidates) is very artificial. Nonetheless, these issues do not seem to weigh too heavily in the actual reasoning of the CJEU, which  imposes a flexible approach to the rules on modification of bidding consortia, subject to respect for the qualitative selection requirements imposed by the contracting authority (ie, no selective/preferential waivers), as well as the absence of competitive advantage.

changes in the composition of bidding consortia prior to award,
even when they are only a duo

In abstract and general terms, the approach taken by the CJEU should be welcome because it focuses on the creation of the maximum possible flexibility so as to preserve (intra-tender) competitive pressure. This is something I had broadly advocated for:

Member States should depart from formal criteria based on rigid interpretations of the principle of equal treatment in designing their domestic provisions on bidding consortia—such as rules regulating their composition, their modification, etc. Rules on bidding consortia should adopt a pro-competitive orientation and, consequently, should foster participation of consortia to the maximum possible extent permitted by competition law. In this regard, the general criterion should be to allow the most flexible solutions unless their implementation could be materially negative for the development of the tender process. Along these lines, in relation with, for example, modifications of a group of contractors—such as the inclusion of new members, exclusion or substitution of previous members, re-allocation of shares to the consortium, or of responsibilities and tasks, etc—these should be allowed under national public procurement rules if they are not material, in the sense that the modified composition or internal rules of the consortium have not altered the contracting authority’s decision to qualify the group or to allow it to proceed to any of the stages of the procurement process already conducted. It is submitted that this flexibility should go as far as to allow for the substitution of a consortium with one of its (leading) members, as long as it can prove that it still fulfils all the relevant requirements set by the tender specifications and documents (for instance, by subcontracting to the former members of the consortium or with equally acceptable or equivalent third companies)—since, at least functionally, the group of undertakings involved in the tender would not be materially altered, even though the distribution of risks, responsibilities and benefits amongst them might have significantly changed. Such flexibility is required by the need to favour the continued participation of consortia (or, at least, their core members) in the tender process, since it increases competition and enhances the chances of the public buyer obtaining value for money [A Sanchez-Graells, Public procurement and the EU competition rules, 2nd edn (Oxford, Hart, 2015) 339, footnotes omitted].

However, the issue here is that, in the specific case, it is unclear how Aarsleff could simultaneously have been qualified without resort to Pihl's specialist technical capabilities (particularly, in terms of human resources), and at the same time the fact that it took over the contracts of 50 of Pihl's employees is relevant in terms of ensuring that the changes to the consortium are not material for the purposes of allowing it to proceed as a solo tenderer. Without more details on the case, this is difficult to assess this issue, but it would seem that for Aarsleff's to meet the qualitative selection criteria on its own, it should have demonstrated to have capacity to carry out the specialist bits of the project independently. If this is true, then it would seem that Aarsleff and Pihl's consortium should not have been allowed at all, due to the uncompensated restriction of competition implicit in such type of teaming arrangement (see below).

However, if Aarsleff  had not demonstrated specialist capabilities at qualitative selection stage (because it was not a qualitative selection requirement) and this is only assessed at award stage, it seems that allowing it to rely on the fact that it took over employees from Pihl is a borderline case of conflation of selection and award criteria (not allowed under the rules of Dir 2004/17, but now allowed under the 2014 public procurement package). This can be problematic on its own, but the case does not provide enough information to assess it. At any rate, though, what seems very clear is that the contracting authority seemed to take a "dynamic approach" to the assessment of the technical capabilities of Aarsleff (first as part of the consortium and then on its own, but having taken over part of Pihl's workforce), which seems to create a competitive advantage per se [or, at least, to warrant a very close scrutiny, as stressed by AG Mengozzi in his Opinion (EU:C:2015:774, paras 80-82, not available in English)].

By not establishing this in clear terms and including this concern only as a caveat of the main test created in the MT Højgaard and Züblin Judgment, the CJEU leaves the assessment open to the consideration of the referring Danish complaints board. In that regard, it is important to stress that, in the latter's view,

[the contracting authority] laid down minimum conditions as to quality with respect to the technical capacities of the tenderers and was to undertake a qualitative assessment of the applications only if their number was greater than six. Aarsleff could therefore have been pre-selected in its own name, without being part of the Aarsleff and Pihl group. The fact that Aarsleff took the place of that group had, moreover, no effect on the situation of tenderers, in so far as none of the candidates was excluded in the pre-selection phase and none would have been rejected if Aarsleff itself had applied for an invitation to take part (C-396/14, para 19).

This may well lead the Danish complaints board to conclude that Aarsleff did not gain any competitive advantage over the other candidates participating in the tender. If nothing else, from the beginning, they knew that the capacities of Aarsleff and Pihl would be combined to submit a competing tender. The fact that Aarleff did that under its own name rather than in the name of the group could be seen as a formality without any practical relevance.

However, the broader point is that, once more, this type of reasoning can be affected by the trap of tender-specific reasoning. If it had been foreseeable for undertakings that decided not to participate in the tender that they would only need to demonstrate specialist technical capacity at tender award stage, then this is correct. However, if it would have been the reasonable interpretation that interested economic operators had to demonstrate such specialist capacity at qualitative selection stage, then the analysis would be wrong by failing to identify the discrimination/ disadvantage/ unequal treatment of potentially interested candidates that decided not to participate in the tender.

Thus, it would seem legally sounder to decide the case on the basis of whether the possibility to demonstrate that capacity at tender-specific level (ie award stage) was foreseeable ex ante (and legal, which seems difficult to justify on the basis of Dir 2004/17 and the Lianakis line of case law that controlled its interpretation), rather than whether it is discriminatory ex post. In any case, however, there is the broader issue that the CJEU does not tackle head on, and this is whether the Aarsleff and Pihl's consortium should not have been allowed at all due to its potential incompatibiity with competition law, which requires some attention.

the desirability of bidding consortia more broadly; did the CJEU miss it?

Overall, and from a logical perspective, the discussion on the rules applicable to changes in the composition of bidding consortia and their permissibility necessarily comes second to the broader question of the desirability of bidding consortia in themselves. In my view, this should be assessed under the following framework:

public procurement rules on teaming and joint bidding should be in perfect compliance with article 101 TFEU on agreements between undertakings and its case law—since public procurement rules cannot establish derogations or carve-outs to this fundamental provision of primary EU law ... In this regard, teaming and joint bidding must be seen as instances of collaboration between undertakings and, consequently, should be prohibited if they have as their object or effect the prevention, restriction or distortion of competition (ex art 101(1) TFEU), unless (i) they meet the requirements for the legal exemption of article 101(3) TFEU, (ii) they can be considered de minimis, or (iii) they are otherwise exempted from the general prohibition. Of particular relevance here will be the interpretation that should be given to article 101(3) TFEU in the field of public procurement—ie, what requirements should be met by efficient teaming and joint bidding agreements to benefit from the legal exemption. In this regard, it should be noted that—provided the conditions regarding the indispensability of the restrictions derived from the agreement, and regarding the preservation (rectius, non-elimination) of competition in the market are complied with, so that teaming and joint bidding agreements do not distort competition in the market—otherwise restrictive consortia agreements are desirable if they expand the number of candidates or tenderers (ie, if they are concluded between firms that do not have the economic capabilities to undertake the procured contract individually) and/or if they intensify the competition between existing candidates or tenderers (ie, if they improve upon the participants’ efficiency to the benefit of the public buyer). Therefore, the relevant criteria from a competition law perspective seem to be that teaming and joint bidding must contribute to intensifying competition within the tender while not generating significant competitive distortions in the market—eg, not generating significant exclusionary effects or otherwise imposing unnecessary restrictions on the market behaviour of the parties to the consortium agreement [Sanchez-Graells, Public procurement and the EU competition rules (2015) 338-339, footnotes omitted and emphasis added].

In this specific case, and on the basis of the limited information available in the MT Højgaard and Züblin Judgment, there seems to be a prima facie case to consider that Aarsleff could have participated in the tender on its own and, consequently, there was no justification for it to team up with Pihl if it was a potential competitor, or to prevent the creation of valuable subcontracting relationships between Pihl and third parties. At the very least, Aarsleff should be required to demonstrate and justify the advantages that it intended to achieve with its collaboration with Pihl and how these would have (or indeed have) been passed on to the contracting authority.Thus, a more detailed assessment would be necessary to determine whether the formation of the Aarsleff and Pihl group was in itself restrictive of competition--eg by allowing Aarsleff to 'grab' the specialist technical capabilities of Pihl in order to prevent it from teaming up with a potential competitor or to compete for the contract on its (if it had the necessary capacities)--or not. This is something only the Danish complaints board can do at this stage, if at all.

Final Comments

Overall, it can well be that all the issues discussed here are simply apparent problems derived from the very stylised version of the facts available in the MT Højgaard and Züblin CJEU Judgment. However, in my view, they serve as a cautionary tale against the adoption of seemingly competition-friendly solutions to deal with specific public procurement issues, without previously checking that the competitive situation is not conceived in an artificial manner (ie the need to avoid the trap of tender-specific reasoning) and that the more general compatibility between EU public procurement and competition law is ensured.

Commission Notice on notion of State aid shows contradictions with EU public procurement rules, in particular concerning aid and contracts for local sgei

The European Commission has published the final version of its much awaited Notice on the notion of State aid as referred to in Article 107(1) TFEU (unofficial version available here). The Notice sets out very detailed guidance on the basis of the existing case law of the Court of Justice of the European Union (CJEU), as well as some 'independent' policy options taken by the Commission of its own motion. One such policies where the Commission is developing its own 'innovative' approach (as part of its State aid control 2.0, or trying to be "big on big and small on small") concerns the interpretation of the requirement of 'effect on trade' as part of Art 107(1) TFEU prohibition and, more specifically, a soft approach to ‘purely local’ State aid measures, particularly for services of general economic interest (SGEIs) (see Notice (2016) paras 190 and ff) .

I criticised this development when it was first proposed in the draft Notice published by the Commission in 2014 [see A Sanchez-Graells, 'Digging itself out of the hole? A critical assessment of the European Commission’s attempt to revitalize State aid enforcement after the crisis' (2016) 4(1) J Antitrust Enforcement 157-187] and submitted that:

 In the [draft Notice] ... the Commission revisits the cases of ‘local SGEIs which do not really seem to affect trade between Member States’ and moves away from considering them as relatively isolated cases towards the creation of a general category of exempted (rectius, not covered) interventions, or a new ‘general exception’ to the application of EU State aid rules [a similar development can be identified in the reinterpretation or redefinition of certain other elements of the notion of State aid, such as selectivity. See Nicolaides (2015)]. Indeed, in [the draft Notice], the Commission takes the view that, in accordance with the CJEU case law, such services can in particular circumstances be regarded as not coming within the scope of Article 107(1) TFEU. In that regard, the Commission recasts three conditions that it considers to emerge from the decisional practice underlying those cases and that allow it to determine that, due to their specific circumstances, certain activities do not affect trade between Member States. Those conditions are that: (i) the aid does not lead to demand or investments being attracted to the region concerned and does not create obstacles to the establishment of undertakings from other Member States; (ii) the goods or services produced by the beneficiary are purely local or have a geographically limited attraction zone; and (iii) there is at most a marginal effect on the markets and on consumers in neighbouring Member States [draft Notice (2014) para 196].

In my view, this approach implicitly indicates that the Commission considers the existing de minimis regimes (both general and for SGEIs) insufficient to cover all ‘purely local interventions’. However, it has not made this explicit and the inadequacy of the existing framework for SGEI support when it comes to purely local interventions remains unclear—in particular in the case of State aid to providers of local healthcare or social services, which can easily be defined as services of general interest (either of an economic or non-economic nature, depending on the case) [see Sauter (2014) 84–109] and, hence, be covered by those sectoral State aid rules. As a result, blurring the boundaries of the notion of State aid at a conceptual level through such an exemption for ‘purely local interventions’ creates uncertainty as to the limits and scope of application of specific State aid regimes (in particular, the rules applicable to SGEI support) and muddles the legal framework applicable to sponsorship of local public services.

Even if the [draft Notice] is still susceptible to change prior to its delayed approval, the Commission has already been using the ‘purely local intervention exemption’ rather generously. Indeed, framing it as an additional effort to clarify to Member States that certain types of economic interventions do not require ex ante assessment despite not being covered by the 2014 GBER, the Commission has recently ‘packaged’ seven of its Decisions and used them to stress that in cases where support is granted to ‘an activity which has a purely local impact’ and which has ‘no – or at most marginal – foreseeable effects on cross-border investments in the sector or the establishment of firms within the EU’s Single Market’, the measure is deemed not to have an effect on trade ‘e.g. where the beneficiary supplies goods or services to a limited area within a Member State and is unlikely to attract customers from other Member States’ [see Commission (2015)]. This can be seen to create an implicit test of ‘significant probability’ of effect on cross-border trade that deviates from the ‘standard’ approach discussed above for ‘purely local State aid interventions’. Those decisions concerned healthcare; sports services; information, advisory and consultancy services to interested individuals, newly created firms and SMEs; as well as the expansion of port facilities. Almost all of them could have been covered by the SGEIs rules (pp. 177-178, emphasis added).

Taking a broader perspective, I also indicated that 'in some specific cases, the lack of clarity in the Commission’s approach to "purely local interventions" ... creates a clash between State aid rules and other tools of EU economic law, such as public procurement law, which I consider an unwelcome development' [Sanchez-Graells (2016) 179].

The final version of the Notice develops the guidance concerning the assessment of State aid measures' effect on trade beyond the content of the draft Notice and, in particular, alters the wording of para 196, which now reads: 'The Commission has in a number of decisions considered, in view of the specific circumstances of the cases, that the measure had a purely local impact and consequently had no effect on trade between Member States. In those cases the Commission ascertained in particular that the beneficiary supplied goods or services to a limited area within a Member State and was unlikely to attract customers from other Member States, and that it could not be foreseen that the measure would have more than a marginal effect on the conditions of cross-border investments or establishment'. This formulation conflates and reorganises the three criteria identified in the draft Notice, to the effect that criteria ii) and iii) of the draft Notice (ie local products or services, and marginal effect on neighbouring markets) are recombined to require that the aid concerns the supply of 'goods or services to a limited area within a Member State and [is] unlikely to attract customers from other Member States', and criterion i) (ie focus on freedom of establishment) is reworded: whereas the draft Notice required that 'the aid does not lead to demand or investments being attracted to the region concerned and does not create obstacles to the establishment of undertakings from other Member States', the Notice now simply indicates that 'it could not be foreseen that the measure would have more than a marginal effect on the conditions of cross-border investments or establishment'. Therefore, even in more clear terms than in the draft Notice, the Notice on the concept of State aid creates the implicit test of ‘significant probability’ of effect on cross-border trade I had criticised.

incompatibility with eu public procurement law

In my view, the test of ‘significant probability’ of effect on cross-border for 'purely local' State aid interventions (in particular for SGEIs) is problematic because, in addition to the messy situation concerning its compatibility with de minimis regimes, it creates an unclear exemption from the prohibition of Art 107(1) TFEU that Member States need to assess on the basis of their own assessment, which can clearly expose the system to strategic behaviour and makes it extremely weak in terms of effective oversight {issues I discuss in detail in Sanchez-Graells (2016)]. Additionally, this approach creates inconsistency, if not incompatibility, with the approach the CJEU has followed towards identifying the existence of cross-border interest for the purposes of EU public procurement law. Given the interaction between these two bodies of EU economic law, particularly in the commissioning or procurement of SGEIs, this is bound to be problematic.

Firstly, because it creates problems of ex post loading of the Commission’s intervention in the area of State aid enforcement, particularly when one considers cases where the Member States may misapply the still emerging 'purely local intervention' exemption by considering that there is no likely (significant) effect on trade and the Commission disagrees with that assessment (either motu proprio, or as a result of complaint). In those cases, the intervention of the Commission also comes too late and reliance on the interpretation of such unclear soft law regarding the coverage of 'purely local interventions' is bound to create legal uncertainty and litigation. And, secondly, because the development of contradictory criteria to determine coverage by different sets of rules of EU economic law that often need to be complied with cumulatively creates significant difficulties.

A comparison of two recent cases regarding minor port investments exemplifies such contradiction. One of the seven Decisions ‘packaged’ by the Commission to complement the 2014 GBER exemption with a light-touch approach to determining the absence of cross-border effects of “purely local” State aid measures involved investment aid for Lauwersoog port. The summary provided by the Commission is as follows: 'The investment project in the port of Lauwersoog consists in a lengthening of the quay in its fishing port, modernising its marina for pleasure boats and constructing a floating platform for recreational fishing. Lauwersoog port is mainly used by small fishing vessels which choose a port mainly in view of its geographical proximity to the relevant fishing grounds. The investment will not lead to a significant increase in the port’s capacities and, in particular, will not increase its capacity to cater for larger ships. Thus, the investment in the fishing port is targeted at a local market and will not have any significant effect on the patterns of trade between Member States in the sense that it would not provide incentives to fishermen from other Member States to use the Port of Lauwersoog rather than fishing ports in other Member States. The parts of the project aimed at recreational activities are also clearly targeted at a local market (the marina only has 60 moorings) and, as such, will not have any negative effect on cross-border trade' (emphasis added). Hence, in view of its purely local impact and the minimal incentives it creates for cross-border trade, the Commission decided that the investment does not constitute aid.

It is worth contrasting the approach in the Lauwersoog port case with that followed in the area of EU public procurement law by the CJEU [C-388/12, EU:C:2013:734, see here], where the direct award of a concession contract for the construction and management of a European Regional Development Fund (ERDF)-supported portuary infrastructure (a slipway) was directly awarded by the Italian Comune di Ancona to the local fishermen cooperative. The Comune di Ancona justified that it needed not comply with general principles of EU law governing the award of concessions contracts on the basis that the contract was not of cross-border interest (ie, fundamentally, that the award of the contract would not have an effect on intra-EU trade) [it must be noted that the case was decided prior to the adoption of Directive 2014/25 on concession contracts; however, general principles remain relevant; see A Sanchez-Graells, 'The Continuing Relevance of the General Principles of EU Public Procurement Law after the Adoption of the 2014 Concessions Directive' (2015) 10(3) European Procurement & Public Private Partnership Law Review 130-139].

The Comune di Ancona considered that the contract was not of cross-border interest (ie in the framework of the Notice on the concept of State aid, there was no significant probability of effect on cross-border trade) because the management of the slipway was 'subject to a number of conditions. These included the obligation to pay the Comune di Ancona an annual charge calculated in such a way as to avoid substantial net revenue being generated for either the concession-granting authority or the concessionaire; a prohibition on modifying the implementation conditions of the operation eligible for funding; a prohibition on engaging in profit-making activity; the obligation to comply with all the applicable EU directives and standards; and the obligation to maintain the public-service function and intended use of the structure at issue. It was also stated that the slipway was to remain, in any event, the property of the Comune di Ancona' [C-388/12, EU:C:2013:734, para 12].

The CJEU rejected the argumentation and subjected the award to the relevant EU public procurement obligations by clearly rejecting that the contract was of no cross-border interest, stressing that 'the Comune di Ancona has not invoked any objective facts capable of explaining the lack of any transparency in the award of the concession. On the contrary, it maintained that the concession was not liable to interest undertakings located in other Member States, in so far as the concession granted to the Pescatori cooperative was designed so as not to be capable of generating substantial net revenue for its beneficiary or an undue advantage for the latter or for the municipality. However, the fact that a concession is not capable of generating substantial net revenue or an undue advantage for an undertaking or for a public body does not, in itself, support the inference that the concession is of no economic interest for undertakings located in Member States other than that of the contracting authority. In the context of an economic strategy to extend part of its activities to another Member State, an undertaking may take the tactical decision to seek the award in that State of a concession despite the fact that that concession is incapable as such of generating sufficient profit, since that opportunity could nevertheless enable the undertaking to establish itself on the market of that State and to make itself known there with a view to preparing its future expansion' (C-388/12, EU:C:2013:734, paras 50-51, emphasis added).

In my view, at least as a matter of principle, the approach of both cases is diametrically opposed. In the public procurement field, there is no de minimis exemption and any potential impact on cross-border trade, even hypothetical, triggers compliance with public procurement principles (and rules) [see A Sanchez-Graells, Public procurement and the EU competition rules, 2nd edn (Oxford, Hart, 2015) 225-26]. On the contrary, in the field of State aid and with the push for the 'purely local intervention exemption', the Commission seems willing to create such (additional) de minimis exemption from the need for Member States to either fit the aid measure within the applicable block exemption regulation (ie, either the 2014 GBER, general de minimis rules, or the SGEI package) or obtain an individual authorisation from the Commission. Overall, this creates internal inconsistencies in areas of EU economic law that require more convergence, particularly if the direct award of the contract results in the presumption that State aid was illegally granted [see A Sanchez-Graells, 'Public Procurement and State Aid: Reopening the Debate?' (2012) 21(6) Public Procurement Law Review 205-12]; and, more generally, creates a problem for the Commission to identify and properly tackle cases where the Member States improperly apply this (still emerging) 'purely local intervention exemption'. Thus, in my view, this is an unwelcome development of EU State aid policy, and one where I would expect litigation soon to emerge.

Interesting short paper on public procurement and competition law: Blažo (2015)

Reading O Blažo, 'Public Procurement Directive and Competition Law - Really United in Diversity?' (2015), I have found some interesting and thought-provoking remarks on the impact of public procurement regulation over the effectiveness of competition law enforcement. The paper focuses 'mainly on three problematic issues: participation of companies of the same economic group in public procurement procedure, disqualification for cartel infringement, attractiveness of leniency programme'.

Multiple bidding by members of an economic group

Blažo's discussion of the issue of multiple participation by companies of the same economic group discusses Assitur (C-538/07, EU:C:2009:317), where the Court of Justice of the European Union (CJEU) declared contrary to EU public procurement law an Italian rule not allowing companies linked by a relationship of control or significant influence to participate, as competing tenderers, in the same procedure for the award of a public contract. The CJEU determined that, 'while pursuing legitimate objectives of equality of treatment of tenderers and transparency in procedures for the award of public contracts, [a national rule that] lays down an absolute prohibition on simultaneous and competing participation in the same tendering procedure by undertakings linked by a relationship of control or affiliated to one another, without allowing them an opportunity to demonstrate that that relationship did not influence their conduct in the course of that tendering procedure' is incompatible with EU public procurement law (para 33, emphasis added). 

Blažo considers that this 'appears as “over-regulation” and “under-regulation” [at] the same time in his context: it does not solve problem of participation of several companies forming of one economic group in one tender procedure and on the other hand outlaws their automatic exclusion'. I would disagree with this critical assessment and submit that the CJEU reached a good balance of competing interests (ie ensuring sufficient intra-tender competition vs avoiding collusion or manipulation risks). As I wrote in Public procurement and the EU competition rules, 2nd edn (Oxford, Hart, 2015) 341-342 (references omitted): 

the grounds for exclusion based on professional qualities of the tenderers—and the existence of relationships of control between them, or their control structure, is clearly a professional quality—are exhaustively listed in article 57 of Directive 2014/24, which precludes Member States or contracting authorities from adding other grounds for exclusion based on criteria relating to professional qualities of the candidate or tenderer, such as professional honesty, solvency and economic and financial capacity. Nevertheless, it does not preclude the option for Member States to maintain or adopt substantive rules designed, in particular, to ensure, in the field of public procurement, observance of the principle of equal treatment and of the principle of transparency. Given that the extension of the ban on multiple bidding has as its clear rationale the prevention of discrimination between self-standing entities and those integrated in group structures, prima facie it seems to constitute a case of permitted additional ground for the exclusion of tenderers not regulated by article 57 of Directive 2014/24.

However, as also noted, when establishing these additional grounds for the exclusion of tenderers, Member States must comply with the principle of proportionality and the automatic exclusion of tenderers for the sole fact of belonging to the same legal group seems to be in breach of this latter requirement. Interestingly, EU case law seems to be moving in the direction of restricting the scope of this type of (extended) prohibition by outlawing the automatic exclusion from tendering procedures of tenderers between which there exists a relationship of control (as defined by national law) without giving them an opportunity to prove that, in the circumstances of the case, that relationship had not led to an infringement of the principles of equal treatment of tenderers and of transparency.

This would be in line with the rules applicable to the treatment of conflicts of interest (art 24 Dir 2014/24), which only justify the exclusion of candidates and tenderers ‘where a conflict of interest … cannot be effectively remedied by other less intrusive measures’ (art 57(4)(e) Dir 2014/24). 

Exclusion of competition law infringers, Self-cleaning & impact on the attractiveness of leniency programmes

Interestingly, Blažo explains that, under the version of Slovak procurement law prior to the transposition of Dir 2014/24, contracting authorities were bound to exclude tenderers that had been convicted of infringements of competition law [on this, see Generali-Providencia Biztosító, C-470/13, EU:C:2014:2469, and discussion here], but 'undertaking[s] who successfully qualified for the leniency program (immunity as well as fine
reduction)' were not excluded from participation in public procurement procedures. Or, in more detail, 'The scheme excluding entrepreneurs who have been convicted of a cartel in public procurement applies automatically, therefore there is no need to issue any other disqualification decision. It is also a compulsory system, thus the contracting authority authority shall be obliged to exclude such an undertaking ex officio, and the law does not allow any way to alleviate such sanctions. Only the undertaking who takes part in an agreement restricting competition in public procurement can avoid exclusion from public procurement, its cooperation with the Antimonopoly Office in leniency program' (Blažo, p. 1494).

Blažo then goes on to assess the changes that the transposition of Dir 2014/24 will require [in particular, art 57(4)(d) on the exclusion of competition law infringers and art 57(6) on self-cleaning, for discussion, see here and A Sanchez-Graells, 'Exclusion, Qualitative Selection and Short-listing', in F Lichère, R Caranta & S Treumer (eds), Modernising Public Procurement. The New Directive, vol. 6 European Procurement Law Series (Copenhagen, DJØF, 2014) 97-129], noting that 'the directive does not expressly mention leniency program as an exemption from exclusion'; and, in particular, criticises the fact that Art 57(7) requires that Member States 'shall, in particular, determine the maximum period of exclusion if no [self-cleaning] measures ... are taken by the economic operator to demonstrate its reliability. Where the period of exclusion has not been set by final judgment, that period shall not exceed ... three years from the date of the relevant event in the cases referred to in paragraph 4'. In view of this, Blažo concludes that

If the contracting entity wishes to establish an infringement using a final decision of competition authority (or judgment dismissing the action against such a decision), it is almost unrealistic to have these documents available within three years from the infringement, or the time for which the undertaking can be excluded from public procurement will be very short. It is obvious that word-by-word transposition of the PPD into Slovak legal order eliminates current patterns punishment of undertakings for bid rigging and replaces it with a system that does not constitute a sufficient threat of sanctions, which would have preventive effects against cartels in public procurement. Furthermore even in case of effective application of this system, it may discourage leniency applicants and thus undermine effective public enforcement of competition law (p. 1495).

I share some of his concerns about the difficulty of establishing appropriate timeframes for exclusion based on competition law infringements. As I pointed out in Public procurement and the EU competition rules, 2nd edn (2015) 291:

This raises the issue of how to compute the maximum duration, particularly in the case of article 57(4) violations, as the reference to the ‘relevant event’ admits different interpretations (ie, either from the moment of the relevant violation, or the moment in which the contracting authority is aware of it or can prove it). Given that some of the violations may take time to identify (eg, emergence of a previous bid rigging conspiracy that can be tackled under art 57(4)(c) Dir 2014/24), a possibilistic interpretation will be necessary to avoid reducing the effectiveness of these exclusion grounds. In any case, compliance with domestic administrative rules will be fundamental.

However, I am not sure that I share the concerns about the effectiveness of leniency programmes and their attractiveness for undertakings that may risk exclusion from procurement procedures. First, I am generally sceptical of the claim that leniency programmes need to be protected at all costs (see here, here and here). Second, and looking specifically at the worry that not having a mention to leniency programmes in Dir 2014/24 may exclude or reduce the possibility for contracting authorities (or Member States) to treat leniency applicants favourably in the procurement context, I am not sure that this is the case, mainly, because it would still seem possible for competition rules to foresee that any final decisions declaring the infringement of competition law should not include sanctions concerning debarment from public procurement procedures for leniency applicants (I am not convinced that this is desirable, but it is certainly possible). In that case, there would be no final judgment from which the exclusion could derive and, consequently, contracting authorities intending to exclude the leniency applicant in view of its previous infringement of competition law would be using their discretion to exclude without the constraints derived from the previous decision. This has a significant impact in terms of self-cleaning.

While Art 57(6) in fine foresees that 'An economic operator which has been excluded by final judgment from participating in procurement ... shall not be entitled to make use of the [self-cleaning] possibility ... during the period of exclusion resulting from that judgment in the Member States where the judgment is effective' [something I criticised in 'Exclusion, Qualitative Selection and Short-listing' (2014) 113], this restriction does not apply in the absence of a final judgment imposing the exclusion. Thus, the successful leniency applicant would still be able to rely on its leniency application and collaboration with the competition authority in order to claim it has complied with the requirements of the self-cleaning provisions in Art 57(6) Dir 2014/24. The sticky point would be the need to 'prove that it has paid or undertaken to pay compensation in respect of any damage caused by the ... misconduct'. Of course, this takes us back to the claim that leniency programmes will not be attractive if, in addition to exempting the applicant from the competition fine that would otherwise be applicable (let's remember it can be up to 10% of its turnover), they do not also shield competition law infringers from claims for damages--and now public procurement debarment. As mentioned, I am highly sceptical of these claims and, from a normative perspective, I am not persuaded that leniency should come at such high cost.

In any case, these are interesting issues and it would be very relevant to engage in empirical research to see if the entry into force of Dir 2014/24 last month actually has an impact on the effectiveness of leniency programmes in the EU.

Some thoughts on circular economy and public procurement - a propos Witjes & Lozano (2016)

The emphasis on sustainability and more effective resource management in all dimensions of public policy or, in other words, the move towards a circular economy [as first formalised by RA Frosch & N Gallopoulos, 'Strategies for manufacturing' (1989) 261(3) Scientific American 144-152] has clear public procurement implications. This has been stressed in the recent Action Plan for the Circular Economy developed by the European Commission.

The Action Plan stresses several ways in which public procurement policy can be developed or adjusted. In particular, it indicates that
 

Public procurement accounts for a large proportion of European consumption (nearly 20% of EU GDP). It can therefore play a key role in the circular economy, and the Commission will encourage this role through its actions on Green Public Procurement (GPP), where criteria are developed at EU level and then used by public authorities on a voluntary basis. First, the Commission will make sure that in future, special emphasis is placed on aspects relevant to the circular economy, such as durability and reparability, when setting out or revising criteria. Secondly, it will support a greater uptake of these criteria by public authorities, and reflect on how GPP could be used more widely across the EU, in particular for products or markets that have high relevance for the circular economy. Finally, the Commission will lead by example, by making sure that Green Public Procurement is used as widely as possible in its own procurement, and by reinforcing the use of GPP in EU funding.

- The Commission will specifically consider proportionate requirements on durability and the availability of repair information and spare parts in its work on Ecodesign, as well as durability information in future Energy Labelling measures.

- In the revised waste proposals, the Commission proposes new rules which will encourage reuse activities.

- The Commission will work towards better enforcement of the guarantees on tangible products, examine possible options for improvement, and tackle false green claims

- The Commission will prepare an independent testing programme under Horizon 2020 to help the identification of issues related to possible planned obsolescence. This work would involve relevant stakeholders as appropriate.

- The Commission will take action on Green Public Procurement (GPP), by emphasising circular economy aspects in new or revised criteria, supporting higher uptake of GPP, and leading by example in its own procurement and in EU funding.

The Action Plan also specifies that 'Public authorities can also contribute to the demand for recycled materials through their procurement policies.'

All of this is very closely linked to a 'classical' understanding of green public procurement (GPP), on which the European Commission has recently published the third edition of its Buying green! Handbook, and points towards two main issues under the rules of Directive 2014/24: technical specifications (including preliminary market consultations aimed at their definition) and life-cycle costing methods as part of contract award criteria [for discussion, see A Sanchez-Graells, Public procurement and the EU competition rules, 2nd edn (Oxford, Hart, 2015) 327-336, 373-377 and 379-388]. Within this framework, it seems natural that contracting authorities can enjoy discretion to determine what to buy and, subject to requirements of technical neutrality (see here) and the avoidance of technical steering by undertakings involved in the market consultations (see here), and to the development of appropriate and transparent methodologies for life-cycle costing (which can be very challenging, if at all possible, see here), this should not require any changes in the applicable EU public procurement legal framework.

However, there is a different interpretation of the Action Plan for the Circular Economy that conflates resource-based issues linked to GPP with other socio-economic dimensions of a broader understanding of the circular economy. I find this very problematic because it is increasingly clear to me that environmental and social considerations cannot be assessed (or promoted) together--or, strictly, under the same rules and with the same leeway for contracting authorities--due to their different impacts on market competition and local protection, and to the fact that the EU has a significant volume of environment-related competences, whereas its ability to regulate in social matters is extremely limited, if not practically non-existent. Thus, a trend that bundles together the pursuit of environmental and social considerations as part of a broader understanding of smart or sustainable procurement can be analytically problematic and result in proposals that do not pass legal muster.

This is particularly clear in positions such as the one advanced by S Witjes & R Lozano, 'Towards a more Circular Economy: Proposing a framework linking sustainable public procurement and sustainable business models' (2016) 112 Resources, Conservation and Recycling 37–44, where the authors claim that 'a Circular Economy has been proposed as one of the latest concepts for addressing both the environmental and socio-economic issues. A Circular Economy aims at transforming waste into resources and on bridging production and consumption activities' (emphasis added). Their paper 'proposes a framework to include technical and non-technical specifications of product/service combinations that improve resource usage efficiency through recovery. The framework also considers socio-cultural specifications and physical and social proximity between the stakeholders in the procurement process. The framework is based on collaboration, which is a vital link between the public procurement process and the development of more sustainable business models'.

Their main claim is that a shift from product based procurement towards service-based sustainable public procurement (SPP) is desirable and likely to achieve superior results in terms of sustainability, which they represent as a change of paradigm in terms of engagement with suppliers from the (current) tender stage to a much earlier preparation stage (see graphs below).

In their own words: 'Long term collaboration during the SPP process requires a shift from the technical specifications set up by the procurer to a more collaborative discussion on, and definition of, the proposed technical and non-technical specifications between the supplier and procurer. In addition, socio-cultural specifications, such as beliefs and attitudes of the people contributing to the procurement process ... must be included in the SPP process. While the technical and non-technical specifications drive the supplier and procurer to develop products or services aiming for more resource efficiency, the socio-cultural specifications will help the parties to hire and train personnel specifically for the co-development process, addressing the Social innovation and Multi-stakeholder involvement components of the resource efficiency transformations proposed by the European Commission' in Directive 2014/24 [sic] (emphasis added).

I find this very problematic for several reasons. First, because the dialogue on (technical) environmental issues can be achieved through market consultations and the effective use of variant bids and technical equivalents, without creating market foreclosure at early stages of the procurement procedure. Second, because the suggestion that contracting authorities can select tenderers on the basis of 'socio-cultural specifications' (sic, criteria) simply runs against the case law of the Court of Justice of the European Union that bans the use of general corporate policies for the purposes of qualitative selection--as clearly stressed in the fair trade coffee case (Commission v Netherlands, C-368/10, EU:C:2012:284; for discussion, see Sanchez-Graells, Public procurement and the EU competition rules, 2nd edn (2015) 388). And, finally, because this sort of arguments do not discriminate between types of procurement and goods to be sourced by the contracting authority. There certainly has to be a (very significant) threshold for contracting authorities to team up at such an early stage and get involved in the development of the technical solution to its needs, which has traditionally been linked to the possibility to use a technical dialogue and, more recently, an innovation partnership procedure--both of which surely must remain exceptional in terms of the volume of (non off the shelf, highly complex, highly value added) procurement they channel.

Overall, then, I think that the discussion on the interaction between circular economy and public procurement should remain restricted to the maximisation of green public procurement in both an innovation-promoting and competition-neutral way. And I also think that the discussion on the use of public procurement to achieve social outcomes need to be kept separately and subjected to very strict proportionality requirements due to its high risk for abuse of discretion, protectionism and, more generally, poor procurement practices leading to reduced value for money (for extended discussion in view of RegioPost, see here). In particular, I find the idea that public procurement should be used to support the emergence and consolidation of alternative forms of (corporate) governance deeply troubling, and I do not think that the issue of collaboration between private and public sector should aim at pre-selecting the modes of business structure 'for the future', however sustainable they may present themselves. The use of (public) consumption as a form of undercover economic regulation is certainly undesirable. However, this seems to be an issue that may be favoured by current policy directions...

Again, on the 'tricky' concept of State resources under EU State aid law: GC rules on German financial support for renewable energy (T-47/15)

In its Judgment of 10 May 2016 in Germany v Commission, T-47/15, EU:T:2016:281, the General Court (GC) has revisited once more the tricky issue whether publicly-mandated payments between private economic operators can constitute State aid. The GC has followed the functional approach of the Court of Justice (ECJ) in Vent De Colère and Others (C-262/12, EU:C:2013:851, see here), continuing a line of case law that distinguishes PreussenElektra (C-379/98, EU:C:2001:160, see here), and further minimising the 'outlier' decision in Doux Élevages and Coopérative agricole UKL-AREE (C-677/11, EU:C:2013:348, see here).

In the case at hand, the relevant German scheme of financial support for the production of renewable energy created both mandatory purchase obligations of energy from renewable sources ('EEG energy') at above-market prices (the 'support scheme'), and reductions in such surcharges for certain types of electric-intensive undertakings in the manufacturing sector (or 'EUIs') (the 'compensation scheme'). Thus, the EEG energy financial scheme included both measures in support of producers and of 'heavy-users' of electricity. Importantly, all these financial measures were managed by intermediaries in the energy markets. The Commission had found this scheme in breach of EU State aid rules, unless stringent conditions applied.

One of Germany's main submissions against the application of State aid rules by the Commission (mainly, Art 107 TFEU) to prohibit was that the EEG energy support and compensation schemes was that 'according to the case-law, payments between individuals which are ordered by the State without being imputable to the budget of the State or of another public body and in respect of which the State does not relinquish any resources, in whatever form (such as taxes, duties, charges and so on), retain their private-law nature' (para 73).

This submission triggers an analysis of whether such payments qualify as State resources, which mainly hinges on whether the State has control over those funds. Seeking to rely on PreussenElektra and Doux Élevages, the arguments submitted by Germany focused on the fact that the aid was administered 'at arms length' by the energy intermediaries. On the contrary, seeking to rely on a functional approach to the assessment of 'public control' of the private funds that derived from the EEG energy financial scheme, the Commission's arguments were closer to the position of the ECJ in Vent De Colère.

In order to assess these issues, the GC reiterated consolidated case law of the ECJ and stressed that 'Article 107(1) TFEU covers all the financial means by which the public authorities may actually support undertakings, irrespective of whether or not those means are permanent assets of the public sector. Therefore, even if the sums corresponding to the measure in question are not permanently held by the Treasury, the fact that they constantly remain under public control, and therefore available to the competent national authorities, is sufficient for them to be categorised as State resources' (para 83).

In the assessment of the EEG energy support and compensation schemes, the GC engaged in a reasoning that, fundamentally, relied on two main issues: 1) the fact that German law imposed on specific energy intermediaries (in the case, on transmission system operators, or TSOs) obligations oriented towards the administration of the EEG energy financial schemes that 'can be assimilated, from the point of view of their effects, to a State concession' (para 93); and 2) the fact that the funds raised through the EEG energy financial schemes are ring-fenced by law or, in other words, 'the funds are not paid into the TSOs’ general budget or freely available to them, but are subject to separate accounting and allocated exclusively to the financing of the support and compensation schemes, to the exclusion of any other purpose' (ibid).

As a result of these two circumstances, the GC concludes that 'the funds generated by the EEG surcharge and administered collectively by the TSOs remain under the dominant influence of the public authorities in that the legislative and regulatory provisions governing them enable the TSOs, taken together, to be assimilated to an entity executing a State concession' (para 94, emphasis added). Or, even more clearly, that 'the fact that the State does not have actual access to the resources generated by the EEG surcharge, in the sense that they indeed do not pass through the State budget, does not affect ... the State’s dominant influence over the use of those resources and its ability to decide in advance, through the adoption of the EEG 2012, which objectives are to be pursued and how those resources in their entirety are to be used' (para 118).

The second key element in the analysis, in my view, is that the GC gives significant relevance to the fact that the payments ultimately required from consumers derived necessarily from the existence of the German law enacting the . In other words, the GC relied heavily on the fact that the surcharges amounted to '20% to 25% of the total amount of an average final consumer’s bill. Having regard to the extent of that burden, its passing on to final consumers must therefore be regarded as a consequence foreseen and organised by the German legislature. It is thus indeed on account of the EEG 2012 that final electricity consumers are, de facto, required to pay that price supplement or additional charge. It is a charge that is unilaterally imposed by the State in the context of its policy to support producers of EEG electricity and can be assimilated, from the point of view of its effects, to a levy on electricity consumption in Germany. Indeed, that charge is imposed by a public authority, for purposes in the general interest, namely protection of the climate and the environment by ensuring the sustainable development of energy supply and developing technologies for producing EEG electricity, and in accordance with the objective criterion of the quantity of electricity delivered by suppliers to their final customers' (para 95, emphasis added).

In my view, the GC is right on both points, and both the functional analysis of the control the State exercises over ring-fenced mandatory charges and the stress given to the (para)fiscal nature of the charge are good justifications for the enforcement of State aid rules against this type of State intervention--thus closing the gap created by cases such as Doux Élevages. 

However, the case also leaves a strange aftertaste due to the references to a 'State concession'. Given the increasing body of EU economic law applicable to concessions (notably, Dir 2014/23, which does not seem to have much to do with what the GC assessed in Commission v Germany), it would probably have been preferable for the GC to keep a stricter use of language.

In that regard, if the GC actually wanted to stress that the intermediaries administering the EEG energy financial scheme were exercising (quasi) delegated public powers or (quasi) delegated State prerogatives (which was the language used in Doux Élevages, para 32), then it better ought to say so in those terms. Otherwise, there is a risk of generating additional confusion in an area of EU economic law that, honestly, is getting ever more complex.

RegioPost and its implications: personal notes of the full extended discussion at Bristol conference

Pictures by @PetraOden & @asanchezgraells

Spending a whole day with friends and distinguished academics discussing the RegioPost judgment and its implications for the enforcement of labour law standards in public procurement settings under EU law proved to be both intellectually challenging and very rewarding. I am sincerely grateful to all speakers and participants for the excellent exchange of ideas (the event was definitely not short on controversy ...).

It will take us some time to get the formal publication of the proceedings of the conference in place, so I thought it would useful to advance here some of the most salient issues discussed at the event. These are my (lengthy) personal notes and, even if I tried to capture the essence of the speakers' presentations, they may not represent their views and they do not bind them in any way; all mistakes in these notes are my own.

Joanne Conaghan gave us a very warm welcome (literally, for it was a really hot day in Bristol after the gorgeous weekend weather) and stressed the relevance of putting the discussions to be held in the broader context of the constant struggle of harmonising economic and social considerations in any regulatory and policy framework.

With this in mind, the discussions for the day were organised around four panels, covering in turn different perspectives of the RegioPost judgment and, more generally, the difficulties and challenges in enforcing labour standards through public procurement. 

Panel 1: Constitutional and Internal Market Aspects of the Enforcement of Labour Standards in the EU

Constitutional view on RegioPost

Phil Syrpis' paper addressed the constitutional framework considering the dynamic relationship between secondary and primary EU law, and in particular how the posting of workers directive (PWD) impacts on provision of services in the EU. Two constitutional visions: a) all secondary legislation is under the Treaties and, consequently, secondary law cannot have any influence on the way the CJEU interprets primary law; b) more organic or heterarchical model, the CJEU’s monopoly on the interpretation of primary law is necessarily complemented by legislative action whereby the legislative institutions provide input on the context of the rights and, consequently, the CJEU should take this into account when interpreting rights under the Treaties.

Not clear how secondary law in conflict with previous case law of the CJEU should be dealt with, as both models are in tension. The case law of the CJEU is inconsistent and the Court has not clarified what is the right approach in cases of conflict between secondary law and previous case law interpreting primary law. As an aside – these issues raise important points for Brexit, particularly when some directives create individual rights, as well as the possibility for MS to shape social and citizenship rights and influence the case law of the CJEU.

Initial reaction to RegioPost is that it clarifies some issues, but it confuses others too. Essentially, the question was about compatibility with Art 56 TFEU for the regional government to insist on compliance with regional minimum wage. Usefully, the CJEU distinguished between exhaustive and non-exhaustive harmonisation. Where there is exhaustive harmonisation, the framework provided by the secondary legislation displaces that of the Treaty. From a constitutional perspective, that is the easy case. However, Art 26 Dir 2004/18 does not lay down exhaustive rules on contract performance and, consequently, the analysis of legality needs to be carried out under primary law—ie Art 56 TFEU. Moreover, Art 26 explicitly required for contract compliance clauses to be in compliance with Union Law.

However, in para 60 of RegioPost, despite saying they would assess under primary law, the Court actually assessed compliance with the PWD, which is a measure of non-exhaustive secondary legislation as well. In the light of the relationship between primary and secondary law, this approach is strange and complicates the issue of what the hierarchies are. The provision of regional law was determined to be compatible with EU law due to compliance with Art 3 PWD, rather that Art 56 TFEU, which is unusual and confusing.

Distinction between exhaustive and non-exhaustive harmonisation presupposes that most initiatives by the EU legislator will be of exhaustive harmonisation. However, exhaustive harmonisation is never the case, particularly in areas such as social or environmental law. This requires a more sophisticated approach to what to do in these areas in terms of compatibility with EU law.

PWD and Dir 2004/18 seem to be in a strange relationship because the legality under Dir 2004/18 ends up depending on the interpretation of the PWD—does this trigger a privileged position of the PWD over the procurement rules? RegioPost suggests that the CJEU’s controversial interpretation of the PWD is more important to the CJEU than the interpretation of the procurement rules. That is odd. What should the relationship between particular directive and the CJEU’s interpretation of the Treaty? ‘Provided they are compatible with the Treaties’ should imply some independent analysis of compatibility with Art 56 TFEU itself, almost regardless of compatibility with other rules of secondary EU law.

For the future: what is the likely impact for changes in the public procurement rules? Art 26 Dir 2004/18 vis-à-vis Arts 18(2) and 70 Dir 2014/24. Does the subtle wording in Dir 2014/24 alter the position of the procurement rules? Also, in view of the proposals for the revision of the PWD, there are queries as to the permeability of procurement rules to that reform. Finally, it is also unclear to what extent these changes in secondary law are likely to affect the CJEU’s case law and interpretation of primary law (will it reflect the organic model?).

Art 56 TFEU and the principle of proportionality

Piotr Bogdanowicz stressed that RegioPost has been described as the gold standard for the social protection of workers performing public contracts. However, there was no reference to proportionality in the judgment. Generally, there is a three step methodology in this area: restriction, justification and proportionality assessment. It is surprising that RegioPost does not engage in this three-step analysis because it had been used in Ruffert and Bundesdruckerei. The lack of this analysis is a shortcoming of this Judgment and, unfortunately, another case challenging the coherence of the case law of the CJEU.

Why should proportionality apply to RegioPost? Because Art 56 TFEU should apply, mainly due to the fact that procurement rules are a fundamental expression of free provision of services, as well as the fact that the fundamental freedoms are the legal basis for the adoption of the Directives. Furthermore, due to the lack of exhaustive harmonisation.

The analysis is odd because, should Art 26 Dir 2004/18 not have required compatibility with EU law, would this have been an issue? This is particularly relevant because Art 70 Dir 2014/24 does not require it. In Piotr's opinion, there is no need for this requirement to be written in secondary law because it derives simply from supremacy of EU law. And, in order to assess such compatibility, the three-step approach needs to be followed. Restrictions are easy to prove and the CJEU rarely rejects the public interest reasons raised by the Member States, so proportionality ends up being the key issue of analysis in almost all cases.

In procurement, proportionality is particularly relevant because it has been included from the early generations of public procurement directives. Proportionality has always been applied in the procurement setting as a general principle of EU law. It was applied in the case law anticipating RegioPost (Ruffert and Bundesdruckerei) and in both cases the CJEU found that national measures did not pass the proportionality test. The importance of proportionality is also reflected in Art 18(1) Dir 2014/24, where it is explicitly consolidated.

Why did the CJEU not apply proportionality? It is difficult to identify the reasons why, mainly because it derives from the construction of the judgment itself. In para 67, the CJEU stresses that interpretation of Art 26 Dir 2004/18 is supported by Art 56 TFEU, which is a strange argument. That is why the abrogation of the proportionality analysis is an odd analytical strategy. In Ruffert, the CJEU had gone the same way but did apply proportionality to assess compatibility with EU law (after the restriction was demonstrated under the PWD). Even if the CJEU wanted to distinguish RegioPost from Ruffert, it ought to have carried the proportionality analysis. As it is now, it seems that the PWD offers a safe haven for national law, which could have been done 8 years ago (in Ruffert), but not now because Art 26 Dir 2004/18 applied to the case and this should have triggered a different analysis.

This adds complication under Dir 2014/24 because of Art 70 + 18(1), which change wording and potentially the test. The case law of the CJEU shows that the more politically sensitive the case, the less intrusive the scrutiny seems to be. ‘Indulgent’ scrutiny was advocated for by AG Mengozzi because the measure is applicable to workers assigned to public contracts rather than workers in the private sector—this raises an issue of conflict between economic and non-economic goals (competition v social protection). This, however, should trigger a strict proportionality test.

The implications of lack of proportionality in RegioPost are severe. A recent report by Bruegel showed that there is 1.2 million posted workers in the EU, 40% come from Eastern countries (20% come from Poland). The CJEU seems to have adopted a more careful approach to the PWD and this may improve the situation for posted workers. This is something that requires further case law from the CJEU.

DEBATE

focused on complex issues around the way the preliminary reference ‘framed’ the CJEU’s assessment and why the CJEU ‘abrogated’ alternative analyses such as non-discrimination or split of competences. The discussion also covered the difficulty of applying proportionality in fields where we are dealing with incommensurate values. Moreover, this is complicated by the lack of clarity and consistency of the recitals in specifying what specific secondary law interventions aim to achieve—which is particularly muddy regarding Dir 2014/24.

Panel 2: Public Procurement and Labour Standards (I):
EU Procurement Law Perspective

Sustainable procurement and corporate experimentation

Nina Boeger shared some thoughts beyond RegioPost and an enquiry into two developments arising from the financial crisis: a) rise of polarisation of corporate governance models with, on the one hand, market responses to financial crisis that persevere on traditional approach to maximisation of return on investment and, on the other hand and as a counterbalance, new or revived corporate models, such as social enterprise, cooperative enterprise and commons-oriented enterprise; b) rise of sustainable or smart procurement driven by austerity politics and cuts on public budgets, which is also becoming polarised with, on the one extreme, traditional or economically-driven procurement, with focus on immediate value for money obtainable from service outputs and very much focussed on price and concrete delivery and, on the other extreme of the spectrum, smart / sustainable procurement that aims to change perspective of procurement and commissioning practices and moving towards longer-term perspectives on triple bottom line for the communities that are relevant for the procurement or commissioning body, as well as process sensitivity and long term relationships with providers of services.

Smart procurement involves a recognition of the risk that contracting with shareholder-driven corporations entails (large corporations are “too big to fail” and the risk of failure that the public sector faces requires a more diffuse provider base), as well as the passing on of costs to the tax payer. There is also a concern on the risks of insufficient specification (under-specification) and uncertainty, which is an integral part of procurement and commissioning. Corporate governance and the way they are structured will affect the way they deal with these issues of risk and how they will respond. Alignment of corporate governance and risk issues is necessary and contracting authorities are searching for trust and reliability in addition to capacity. New corporate models (such as social enterprises) that are struggling to make their business sustainable are dying to access public demand, both to raise funds for their sustainability and to raise social awareness.

In view of these trends, it looks like there are promising possibilities in procurement in aligning two very important structural developments: emergence of new corporate forms and the development of smart procurement. The question now is whether there is enough flexibility in the legal regime to allow public authorities to procure in this way? [this looks like a watershed moment for EU public procurement law, which is still fulfilling a traditional role of non-discrimination, transparency and workable market openness; but is also fulfilling the role of a change agent by supporting the development of those new models—the tension is not anymore on what the EU / the MS can do, but rather about thinking about new structures of capitalism].

The issue of flexibility then hinges on certain aspects of Dir 2014/24, such as market engagement (Art 40), the possibility of reserving non-profit contracts (Spezzino), grounds for exclusion also help some experimentation (Art 57), reservation of contracts for employee-led organisations (Art 77—which is incredibly narrow) … but the main problem for the development of ‘corporate governance’ clauses in procurement is the requirement of link to the subject matter (LtSM), which has been extended massively compared to Dir 2004/18. This poses the question how do we make sure that we can distinguish corporate governance requirements linked to the provision of the service from the limits on mandating general corporate policies. It is necessary to have these conversations so that the developments can move forward.

Minimum and living wage in public contracts:
Enforceability after RegioPost

Abby Semple started off stressing that the discussion on the enforcement of labour (pay) standards needs to be more specific and we need a taxonomy that distinguishes minimum wage, sectoral minimum wage [in particular, wages specific to public contracts], collectively agreed wage and living wage (which is a voluntary undertaking to pay a wage above the legally-mandated minimum wage). There is also an interesting argument on whether requirements for fair trade that link to wages paid to producers can be included as part of the same analysis. She also stressed that minimum wages show great disparity in the 28 Member States, even when adjusted by parity of purchasing power. This raises significant practical difficulties.

What does RegioPost say? The CJEU distinguished the Ruffert case very strongly because it was then a non-universal collective agreement that set the minimum wage in dispute, whereas in RegioPost the minimum wage is a result of (regional) law, in which case it does not matter that it only applies to the public sector. The CJEU also acknowledged the social protection argument as potential justification (like in Bundesdruckerei), but did not engage in full proportionality assessment (maybe because it did not need to do so, but leaves RegioPost vulnerable to future case law where the CJEU may engage in proportionality review).

Proportionality review should be a mechanism of last resort because Dir 2014/24 sets precise rules and, if they were not shielded from proportionality review, then contracting authorities would have no liberty to rely on the secondary rules.

Interestingly, the CJEU did not distinguish from Bundesdruckerei. The CJEU did not make any assessment / statement on the issue of lack of a cross-border situation in RegioPost. This is important in itself. It is also relevant that the CJEU engaged with an analysis with the PWD, primarily because the referring court had raised it. Also because Art 26 Dir 2004/18 is an empty / reenvoi clause that required engaging with PWD (this is cross-referenced in Recital 34 of Dir 2004/18C and Recital 98 of Dir 2014/24).

It is also relevant to stress that RegioPost makes some conceptualisations of contract compliance / performance clauses problematic. Nord pas de Calais, which reinterpreted Beentjes, also created a circular self-justifying doctrine that indicated that contract performance clauses did not allow for exclusion of those that did not meet the requirements. The RegioPost judgment now allows for exclusion of tenderers that are not committing to comply with contract performance requirements, which conflicts with the Commission’s understanding under the previous case law.

Looking specifically at minimum wage clauses, it is relevant to look at the Fair trade coffee case (C-368/10), where the CJEU stressed that you could have fair trade as an award criterion. Fair trade includes, amongst other things, the payment of wage premia to producers—this creates a problem if a contracting authority can do it in a third jurisdiction, but not in its own jurisdiction. There is evidence that the Commission does not accept that payment of a living wage could be a pass/fail criterion (Scottish government sent repeated letters to the Commission, to which it replied in the negative). How to address living wage as an award criterion? Could you use the wages the tenderer is willing to pay as an award criterion? Semple does not see any reason why it is not possible.

Scenarios for further thought. 1. Could you have a maximum wage clause in the contract for cost-control purposes? 2. Where a contract is affected by TUPE, the obligation to apply same terms and conditions, as the contracting authority, you need to effectively require pre-existing terms and conditions including wages (and you NEED to do that, including where the incumbent is the contracting authority itself in case of outsourcing).

RegioPost allows for legally-embedded sectorial [public sector] minimum wages. It does not deal specifically with living wages but the argument can be made in light of fair trade coffee.

Competition and State aid implications of
minimum wage clauses in EU public procurement

Albert Sanchez-Graells' presentation focused on the trade / social dumping rationale for minimum wage requirements, and I submitted that the PWD is the anti-dumping standard under EU economic law, so that no more demanding standard can be allowed without subjecting them to a very strict proportionality test. I also submitted that the approach of the CJEU to the interpretation of the PWD in the public procurement scenario does not make economic sense because it creates double standards for cross-border and inter-regional situations, which results in an impossible situation for contracting authorities that, at the time of tendering, cannot foresee whether they will manage a purely domestic or cross-border procurement project (as that depends on actual interest from cross-border tenderers).

On that basis, I discussed the problems of reverse discrimination and unforeseen consequences (anti-SME, pro-delocalisation, etc) that can derive from strict enforcement of the contradictory rules created by the Bundesdrukerei-RegioPost tandem. I moved on to stress the competition law implications that can result from this situation and the difficulties in capturing such anticompetitive effects with the competition law prohibitions in Arts 101 and 102 TFEU, included the supporting State action theory.

I finally tackled issues of application of State aid and submitted that the payment of above-market wages by the contracting authorities is an economic advantage that triggers the prohibition of Art 107 TFEU and, in turn, this cannot be justified either under the 2014 general block exemption regulation (it does not fit the regulated categories of disadvantaged/disabled employment, or creation of jobs), or the de minimis regulation (the aid is not transparent). Thus, I submitted that State aid enforcement in this area can raise difficult issues in the near future.

DEBATE

focused mainly on the issues of the social economy model and the extent to which competition law / State aid can apply to these issues at all, as well as the undesirability of a strict proportionality assessment that would kill innovation. It is also discussed to what extent a proportionality analysis is at all possible and whether social requirements are necessarily protectionist or not, and whether this should be dealt with as an issue of direct or indirect discrimination and how EU law would regulate them, which comes back to issues of proportionality of restrictions vis-à-vis their intended goals. The debate then also moved upwards and looked at the different treatment under WTO GPA and the EU rules, as well as the possibility to coordinate them. The issue of the heterogeneity of what is considered a ‘social consideration’ was also explored in some detail.

Panel 3: Public Procurement and Labour Standards (II):
EU Labour Law Perspective

Government as a socially-responsible market actor after RegioPost

ACL Davies took a step back and looked at the discussion from first principles. Use of contracts to pursue contract-unrelated policy is controversial. It is useful to distinguish two dimensions: a) reinforcing existing legal requirements, and b) creating requirements that go beyond existing legal duties. a) may see superfluous but the leverage of contracting can make up for deficiencies in enforcement elsewhere (in the UK case, given the lack of labour inspectorate). b) has attracted significant opposition + international drive to reduce the use of contracting authorities’ discretion is a way of reducing the chance for them to adopt protectionist strategies, willingly or otherwise.

The justification for the use of procurement to enforce social goals is as follows: 1) consistency and trust in government (legislative process not only aspect of democratic mandate given to government), so if the government is committed to a public policy, it should enforce it through contracting (to show consistency and avoid silo mentality, all of these foster trust in government). This is linked to the doctrine of legitimate expectations to get government to follow promises made in the past. This use has a long tradition (government as a model employer, and procurement as an aspect of that). 2) stronger argument in modern times is to prevent the harm that competitive tendering can create. This is linked to ILO standards for government contracting. This is particularly relevant in labour-intensive services, where government can create a level playing field in terms of employment conditions, so that alternative providers compete on other dimensions and labour standards are taken out of competition.

Two issues with RegioPost: lack of understanding of procurement and lack of understanding of wage clauses in procurement. Before the negatives, RegioPost is generally welcome if nothing else because it reverses Ruffert on the basis of Art 26 Dir 2004/18.

BUT.

Art 56 TFEU and its key test for determining whether something is restrictive requires to assess whether it ‘constitutes an additional economic burden that may prohibit, impede or render less attractive the provision of their services in the host Member State’. This is applied in RegioPost and the minimum wage is characterised as an additional economic burden that makes the activities less attractive. The cost linked to the minimum wage can be a burden, but the cost can be passed on to the government and, from that perspective, there is no impediment or restriction to the provision in another Member State because the additional cost is covered by government. However, the services can be less advantageous by limiting the profit that the provider could achieve. This disadvantage is very artificial because it does not carry a loss for the service provider, but merely a missed opportunity for a larger benefit. This should not be covered by Art 56 TFEU or, at least, given that the disadvantage is very marginal. Maybe it is State aid (the government pays for it and State aid can be discussed), but it cannot also be exclusionary. It is either one or the other.

From the perspective of minimum wages, we need to remind ourselves that EU law does not say a great deal about wages. The difficulty of regulating pay at an EU-wide level is significant. This does not stop the CJEU from scrutinising different issues regarding pay in the internal market perspective, but the CJEU lacks a point of reference in this setting. This is what leads it to rely on the PWD and the importance on the wage being a minimum wage. The interpretation of the PWD in Laval is a clear attempt to elevate the PWD to the standard applicable in terms of social dumping in the EU. What’s wrong with the emphasis on minimum wage? The issue is with the justification on worker protection as the justification for the measure discussed in RegioPost. Minimum wage is of course a protection. The elephant in the room is that the minimum wage is only for public contracts, which diminishes the relevance of the argument as compared with contexts of general economic regulation.

In the public procurement setting, minimum wage is not a concern as in the labour market as a whole, but a protection against the competitive nature of government contracts and the ensuing downward pressure on worker protection. So the analysis should be procurement context-specific.

So, upshot, it is better that Ruffert, but RegioPost misses the difference between procurement and regulation, procurement being the space where the government is ready to put its money where its mouth is. This ought to do with preventing the harm that procurement might otherwise cause.

Labour law in the state of exception

Lisa Rodgers looked at labour law as an exception to economic rules and tried to see how far that helps us when thinking about labour standards in public procurement. It is worth stressing the link between economic and social law, and the theory of the ‘state of exception’ derived from neoliberal thought following the crisis. Labour law is an exception or concession against the basic economic foundation that we have. Following the crisis and austerity measures, this exceptionality has become more clear. The focus on procurement is an expression of this exceptionalism.

The state of exception is a theoretical perspective that uses the importance of the exception itself. The argument is that the ‘exception’ is the most important element in any system of regulation because it is at the edge of the legal system and it shows how politics get involved in the adjudication of legal issues. Used this way, it crowds out political considerations because the law starts covering it all.

Positive claims about inclusion of labour law in economic standards: 1) labour law’s concerns are included within the law; 2) labour law’s concerns become part of the economic paradigm; 3) law is subject to interpretation by favourable CJEU; 4) other Treaty provisions can help; 5) incorporation of international legal standards is facilitated.

Responses to the claims: 1) labour law is an exception or a concession, so it is included (by exclusion) as a discretion rather than a mandatory condition [eg Arts 56(1) and 57(4) Dir 2014/24] and some innovations do not include social/economic concerns [eg Art 68 Dir 2014/24]; 2) as an ‘exception’, labour law is only part of the economic paradigm, which weakens the political power of labour law institutions; 3) the CJEU has given broad discretion to consider employment and social considerations as part of the public procurement process (Beentjes), BUT the link to the subject-matter of the contract (LtSM) is an increasingly constraining economic test, which means that the contracting authority cannot influence the policy it applies; 4) relationship between labour standards, public procurement and other EU law provisions and policies (including soft law) show a shift in those instruments and a prevalence of macroeconomic policies that downgrades labour law standards’ relevance; 5) finally, there is a very limiting approach to the inclusion of international standards [narrow list included in Dir 2014/24 and NO reference to ILO convention 94 on public contracts) + Art 18(2)].

In conclusion, labour law is increasingly seen as important in the context of the public procurement directives, but there are some important risks if labour law is seen as an exception or a concession to economic law and economic goals. Labour standards are restricted because they need to comply with economic paradigms, there is a tendency to promote individual over collective rights, the institutions of labour law can find their power to challenge the law reduced.

Scope for collective bargaining in posting and procurement

Tonia Novitz looked at Laval and Ruffert and their impact on collective bargaining in public procurement, and positioned them in historical context (decided in 2007 and 2008), which has changed very significantly as a result of the economic crisis. Elektrobudwa and RegioPost indicate new horizons for trade union protection of posted workers and space for regional protection, but not for collective negotiation. This indicates stark shortcomings in proposals for the revision of the PWD.

Laval was a case of a trade union trying to improve conditions for a group of workers. This was generally seen as problematic. Collective negotiation and action could only be permitted in the context of social dumping. This is a very controversial judgment and has been heavily criticised. Laval had a negative impact on the ability of trade unions to call for action with cross-border effects. There is a strong clash between the EU approach and international standards, which cannot be easily reconciled.

Ruffert adopted the Laval approach whole-heartedly on the basis of another rigorous reading of the PWD and, in particular, about Art 3(8) setting out the ways in which collective agreements can be declared generally applicable. Ruffert failed to meet those. MS could exclude the construction industry from these requirements under Art 3(10) PWD, but that did not save the situation either. The imposition of such large limitations on the collective setting of rights for posted workers’ rights led to an understanding of the PWD as a ceiling rather than a floor of employment rights. This could not be overcome as a result of the Monti II Regulation, which was abandoned for different reasons.

It may be worth revisiting these issues by going back to the basics of the need for the PWD, particularly in view of the vulnerability of posted workers, which supports the case for their access to collective representation. It is also worth stressing that the capacity of labour inspectorates across the EU has been severely eroded as a result of the financial crisis. Additionally, memoranda and other crisis-related recommendations have been in line of flexibility and minimising collective negotiation to enterprise level-agreements. Overall, this makes the requirement of universal application stressed in Laval and Ruffert seems very outdated in the context of 2016.

Currently, the number of posted workers is at about 1.9 million and has increased by 49% compared to prior to the crisis. The treatment of posted workers is also reported to suffer from 51% lower wages, higher instances of work-related accidents and displacement issues. This can be triggering a mild shift of the case law regarding collective bargaining.

In Elektrobudwa, there was support for regional collective action on behalf of posted workers. This is linked to the issue of individual claims because in this specific case, there is direct representation by the trade union. There is nothing to indicate sympathy for collective bargaining for posted workers, but it could be seen as a first step in that direction. In RegioPost you can also identify a first step away from Ruffert, but they stress that there was no collective agreement and, therefore, the distinct treatment between public and private workers did not matter. However, none of these cases make significant inroads into collective bargaining in public procurement. RegioPost was very cautious in the way it treated collective agreements.

Commission’s proposals from February 2016 can potentially make a difference around collective agreements that could have a spillover effect on procurement. Of these proposals, the rules concerning subcontract chains, including those that foresee the posting of workers, can have significant effects. But, for this to be relevant, there has to be a move beyond ‘minimum rates of pay’ (absolute minimum) towards ‘remuneration’ (so as to cover a variety of different elements), which should then be equally applicable to all employees regardless of subcontracting chains. This has a connection with Art 71(6) Dir 2014/24 in terms of control of subcontracting chains. It is also a nod to international standards, but a timid one.

Overall, however, this seems very unlikely to be adopted in the near future, and it may well be only after a monitoring of the implementation of the PWD enforcement measures. However, a case could reach the CJEU on the basis of a case based on strike action including both posted and non-posted workers, which will trigger issues of evidence-based social dumping and may not allow the CJEU to set aside this type of collective action as easily as in the past.

DEBATE

focused on issues of localism and devolution, and the way that this can impact the use of procurement to enforce labour standards, particularly in the UK. It also explored the implications of the post-Lisbon social market economy on the issue of the ‘exceptionalism’ of labour law. The audience also questioned whether Laval is really not still the relevant standard and whether the restrictive approach to collective bargaining is not still the rule. There was also discussion on whether wage-based advantages deserve a different treatment where there are and where there are not posted workers, as well as what actually amounts as a restriction on the freedom of provisions of services in terms of two-tier employment scales and issues of discrimination / disadvantage of workers within one same undertaking.

Panel 4: Procurement and Labour Standards (III):
Domestic UK Perspective

Labour standards, domestic law and public procurement

Michael Ford focused on how non-pay labour standards (such as blacklisting [note: of workers involved in trade union activities, not of undertakings from public procurement procedures] or discrimination rules) can be applied in the public procurement setting. UK history shows that the underlying issues have been discussed repeatedly in the past. However, there have been significant developments, such as the use of procurement to promote non-discrimination law. Section 149 Equality Act 2010 (EA 2010) imposes an explicit duty on public authorities to prevent discrimination and give effect to advancing equality law. It is also important to stress the importance of sectoral collective bargaining and quasi-collective bargaining in the UK, which lead to legally binding pay rates and holiday terms. Currently, though, this has been discontinued and there is no legal mechanism for the determination of sectoral pay. Query is whether this will not change again in the future.

From a practical perspective, looking at procurement litigation, it is worth reminding that this is an area institutionally dominated by large commercial organisations with large budgets to litigate, which skews the litigation field. It is also affected by other pragmatic tensions, which raises issues of the different access to statutory review vs judicial review of procurement decisions. Pragmatically, it is also very difficult to apply standard legal tools (proportionality) to non-pay labour standards and, in particular, in issues of non-discrimination—not least due to the absolute protection of non-discrimination concerns over economic issues. Thus, even if it is fundamentally difficult, pay is relatively straightforward compared to non-pay labour standards.

The counterfactual question is, though, what would have happened in EU procurement law if there had been no PWD? Would the CJEU engaged in an untrammelled proportionality test based on ultimate considerations of discrimination? That would have been highly political and this is why the CJEU has sheltered behind the PWD, which has effectively provided the CJEU with a relatively easy answer compared to the alternative of having to legitimise its decisions. This is exemplified in Bundesdruckerei in that there was not AG Opinion to support the CJEU, which considered the use of the PWD straightforward.

However, let’s assume that the PWD is a useful point of departure. Can the government use 'administrative provisions' [which are not defined, under Art 3(1) PWD] to enforce pay policies, particularly reinvigorating sectoral rate setting mechanism? This raises a set of issues: would it still qualify as minimum wage of pay despite the existence of a lower universally applicable minimum wage? Yes, it would. Would it be possible to give legal effect to the result of the collective bargaining? Yes, it would because the rate, despite the collective bargaining origin, derives from law. Could you use a RegioPost type system where you already have a national minimum wage (ie creating a higher minimum wage only for public contracts)? It looks as if the CJEU considered it central that in RegioPost there was no minimum wage, but it is not clear why it would not be possible to go above that ceiling with a RegioPost-like mechanism.

An alternative to the legal enforcement of rates of pay, which is not in line with UK tradition, would be to rely on Art 70 Dir 2014/24 rather than on Art 3(1) PWD (ie base it on discretion of the contracting authority). However, this is still a confusing environment.

A connected issue is blacklisting, in relation with the ILO conventions, which is now illegal under UK law. However, this could be possible under Art 18(2), Art 57(3) and Art 70 Dir 2014/24 by focusing on the tender rather than the tenderer [as in the enactment of reg.56(2) PCR2015]. This should not be subjected to a proportionality analysis under Art 18(2) Dir 2014/24, which only requires proof of breach of any of the international standards.

Another issue is whether there is a tension between the public sector equality duty under the EA 2010 and public procurement. One difficulty is whether you can use procurement as a preference for undertakings that have equal opportunity policies, equal pay audits, etc. This would fit within Art 70 Dir 2014/24, complemented with the relevant ILO conventions. There is again a tension with the issue of minimum standards in the PWD or not.

The answer is that PWD, even when it applies, it does not give the answer—particularly outside the area of pay, it is very difficult to figure out how to effectively carry out a proportionality assessment when there are procurement measures that go beyond agreed (EU) standards.

Discretion and labour objectives

Richard Craven presented preliminary findings of on-going research funded by the British Academy and Leverhulme, where he assesses practitioners’ reactions to existing rules on the possibility to enforce labour standards within the limits of discretion given to public procurement officers.

DEBATE

focused on the difficulties of extrapolating qualitative insights and the insufficiency of public procurement data, which could allow for complementary quantitative research.

An extended discussion of RegioPost--teaser

On Monday 9 May 2016, and in celebration of Europe Day 2016, at the University of Bristol Law School, we are hosting the event "Public Procurement & Labour Standards–Reopening the Debate after RegioPost", where we will discuss in depth the implications of the Judgment of the Court of Justice of 17 November 2015 in RegioPost, C-115/14, EU:C:2015:760 (for my own views, see here and here).

We will be live tweeting from the event (follow #regiopostandbeyond), and I will post a summary of the discussions next week. For now, as a teaser, these are the slides that I will be using in my own presentation regarding the competition and State aid law implications of RegioPost.

Competition and state aid implications of minimum wage in procurement from Albert Sanchez Graells

Additional Austrian postal services to be exempted from compliance with EU (utilities) procurement rules (T-463/14) -- a warning of procedural rebalancing under dir 2014/25?

In its Judgment of 27 April 2016 in Österreichische Post v Commission, T-463/14, EU:T:2016:243 (not available in English), the General Court (GC) of the Court of Justice of the European Union ruled on judicial review of the Commission Implementing Decision exempting certain services in the postal sector in Austria from the application of Directive 2004/17 on utilities procurement, in particular as carried out by Österreichische Post AG (the Austrian national universal service provider, under public ownership of 52.8% of its capital).

The GC quashed the Commission's Decision regarding the denial of exemption for cross-border postal services for addressed (‘outbound’) business to business and business to consumer letters ('B2X letters'), as well as for addressed (‘outbound’) letters between private customers and between private customers and business customers ('C2X letters')--ie, in relation with the activities covered in paras [43]-[50].

The Commission's Decision was based on Art 30 Dir 2004/17, which allowed for utilities procurement linked to activities directly exposed to competition to be exempted from compliance with the otherwise applicable EU public procurement rules. The same regime is now foreseen in Art 34 of Directive 2014/25 on utilities procurement. Thus, the GC's Judgment in Österreichische Post v Commission is interesting in order to gain a better understanding of the procedure (and evidentiary requirements) for the exemption of activities directly exposed to competition from compliance with the revised EU utilities public procurement rules.

the contested decision

In its Implementing Decision, the Commission had considered that

(46) Competition for cross-border letter post is very different for private persons and for companies. Private persons generally have no real choice but to send international mail with their national universal service provider. The volumes sent by private persons are generally too low to offer incentives for new entrants into the market.

(47) It is noted that the competitive situation depends also on the size/population of each city due to the fact that cross-border service providers do not maintain a nationwide access network but generally collect the mail directly at the customer's premises. 

(48) Previous Commission practice... made a distinction between the cross-border postal services for addressed B2X letters market and the cross-border postal services for addressed C2X letters market. 

(49) There is no evidence that the situation is different in Austria,  therefore, for the purposes of this Decision and without prejudice to competition law, two separate product markets will be considered, namely the cross-border postal services for outbound B2X addressed letters and the cross-border postal services for outbound C2X addressed letters. 

(50) Austrian Post could not provide detailed information ... on its relevant shares in each market, nor the market shares of its main competitors. In the absence of information on the degree of competition in each of those markets, it is not possible to conclude that the conditions for granting an exemption under Article 30(1) of Directive 2004/17/EC to cross-border postal services for outbound B2X addressed letters and to cross-border postal services for outbound C2X addressed letters in Austria are met. Consequently, Article 30(1) of Directive 2004/17/EC does not apply to contracts intended to enable the pursuit of those activities in Austria (Implementing Decision 2014/184/EU, paras 46-50, references omitted).

In reviewing this argumentation, which seems to fundamentally rely on the ultimate ratio that Österreichische Post had not discharged the burden of proof imposed by Art 30 Dir 2004/17 (now Art 34 Dir 2014/25), the GC raises some important issues about the level of detail with which the Commission needs to assess estimated figures provided by applicants for exemption from compliance with EU public procurement rules:

(161) ... the applicant states that, following its own argument, the Commission should have exempted at least the B2X international market from the application of Directive 2004/17. It adds that, given that, according to paragraph 46 of the contested decision, its services were not substitutable in the C2X international market, its market share in the B2X international market should be significantly below [confidential]%, which it also corresponded with the Commission's assessment contained in paragraph 47 of the contested decision that the applicant's competitors were mainly in urban areas.

(162) This argument must be accepted. Indeed, on the one hand, the Commission did not dispute that the market share of the applicant in the market for postal services for addressed ['outbound'] B2X and C2X letters at international level was below [confidential]%, as stated in ... the application of the applicant. Moreover, as stated by the applicant, recital 46 of the contested decision shows that the services in question were not substitutable in the C2X international market, since, according to the Commission, private persons generally have no real choice but to send international mail with their national universal service provider. It follows that the market share of the applicant in the market for postal services for addressed B2X letters at international level should be well below [confidential]%, which the Commission did not take into account when considering that those postal services were not directly exposed to competition. In view of these considerations, it must be concluded that the Commission incurred in a manifest error of assessment in not exempting postal address for addressed B2X letters at international level from the application of Directive 2004/17.

(163) Accordingly, the fourth plea must be upheld in so far as it relates to the postal services for addressed B2X letters at international level and dismissed as regards postal services for addressed C2X letters at international level (T-463/14, paras 161-163, own translation from Spanish).

Cracking the specifics of the reasoning is complicated due to the confidential nature of the initial application for exemption under Art 30 Dir 2004/17, as well as the confidentiality of the market share data used by the GC. However, it seems clear that the Commission is subjected to a very demanding standard of data assessment and that it is obliged to use any information provided by the applicants in order to make educated guesses where market intelligence is insufficient to support a direct analysis. Looking to the future, this stringent approach highlights one of the differences between the 'old' regime of Art 30 Dir 2004/17 and the 'new' rules of art 34 Dir 2014/25, which may well make the Commission's life easier.

what Dir 2014/25 has changed

Under the procedural provisions of Art 30(6) Dir 2004/17, 'For the adoption of a Decision [exempting activities directly exposed to competition from compliance with Dir 2004/17] the Commission shall be allowed a period of three months commencing on the first working day following the date on which it receives the notification or the request. However, this period may be extended once by a maximum of three months in duly justified cases, in particular if the information contained in the notification or the request or in the documents annexed thereto is incomplete or inexact or if the facts as reported undergo any substantive changes'.

Conversely, Dir 2014/25 now has a new Art 35 on the procedure applicable for exemption decisions for activities exposed to competition under Art 34. And this is complemented by the additional rules in Annex IV, according to which second paragraph, 'The Commission may require the Member State or the contracting entity concerned or the independent national authority referred to under paragraph 1 or any other competent national authority to provide all necessary information or to supplement or clarify information given within an appropriate time limit. In the event of late or incomplete answers, the periods set out in the first subparagraph of paragraph 1 shall be suspended for the period between the expiry of the time limit set in the request for information, and the receipt of the complete and correct information'.

The change of the extension of the maximum period for a decision to exempt activities exposed to competition for a suspension of the period to adopt such decision is important because, both under the old [Art 30(4)(II) Dir 2004/17] and the new rules [Art 35(3)(II)(b) Dir 2014/25], in the absence of a decision within the specified time period (3 months in the old rules, and 90 working days under the new ones), the Directive ceases to apply to contracts intended to enable the activity exposed to competition. Consequently, a combination of a ticking time limit and the impossibility to reject claims based on what the Commission may have considered unreliable or insufficient evidence, would have resulted in significant pressure on the Commission under the old rules. Thus, it seems clear that, under the new rules and with the ability to 'stop the clock', the Commission will be able to relocate the burden of proof squarely onto the applicant's shoulders, which may well minimise or neutralise the tough approach indicated by the GC in its Österreichische Post v Commission Judgment.

AG Sharpston rightly opposes use of financial guarantees as pre-requisite for procurement challenges (C-439/14 and C-488/14)

In Opinion of 28 April 2016 in joined cases Star Storage and Max Boegl România and Construcții Napoca, C-439/14 and C-488/14, EU:C:2016:307, AG Sharpston considered 'whether EU law precludes a Member State from requiring an applicant to lodge a ‘good conduct guarantee’ in order to access review procedures for public procurement decisions by contracting authorities' or,  'how far can the Member States set up financial requirements for challenging contracting authorities’ decisions in order to reduce the risk of frivolous challenges, that is to say, challenges that are inherently likely to be unsuccessful and whose purpose is merely to impede the public contract award procedure?'.

The case comes on the back of a challenge against Romanian procedural rules whereby undertakings seeking the review of procurement decisions need to lodge such a 'good conduct guarantee' of 1% of the estimated value of the contract (with progressive caps at €10k, €25k and €100k), and contracting authorities retain the good conduct guarantee where the body competent to review their decisions rejects the challenge or where the applicant abandons it. For the sake of completes, the Opinion also assesses whether a guarantee that was returned to the applicant regardless of the outcome of the case would be compatible with EU law.

AG Sharpston's Opinion is interesting because it covers arguments linked both to the right to an effective remedy before a tribunal recognised by Article 47 of the EU Charter of Fundamental Rights (which is clearly of prominence in this area; see Fastweb, C-19/13, EU:C:2014:2194), and to the more precise rights to access to rapid and effective review procedures and remedies in the field of public procurement under the Remedies Directive (and the identical provisions of the Utilities Remedies Directive).

After a very detailed assessment (see below), AG Sharpston unsurprisingly concludes that the Remedies Directive and the Utilities Remedies Directive, 'read in the light of Article 47 of the Charter, preclude national legislation ... which requires an applicant to lodge a ‘good conduct guarantee’ in order to obtain access to review of a contracting authority’s decisions relating to public procurement and under which the contracting authority must retain that guarantee if the challenge is rejected or withdrawn, regardless of whether or not the challenge is frivolous'. Equally, that 'the same provisions of EU law also preclude national legislation which requires an applicant to lodge a ‘good conduct guarantee’ in order to obtain access to review of a contracting authority’s decisions and under which that applicant automatically gets back the guarantee at the end of the challenge, whatever its outcome'.

These issues generally concern the delineation of the locus standi to challenge procurement decisions, which I have submitted needs to be interpreted in broad terms because 'the adoption of open or broad rules on active standing is a crucial element—particularly because, in this area, one of the major problems is the reluctance of public contractors and offerors to initiate litigation' [see A Sanchez-Graells, Public procurement and the EU competition rules, 2nd edn (Oxford, Hart, 2015) 439-441]. AG Sharpston's Opinion is clearly in line with such general expansive interpretation of rules recognising active standing in procurement review procedures. Therefore, her Opinion must be welcome and it is submitted that the Court of Justice should follow it. However, I also submit that she could have been bolder in assessing these issues in the broader context of the use of financial guarantees in public procurement. From this perspective, I think that some of the specific elements of Sharpston's analysis are interesting in their detail.

AG Sharpston's analysis on the basis of art 47 charter

When setting the legal background to the dispute, AG Sharpston emphases that the right under Art 47 of the Charter is not absolute, but that it can only be limited subject to the principle of proportionality and only if the limitation is necessary and genuinely meets objectives of general interest recognised by the EU, or the need to protect the rights and freedoms of others [as per Art 52(1) Charter]. She also stresses that under Art 1(1) of the Remedies Directive, Member States must 'ensure that ... decisions taken by the contracting authorities may be reviewed effectively and, in particular, as rapidly as possible ... on the grounds that such decisions have infringed [EU] law in the field of public procurement or national rules transposing that law', and that under Art 1(3) of the Remedies Directive, 'the review procedures [shall be] available, under detailed rules which the Member States may establish, at least to any person having or having had an interest in obtaining a particular contract and who has been or risks being harmed by an alleged infringement'.

AG Sharpston also clearly stresses that the Remedies Directive only sets 'minimum conditions which the review procedures under domestic law must satisfy in order to comply with EU public procurement law [so that if] no specific provision governs the matter, it is for each Member State to lay down the detailed rules of administrative and judicial procedures governing actions for safeguarding rights which individuals derive from EU public procurement law' (para 30, references omitted). Thus, given that the Remedies Directive 'contains [no] rules on financial requirements which economic operators may have to fulfil in order to obtain access to review procedures against decisions of contracting authorities. National provisions ... fall within the procedural autonomy of the Member States, subject to the principles of equivalence and effectiveness' (para 31).

However, AG Sharpston raises two relevant issues: 'First, can [the principle of effectiveness] be limited to verifying that a national procedural requirement ... renders practically impossible or excessively difficult the exercise of the right to review procedures set out in [the Remedies Directive]? Or is it broader in that it requires any national rule which undermines those provisions to be set aside?' (para 33, emphasis in the original). To which she answers that 'what matters ultimately is to ensure that the rights which EU law confers on individuals receive more, rather than less, protection. [The Remedies Directive gives] specific expression to the right to an effective remedy. It is therefore not possible to limit the analysis of the principle of effectiveness to whether a procedural requirement such as that in issue in the main proceedings is liable to render practically impossible or excessively difficult the exercise of that right. Rather, in that specific context, the effectiveness test must surely involve examining whether such a requirement is liable to undermine the right to effective review procedures which those provisions guarantee' (para 35, emphasis in the original).

'Second, what impact does the fundamental right to an effective remedy under Article 47 of the Charter have on the principle of effectiveness as a limit to the procedural autonomy of the Member States?' (para 36). And, in that regard, she clearly explains that 'Article 47 of the Charter applies in the main proceedings. Providing the good conduct guarantee is a pre-condition for getting any challenge examined. That requirement therefore constitutes a limitation on the right to an effective remedy before a tribunal within the meaning of Article 47. Such a limitation can therefore be justified only if it is provided for by law, if it respects the essence of that right and, subject to the principle of proportionality, if it is necessary and genuinely meets objectives of general interest recognised by the EU or the need to protect the rights and freedoms of others. That test is similar to the test that the Strasbourg Court applies when it examines whether financial restrictions on access to courts are compatible with Article 6(1) of the ECHR' (para 37, references omitted).

This is an interesting analytical approach, which leads to the further consideration that the rules are underpinned by a legitimate purpose. In Sharpston's words, 'the national provisions establishing the good conduct guarantee are intended in essence to protect ... from frivolous challenges which economic operators (including those who are not tenderers) might initiate for purposes other than those for which the review procedures were established. Such an objective is undeniably legitimate. In particular, discouraging frivolous challenges enables the bodies in charge of reviewing decisions of contracting authorities to concentrate on ‘genuine’ challenges. That is likely to contribute to satisfying the requirement that Member States must ensure that decisions of contracting authorities may be reviewed effectively and, in particular, as rapidly as possible where it is claimed that such decisions infringe EU public procurement law or national rules transposing that law' (para 44, references omitted).

AG Sharpston also considers that the possibility of loosing significant amounts (up to €25k or €100k depending on the type of contract) meets the requirement that the rules are capable of achieving that objective because 'costs of that magnitude are such as to deter the lodging of frivolous challenges because the latter are, by their very nature, likely to be rejected and, therefore, to result automatically in loss of the entire good conduct guarantee and the associated costs' (para 47).

However, she submits that the rules on 'good conduct guarantees' do not meet the requirements of the principle of proportionality as derived from Art 52(1) of the Charter because there is no indication that they do no go further than is necessary to attain their objective. She assesses the situation in two scenarios. First, where the guarantee is automatically forfeited in case the challenge is rejected or withdrawn. In this case, there is no question that the rule is not proportionate because '[w]here a challenge was rejected or withdrawn, the ... competent court might for example have been given latitude to ascertain whether that challenge was frivolous or not, taking into account all relevant circumstances, and to decide in consequence whether retaining (all or part of) the good conduct guarantee was justified' (para 50, references omitted). Second, where the the applicant gets back the good conduct guarantee irrespective of the challenge’s outcome (which was a transitional regime proposed by Romania), AG Sharpston considers 'that such a procedural requirement does not protect contracting authorities adequately from frivolous challenges. Under the transitional regime, the contracting authority has to return the good conduct guarantee to the applicant within five days following the date on which the decision ... or the judgment has become final, even where the applicant manifestly abused his right to access review procedures. The costs which the transitional regime involves may therefore not be such as to discourage an economic operator from lodging a challenge that pursues an objective other than those for which the review procedures are established — for example, harming a competitor. They may nevertheless prove an obstacle to an economic operator with an arguable claim but limited means' (para 56). Therefore, she also considers it contrary to EU law.

scope for a bolder approach?

In my view, AG Sharpston is right on all issues she discusses, particularly given the framework of analysis she creates. However, the Opinion leaves space for Member States to still develop mechanisms whereby they require the submission of 'bid protest guarantees' that will only be forfeited in case of spurious litigation and on a case by case assessment. Broadly, this is not in line with the normative position that the use of financial guarantees in public procurement (primarily, at bidding stage, but also at review stage) needs to be minimised and only used where there is an actual risk against which the contracting authority cannot (self)protect by other means--which will very rarely be the case [see my Public procurement and the EU competition rules (2015) 326-327 & 425-426]. In my view, the risks derived from litigation are a given for the public sector and, consequently, unless there is a special circumstance that raises the possibility of damage to the public sector above abnormal levels, the need for the financial guarantee can be doubted.

A less restrictive alternative would be to devise a system of penalties which public procurement review bodies and courts could apply in case of spurious litigation. That would avoid front-loading the financial burden and would dissipate negative effects on access to review procedures. Conversely, it would leave the public sector exposed to bankruptcy risk in case the frivolous challengers did not have the ability to pay the fine. But this is not different from the general risk the public sector (and society at large) faces in terms of the effects of bankruptcy on the effectiveness of administrative sanctions. Thus, once more, the risk does not seem to be specific enough as to justify the requirement of specific 'bid protest guarantees' and, from that perspective, I submit that AG Sharpston could have been bolder in her Opinion in Star Storage and Max Boegl România and Construcții Napoca. However, on balance, her Opinion is certainly a positive step.