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public procurement reform

18 May 2012

On 20 December 2012 the European Commission issued a proposal for a directive of the European Parliament and Council on public procurement and has since that time been subject to considerable debate at working party level in Brussels. This is the first wholesale revision of public procurement in the European Union since 2004 and represents a substantial change in approach in a number of significant areas. Specifically, it endeavours to address a number of criticisms of the current rules such as inflexibility, complexity and uncertainty with varying levels of success. The proposals also codify certain areas of existing case law, providing increased certainty and comfort to contracting authorities. This article highlights some of the key areas of change and discusses their potential impact on both contracting authorities and tenderers.

General aims of the Commission (relevant to contracting authorities and tenderers)

The Commissions proposal sets out the five broad aims behind the proposed reform of procurement law:

1. Simplifying and increasing the flexibility of the procurement procedures

Under the current regime service contracts are split into Part A and Part B services with only Part A services being subject to the full rigour of the regulations. Under the new proposals this distinction will in theory be removed. However, a new separate regime for social, health and education services will be introduced (thus keeping some separation in regimes for different types of services).

A toolbox approach to selecting procedures is also proposed. This provides contracting authorities with more flexibility in selecting the most appropriate procedure to apply. A set of six procurement techniques are also suggested for aggregated and electronic procurement and are discussed further below.

A lighter regime is also proposed for sub-central authorities to provide greater flexibility.

2. Strategic Use of public procurement in response to new challenges

The Commission states that the proposal is intended to provide contracting authorities with "the instruments they need to contribute to the achievement of the Europe 2020 strategic goals". Whilst contracting authorities may have their own views on how they intend to contribute, the objectives of fostering innovation, respecting the environment and climate change and improving employment, public health and social conditions such changes are likely to appeal in principle to contracting authorities although time will tell how they work in practice.

An interesting and welcome change is the power granted to contracting authorities to exclude economic operators which have infringed obligations established by European Union legislation in social, labour or environmental law or international labour law.

3. Better access to the market for small and medium sized enterprises (SMEs) and startups, Several proposals are made intending to simplify procurement procedures in order to encourage participation by SMEs. These include encouraging the division of certain tenders into lots, the simplification of information obligations (such as self declarations or self certifications) and a cap on turnover requirements. Although this may provide some benefit for SMEs, it will inevitably create added burdens for contracting authorities.

4. Adoption of sound procedures, Specific provisions are set out in order to improve the safeguards against unsound business practices. Specific provisions intended to reduce the risk of conflicts of interest, illicit conduct or unfair advantages due to market consultations are included.

5. Governance, to reinforce the fight against corruption and favouritism

The original draft directive required member states to designate a single national authority responsible for monitoring, implementing and controlling public procurement. This proposal was met with much hostility from member states in particular the UK. In the last iteration of the draft directive coming out of the working parties it been dropped.

So what do these proposals mean?

Given the breadth of the proposed directive we have picked out some of the key points to consider in more depth.

Part A and Part B Services and new rules for social services.

The removal of the distinction between "Part A" and "Part B" services means that a wider range of services will now be subject to the formal requirements of the rules. Whilst areas such as most legal (interestingly there has been a small carve out for statutory legal work and legal advocacy) and security services are no longer excluded from the formal requirements health, social and education services will continue to be subject to a lighter touch regime. The Commission justifies this approach on the basis that the characteristics of these services mean that they have limited cross border interest. As such only the basic principles of transparency and equal treatment will apply to contracts with a value above €500,000. Any contracts below this value will automatically be deemed to have no cross border interest and so will not be caught by the proposed directive.

Under these new proposals it is not clear how contracting authorities will need to behave in order for them to comply with their obligations of transparency and equal treatment where a social services contract is over €500,000 (although it is likely that this will catch many contracts of this type).

Historically, UK contracting authorities have taken a cautious approach when procuring high value Part B services, running processes very similar to those required for fully regulated procurements. At this stage it seems unlikely that this approach will change for those contracts subject to this new regime unless there is a change in approach and the view of risk by those running the procurement exercises.

The fact that a wider range of services now fall within the scope of the more formal procedures is somewhat balanced by amended time limits and increased flexibility both in selecting a procedure and in the procedures themselves. This is especially true for those bodies at sub central government level and we will see how these benefits will be grasped by local authorities and emergency services who will continue to account for a huge part of this spend.

Flexibility in selecting and applying procedures

The competitive dialogue procedure (which previously was only available for more complex projects) will be made much more freely available should member states choose to allow for in the enacting domestic legislation. This more flexible approach for tendering will likely be welcomed by both contracting authorities and tenderers. The negotiated procedure will also be replaced by the new competitive procedure with negotiation which is again made much more widely available.

The addition of an Innovation Partnership procedure is also completely new. This new relationship is designed for situations where the contracting authority has a need that cannot be currently met in the market without the development of something new. By combining development and subsequently the purchase of a new, innovative product, service or works this approach will offer, the Commission hopes, a significant incentive for the development of innovative solutions. However, in a working party paper issued by the General Secretariat the Commission has made it clear that the structuring is key to the success of this type of approach, and it should be designed in a way that delivers sufficient incentivisation without market foreclosure.

The Commissions aims set out at the beginning of the proposal also refer to a toolbox of techniques and tools including "framework agreements, dynamic purchasing systems, electronic auctions, electronic catalogues, central purchasing bodies and joint procurement". In reality these are all currently available in one form or another and the proposed directive tweaks and clarifies, rather than revolutionises, the position. It will be interesting to see how these improvements are taken on board and how by the addition of new additional procedures this will simplify matters for both the public and the private sector.

Improving SMEs access to the market

The Commission is of the view that public procurement provides the perfect platform for opening the market to SMEs and startup businesses. Whilst individually procuring services from SMEs may be viewed as more risky due to their vulnerability to market fluctuations single suppliers can never truly guarantee continuity of supply, no matter how large. Economies of scale are not as clear an advantage as they once were given the overheads, administrative burdens and comparative inflexibility of larger organisations. However, the expertise just to understand and participate in public procurement exercises for SMEs is a major problem and unfortunately the other changes made to the directives might make it more and not less complex.

The advantage to SMEs is clear as the award of a stable public sector contract will often provide a springboard for further growth and innovation something that local politicians are often keen to try and deliver. Under the revised proposals there is going to be a presumption in favour of splitting contracts into lots unless there is an appropriate and justifiable reason and in such circumstances the reasons will need to be set out in the contract notice. Contracting authorities will be able to restrict the number of lots which can be awarded to one tenderer in order to reduce the risks associated with over reliance or market foreclosure.

New rules on self certification and provision of information should elicit a sigh of relief from SMEs who have historically struggled with the administrative burden of evidencing their compliance with contracting authorities requirements. There will also be the opportunity to rely upon a European Procurement Passport as a means of proof for the absence of grounds for exclusion. However, clearly this moves the burden and risk more squarely to the contracting authorities.

Perhaps the best news for SMEs is the cap on turnover requirements. Regardless of experience or ability SMEs have historically been excluded from processes due to sometimes unjustified turnover requirements. The proposals will provide that any annual turnover threshold must not exceed three times the estimate contract value unless the contracting authority can justify such a requirement.

The final important change is the potential right to ensure that Contracting authorities must consider including provisions which allow direct payment of sub contractors. Again this will be interesting to see how the primary contractors react to this.

Explicit recognition of "in house" and other co-operation agreements

The proposals have endeavoured to codify the case law relating to public to public cooperation and the joint delivery of services through wholly owned separate vehicles. Anyone who has watched the developing case law in this area over the last 12 or so years will be pleased to see that the Commission have tried to settle this area. In particular the codification of the "Teckal" or in house exemption where by the award of a contract to a wholly owned vehicle (in specified circumstances) is not deemed to be the award of a public contract and thus can be put in place without a procurement exercise, is most welcome.

The draft directive also provides for public-public partnerships, which will not be subject to the formal procurement requirements provided that (amongst other criteria) the character of the agreement is that of genuine co-operation involving mutual rights and obligations between the participating contracting authorities with the intention of their public service tasks being carried out jointly.

Simplified procedures for authorities outside central government

Sub central authorities will benefit from a simplified procurement regime including allowing for the use of Prior Information Notices (PIN) as calls to competition rather than separate contract notices. The use of this route wont negate the need to run a formal process however, it will mean that bidders will have to ensure they register their interest in the PIN opportunity as only those that have registered will be invited to tender.

Modification of contracts including supplier substitution

Another example of the Commission codifying the existing case law is found in relation to the modification of contracts before their expiry. The proposals give greater clarity as to what will and wont be permissible in terms of changes to existing contracts. Importantly if the modification of the contract can be expressed in monetary terms it will not be considered sufficiently substantial to trigger the requirement to re-tender if the value of the modification is (at the time of writing this article) less than 5% of the price. There are several other elements of the test which would indicate that a change is sufficiently substantial, but if this 5% threshold is not passed and the general nature of the contract is not changed a modification will generally be safe.

If modifications are provided for in a clear, precise and unequivocal review clauses or options then such modifications may well be permitted provided that they do not alter the overall nature of the contract. Care will have to be taken in assessing bids for contracts with these options as authorities will need to be able to take into account tenderers abilities to comply with any additional terms imposed by modifications should they apply in future.

Time limits

The minimum time limits which must be allowed for bidders to complete and submit questionnaires and tenders have been reduced across the board. Whilst this provides additional flexibility for contracting authorities, this may have a detrimental effect on SMEs who, as indicated above, often struggle with the resources required to submit effective documents. Additional time pressures are unlikely to make life any easier for these smaller tenderers, although the additional measures designed to assist SMEs will mitigate the impact of these shorter time limits.

Conclusions

There is much to be applauded in the Commissions new proposals. However, it is difficult at this stage to see that they will result in a simplified procurement landscape post June 2014. Much will of course depend on the attitude of procuring bodies to the new tools in front of them and how well the finances of the public sector have recovered by that time in order for them to actively engage in the ways the Commission hope they will. The proposals will now be passed to the Council and the European Parliament for negotiation and adoption. We look forward to the continued debate with interest.

This article was first published in Credit Control Journal

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