Pros and Cons of Competition in/by the Public Sector November 13th 2009, Konkurrensverket Michael Steinicke
Public contracts through procurement -can there still be state aid? An investigation of the significance of procurement rules in the search of the market price under state aid rules Michael Steinicke
Structure of the presentation • Introduction to the rules • Presentation of the problem • Analysis of the public procurement elements that might influence the level of competition in a procurement procedure • Conclusion Michael Steinicke
State aid in the EU • State aid rules: – EC Treaty Article 87-89 (Lisboa Article 107-109) – Prohibition of state aid that distorts the common market (Article 87) • Purpose of the rules – To prevent distortion of competition due to public subsidies to certain enterprises Michael Steinicke
Public procurement in the EU • The procurement directives – The Procurement Directive 2004/18/EC and the Utilities Directive 2004/17/EC • Regulated in the EC Treaty – The free movement rules (primarily goods, services, persons) – Impose obligations of transparency and equal treatment • The purpose of the procurement rules – To open the public market to all enterprises in the EU Michael Steinicke
Public procurement in the EU (II) • The basic instruments of public procurement: • Publication of an announcement • Competition on the basis of procurement documents that applies equally to all tenderers • Prequalifications and award of contract on the basis of pre-published criteria • Public entities must follow the basic principles, primarily those of equal treatment and transparency Michael Steinicke
The interface between state aid and public procurement • Several points of contact between public procurement and state aid – Potential for conflict or synergy • State aid in public procurement – Possibility to exclude abnormally low offers that have received state aid • Public procurement in state aid – Procurement procedures ensure that public transactions are in accordance with the market investor principle since reaching the market price • No rule without exception: T-14/96, Bretagne Angleterre Irlande v Commission – State aid since the public entity purchased more than needed – Raises questions in regard to application and assessment of the purchased quantum Michael Steinicke
The general assumption: procurement procedures equals market price • An assumption that a procurement procedure will result in a market price due to the competitive situation – The market investor principle • Several cases/rules – C-280/00, Altmark (for public services) – N 264/2002, London Underground – Commission communication concerning aid elements in land sales by public authorities, OJ C 209 1997/3 Michael Steinicke
What constitutes a procurement procedure? • No uniform set of requirements in case law or regulation • N 264/2002, London Underground: – An open, transparent and non-discriminatory procedure • Reason to make a distinction between buying and selling procedures – Auction theory: no difference – however, the procurement design is quite different • Should we not just accept the procedures found in the Procurement Directive? – ECJ: no explicit statement to that effect – The Commission has seemingly not accepted this approach • Therefore: it must be assessed whether each procurement procedure is legitimate according to the state aid rules
Elements that might influence the procurement price • Different procurement procedures • Negotiations • Award criteria • The number of participants Michael Steinicke
Award criteria • The lowest price – Should not constitute any problems: valid • The economically most advantageous tender – Should ensure the market price and has been recognized as valid, even though not consistently: – N 525/2001, Ireland Cluster Incubation Scheme • ”..since there is in the present case a qualitative assessment of each project, a discretionary element is introduced in the selection of the developers and the awarding of the grant.” • Result: certain firms might be favoured (state aid) Michael Steinicke
Procurement procedures • Very different designs – Ranging from the open procedure to the competitive dialogue • Different combinations of the following components: – Knowledge of the competitive situation – Number of stages in the procedure – Access to the use of dialogue – Successive exclusion of tenderers Michael Steinicke
Procurement procedures (II) • Open procedure and restricted procedure – The open procedure is apparently the Commission’s favorite • Negotiated procedure and competitive dialogue – Primarily a question of negotiations • Framework agreement and dynamic purchasing systems – Initial price might be changed • Electronic reverse auction – Strategic considerations; bid low from the start of leave room for lowering the price during the auction
Access to negotiations • Negotiations in a procurement context: • Are negotiations decreasing competition and thereby reducing the chances of reaching a market price • Are negotiations actually detriment to competition – Will decrease transparency, but – Might make the bids more competitive Michael Steinicke
The importance of the number of tenderers • A high number of tenderers would ensure the most fierce competition (?) • Restricted procedure, negotiated procedure and competitive dialogue: – Shortlisting of companies down to 3 or 5 enterprises – Is this a problem due to insufficient competition? • High level of requirements/low level of interest might otherwise limit the number of participants • According to the procurement rules the public entity can react when there is not sufficient competition
Compliance of procedures based on EC principles • Are procedures based on the EC Treaty principles in compliance with the state aid requirement? • Such procedures must comply with the principles of: – Equal treatment • Same conditions, time limits, information etc. – Transparency • Announcement of the contract • Will this in general be enough to satisfy the state aid requirements? – Probably not, but should it be enough? Michael Steinicke
The importance of economic theory • Auction theory: concerns economics of bidding/bidders – Has not played any part explicitly so far • Traditional procurement: First price sealed bid • Electronic reverse auction: English auction • Revenue Equivalence Theorem – Approximately the same result regardless of auction design – Supports an approach which allows a broad range of procurement procedures Michael Steinicke
Conclusion • Difficult to establish any specific requirements based on case law and Commission’s decisions • The approach of the Commission: intense scrutiny – Sometimes the Procurement Directive doesn’t sem enough even though very detailed • The Commission also measures the procurement procedure on the basis of the content of the contract • Solution: a horisontal communication explaining exactly what constitutes a procurement procdure Michael Steinicke
In conclusion II • Not satisfactory that there is legal uncertainty concerning the use of public procurement in a state aid context • The obvious solution would be to accept all competitive procurement procedures that are in accordance with the Procurement Directive and the EC Treaty principles – The use of the leverage principle? A ground for legal concern? • The lack of convergence is detriment to satisfactory use of public procurement Michael Steinicke
In conclusion (III) • The public entity has to respect the Procurement Directive and the rules therein • Must also comply with the requirements of the procurement procedure according to the state aid rules • If there is no convergence between the two the public entity might be forced to use a procedure which is not the most practical Michael Steinicke
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