Competition for public contracts: the new EU public procurement regime

Where public entities in the UK or any other EU member state wish to procure goods or services from private sector enterprises, they must follow the processes set out in EU public procurement legislation. In the UK, this legislation is enshrined in the Public Contracts Regulations 2006, as amended (the 2006 Regulations). The EU public procurement directives on which the 2006 Regulations are based seek to ensure that competition for public contracts is open, transparent, fair and non-discriminatory. A package of three new EU public procurement directives, published on 28 March 2014, brings in wide-ranging reforms with the aim of modernising, simplifying and improving flexibility in the existing system. The approved package  will enter into force on 17 April 2014.  The 28 EU member states will have until 17 April 2016 to transpose the new directives into national legislation. The  UK Cabinet Office, for its part, has indicated that it is preparing for an early transposition of the directives into UK law, in order to benefit as soon as possible from the flexibilities in the new rules.1

The modernisation package2 introduces a number of changes to the existing public procurement regime, such as new procedures for awarding contracts, new safeguards for small and medium enterprises (SMEs) and the reduction of paperwork. The 2006 Regulations will be either radically reformed or replaced over the coming months, and it will be important for any enterprise that contracts with government entities in the UK to prepare for these changes. This article summarises the major changes of concern to legal advisers, and discusses the issues that might arise under the new procurement regime.

SIMPLER PRE-QUALIFICATION

Under the new rules, there will be a simplified pre-qualification process. When a potential supplier submits a request to participate in a procurement exercise or submits a tender, the public institution purchaser (‘contracting authority’) will be required to accept what will be known as a ‘European single procurement document.’ This document acts as preliminary  evidence of a supplier’s satisfaction of the buyer’s pre-selection criteria and as a confirmation that the candidate has not been excluded from competition due to  one of the exclusion grounds (see the following section on these grounds of exclusion). Only the winning bidder will have to submit full formal evidence to prove its status. This should result in a great deal less time and effort being spent preparing pre-tender paperwork.

 NEW GROUNDS FOR EXCLUSION FROM A TENDER

 Current rules

The current, and the new, EU directive provides for certain grounds under which contracting authorities in the member states must treat a tenderer as ineligible, and other grounds under which they may treat them as ineligible. Under the current rules, contracting authorities are required to exclude potential tenderers where they have prior convictions for offences related to participation in a criminal organisation, corruption, bribery, certain kinds of fraud, money laundering, involvement in criminal proceeds or the proceeds of drug trafficking. Contracting authorities may currently exclude tenderers on the basis of issues such as bankruptcy or winding up, default of tax or social security obligations or certain other business-related transgression such as conviction of a criminal offence relating to the conduct of their business or profession, or commission of an act of grave misconduct in the course of their business or profession.

New rules

The grounds for excluding candidates have been reviewed, clarified and expanded under the new directives. Some issues have moved from the ‘may exclude’ category to the ‘must exclude’. In addition to a requirement to exclude candidates for participation in criminal organisations, corruption, fraud and money laundering, buyers must also exclude candidates who are guilty of child labour or people trafficking offences, or offences linked to terrorism, have breached their tax or social security obligations (until the supplier has rectified the breach by entering into a binding commitment to pay its dues), and are bankrupt or the subject of insolvency or winding-up proceedings (save for where the buyer has established that the supplier would be able to perform the contract). Member states may choose to set these mandatory exclusions aside where there are overriding reasons relating to the public interest – such as the protection of public health or the environment. In addition, member states may take the power to set aside these exclusions where an exclusion would be disproportionate – such as where only a minor amount of tax is unpaid. In any event, the right to exclude a tenderer will expire once it has fulfilled its obligations by paying the amounts due for tax and social security, with interest and fines if any, or has entered into a binding arrangement to do so.

The second set of circumstances are those which government entities may use as grounds for exclusion. However, national laws may require contracting authorities to reject tenderers on these grounds; this means that different rules on eligibility may apply in different member states. Falling into this category are tenderers (subject to the ‘self-cleaning mechanism’ below):

who are in breach of their obligations under EU or national laws or under collective agreements in the fields of environmental, social or labour law;
who are bankrupt or the subject of insolvency or winding up proceedings;
who are guilty of grave professional misconduct which renders their integrity questionable;
in relation to whom ‘there are has sufficiently plausible indications to conclude that they have entered into agreements with other economic operators aimed at distorting competition’. Note how broad this exclusion is: no decision or judgment is required and there is no explicit connection to the tender – the indicated behaviour may be thought to have been committed in an entirely different context. The preamble to the new directive treats this category of tenderers and those in the previous category as the same, in that the prior acts render them ‘unsuitable to receive the award of a public contract irrespective of whether [they] would otherwise possess the technical and economical capacity to perform the contract’;
whose inclusion would lead to a conflict of interest that cannot otherwise be resolved;
whose inclusion would lead to a distortion of competition as a result of their prior involvement in the preparation of the procurement procedure, which cannot be remedied by other, less intrusive measures;
who have shown persistent or significant deficiencies in performing a prior public contract with any contracting authority and which led to early termination, damages or other comparable sanctions;
who are guilty of misrepresenting the information required for fulfilling the buyer’s pre-selection criteria; or
have sought to unduly influence the buyer’s decision-making process.

Contracting authorities may accept previously excluded candidate suppliers who can provide evidence to show they have taken appropriate measures to remedy the consequences of any illegal behaviour and to prevent the same behaviour arising in the future.

NEW PROCUREMENT PROCESSES

 Current rules

Under the current regime, all procurements are conducted using one of four procedures:

open;
restricted;
competitive dialogue;
negotiated procedure (with or without notice).

The ‘open’ procedure is the most simple, advertised one. The buyer notifies a contract for the supply of goods, services or works in the Official Journal of the European Union and all companies are free to tender. The ‘restricted’ procedure is also a simple, advertised procedure, but it uses an initial pre-qualification stage whereby the buyer is able to reduce the number of interested suppliers who will be invited to tender, on the basis of published selection criteria. The competitive dialogue and negotiated procedures are more complex. The competitive dialogue procedure is similar to the restricted procedure; however the pool of pre-selected suppliers is invited to participate in a competitive dialogue to develop one or more solutions to meet the buyer’s procurement needs. The latter envisages that pre-selected suppliers will be invited to negotiate the terms of the procured contract directly. There are strict limitations on use of both the competitive dialogue and the negotiated procedures; generally, they may only be used for complex contracts where the other procedures would not result in any viable bids (for example, where the specifications cannot be decided with sufficient precision or prior pricing is difficult).

 New rules

Under the new rules, there will be the following six procedures:

open;
restricted;
competitive dialogue (which can now be used in broader circumstances);
competitive procedure with negotiation (new);
negotiated procedure without notice;
innovation partnerships (new).

As before, the new rules will set a high bar for any departures from the ‘open’ or ‘restricted’ procedures.

Competitive procedure with negotiation: this new procedure is intended for use for any type of contract, provided it is not merely ‘off the shelf’. The European Commission envisages that the procedure will be useful for services or supplies contracts that require some adaptation or design effort, for example purchases of sophisticated products where negotiations may be necessary to guarantee that the supply or service corresponds properly to the complex needs of the contracting authority. The new procedure, however, is subject to various safeguards. Contracting authorities must specify the subject matter of the contract, the award criteria and the minimum requirements at the time the contract notice is published. Any changes must be communicated to all candidates and every candidate must be given the possibility to submit a final tender. Finally, the conduct of the negotiations must be documented in a report to be drawn up by the contracting authority.

Innovation partnership: this new procedure can be used where the contracting authority is procuring an innovative product, service or works. ‘Innovative’ is anything not readily available on the market. The partnership is aimed at the development of the product, service or works (eg research and development (R&D) services) and the subsequent purchase and supply of the resulting product, service or works. The buyer is able to set up a partnership with one partner or several partners conducting separate R&D activities.

Reduced time limits: another important procedural change will be a sharp reduction in the minimum time limits within which suppliers may be required to respond to invitations to tender (ITT). Under the new rules, buyers may require potential suppliers to respond within 30 days from the date of the ITT; currently, potential suppliers must be given at least 40 days to respond.

 NEW CRITERIA FOR ASSESSING TENDERS

Current rules

Currently, tenders may be assessed either on the basis of (a) lowest price or (b) the most economically advantageous tender (MEAT), which includes criteria in addition to lowest price.

New rules

Under the new rules, MEAT will be the only basis for award, and it has now been defined in the new directive. Under the new MEAT-only approach, national procurement laws:

must identify which is the MEAT on the basis of price or cost using a cost-effectiveness approach. Such approach may be based on explicitly stated life-cycle costing criteria which include, among other things, the cost of acquisition and use.
may allow public authorities to use a methodology referred to as best price-cost ratio – which includes, among other things, qualitative and social aspects linked to the contract. Quality includes features such as technical merit, social and innovative characteristics and technical assistance.
may prohibit public authorities from using cost only or price only as the sole award criterion.

This new approach to MEAT will add a certain complexity as public authorities in different member states will be subject to different obligations under national legislation implementing the directive.

 BETTER ACCESS FOR SMES

SMEs are not readily catered for in the current rules. That is set to change with the introduction of new measures to boost SME opportunities, including:

reduced paperwork at the pre-award stage, as summarised above;
new requirements on buyers to divide their contracts into lots to facilitate entry by SMEs or to explain in the procurement documents the reasons for not doing so; and
the introduction of a turnover cap so that buyers will not be able to set the minimum yearly turnover of potential suppliers at more than twice the estimated contract value, unless there is a justification (eg risks attached the type of services, supplies or the works to be undertaken).

MANDATORY E-PROCUREMENT

As part of the modernisation of procurement procedures, it will become mandatory to provide for e-procurement. All notices and procurement documents will need to be transmitted in electronic form.

This appears to be a big change, but in reality a lot of procurement in the UK is already conducted through e-procurement. All EU member states will be allowed an additional 30 months to introduce e-procurement, on top of the two years allowed to transpose the new Directive into national law.

ENVIRONMENTAL, SOCIAL AND LABOUR LAWS

The new rules require member states and contracting authorities to take appropriate measures to ensure compliance with applicable environmental, social and labour laws at all stages of the procurement procedure. The directives do not lay down specific requirements, but stress that the measures could be mirrored in contractual clauses with suppliers. As discussed above, the new rules also note that non-compliance by a supplier could be considered a relevant ground to exclude the supplier from the award of the contract.

In addition to the above, the assessment of the price-quality ratio under MEAT may take into account environmental and/or social characteristics. Life-cycle costing should also take into account environmental externalities such as the cost of greenhouse gas emissions and  other pollutants.

 CLARITY ON POST-AWARD MODIFICATIONS

There will be new and greatly needed clarity on modifications of procured framework agreements and other contracts during their term. The new rules codify case law deriving from the European Court of Justice’s decision in Pressetext v Republik Österreich (Bund) & ors [2008] that a substantial modification post-award will be considered to be a new award and will therefore require a new procurement procedure.

A substantial modification is one that:

had it been part of the original ITT would have permitted other tenderers to take part;
changes the economic balance of the contract in favour of the contractor;
extends the framework agreement ‘considerably’; or
replaces the original contractor (there are some exceptions).

However, none of these specified modifications will be ‘substantial’ if their value is below certain thresholds – ie if the value of the modification is below the financial thresholds for procurement contracts (eg €134,000) and it is less than 10% of the initial value of the contract.

There is also clarity given on types of changes that would not be considered as substantial and therefore do not require a new award procedure:

Changes that, whatever their value, were provided for in clear, precise and unequivocal terms in review clauses (including as to price) contained in the procurement documents, such as the framework agreement. To be valid, such clauses must state the scope and nature of the possible modifications and the conditions under which they will be used. It remains to be seen whether this exception is intended to override the Pressetext definitions of substantiality – so that a modification that is provided for in the procurement documentation would not be substantial even if it  would have permitted other tenderers to take part.
Changes that provide for additional supplies to be made and where a change of contractor is not possible for technical or economic reasons and would cause significant effort or cost to the public authority; the value of each such change is limited to 50% of the original contract.
Changes the need for which could not have been foreseen by the public authority acting diligently, but the overall nature of the contract remains the same and any increase in price is limited, on each occasion, to 50% of the value of the original contract or framework agreement (note: there is no express provision relating to decreases in price).

 No change to remedies or appeals process

The new rules will not change the process for seeking remedies against defective ITTs or awards or the remedies available. Tenderers or those seeking to be qualified must continue to move very quickly in order to challenge any defect in an invitation to tender, qualification procedures or awards.

By Tim Frazer, partner, and Gemma Davies, associate, Arnold & Porter (UK) LLP.

E-mail: tim.frazer@aporter.com; gemma.davies@aporter.com.

 Notes

https://www.gov.uk/government/news/eu-to-open-up-public-procurement-following-uk-government-lobbying.
 The new directive changing the rules relating to the supply of goods and services will be the Directive of the European Parliament and of the Council on Public Procurement (Classical Directive) (number not known at the date of publication).