This briefing is a round-up of some of the important recent developments in EU public procurement. We will focus on:
- the new Remedies Directive;
- defence procurement; and
- pre-commercial procurement for research and development services.
The Remedies Directive
We first reported on the proposals for a Remedies Directive in our October 2006 briefing. The new Directive 2007/66/EC (the new Directive) was formally adopted on 15 November 2007 and published in the Official Journal of the European Communities (the Official Journal) on 20 December 2007. It contains amendments to the previous remedies directives with the aim of improving the effectiveness of review procedures on the award of public contracts.
The impetus behind the new Directive was the perceived weaknesses in the measures that were available to ensure compliance with the public procurement regime, which primarily concerned the absence of an effective review process between the decision to award a contract and the actual conclusion of that contract between the purchasing authority and the successful tenderer.
The new Directive not only includes the EU wide implementation of a standstill period, which already applies under current UK law, but also provides for effective remedies where a contract is awarded without competition.
The most important changes introduced by the new Directive are as follows.
A standstill period
- Contracts cannot be concluded before the expiry of a minimum of 10 calendar days, calculated from the day following the date on which the contract award decision is sent to the tenderers if that decision is communicated electronically or by fax. Where other forms of communication have been used, that standstill period will be extended to a minimum of 15 days, or at least 10 days, following the date of receipt of the contract award decision.
- The contract award decision must be accompanied by a summary of the reasons for the award and a precise statement of the applicable standstill period.
- If an unsuccessful tenderer challenges the decision, the award of the contract will be suspended until a body independent of the contracting authority (in most member states this is likely to be the national courts) makes a decision on interim measures or on a review of the merits of the case. This period of suspension cannot end earlier than the applicable standstill period for that contract.
- An infringement of the procurement directives (for example, a contract award without prior publication in the Official Journal) will result in the contract being rendered ‘ineffective’ by the courts. The precise consequences of this are left to be determined by national law, but these may include the retroactive cancellation of all contractual obligations, or simply those obligations that have yet to be performed.
- An infringement of the standstill obligations will in principle render the contract ineffective if combined with other infringements of the procurement directives.
- Alternatively, the courts may be given the discretion to allow the contract to remain in force where there are overriding reasons in the general interest to do so. Economic interests in the contract proceeding can only be considered as an overriding reason if cancellation would result in disproportionate consequences. However, it is unlikely that economic interests directly linked to the specific contract will be able to take advantage of this exception – ie the costs resulting from delay in executing the contract, re-tendering the contract and the like.
- Member states must make available ‘effective, proportionate and dissuasive’ alternative sanctions for either the exceptional circumstances in which the courts may allow a contract to remain in force or other formal infringements of the new Directive. These can include fines or shortening the duration of the contract, but not an award of damages.
- Infringements may also be dealt with by the direct intervention of the European Commission (the Commission) in tender procedures. Under the new rules, the Commission would be able to do so where it considers that a ‘serious infringement of Community provisions in the field of public procurement has been committed’.
- Member states can provide that applications for review seeking to render contracts ineffective must be made within 30 days of the publication of the contract award, or, in the absence of that notice, within six months of the conclusion of the contract.
Framework and dynamic purchasing
- Specific procedures will apply for contracts that are awarded on the basis of framework agreements and dynamic purchasing systems (such contracts rely on speed and efficiency). Rather than applying a mandatory standstill period, member states may provide for ineffectiveness as a post-award remedy.
Member states are due to bring into force the laws, regulations and administrative provisions necessary to comply with the new Directive by 20 December 2009.
In early December 2007, the Commission published a package of initiatives designed to encourage greater competition in the context of defence procurement across national borders in Europe, while enabling member states to retain control over their essential defence and security interests. This defence package contains a proposal for a directive on intra-community defence transfers and a communication on the competitiveness of European defence industries. However, the most significant proposal is for a directive on defence procurement to enhance openness and competition in member states’ defence markets.
Why a separate defence procurement directive?
Defence and security contracts currently fall within the scope of Directive 2004/18/EC1 (the Directive), which governs all public sector procurement in the context of supplies, works and services. Given the sensitive nature of contracts regarding defence and security, there are a number of Treaty exemptions that allow member states to bypass the Directive in circumstances where it is necessary to protect national security interests.
However, it was always intended that the use of these exemptions would only occur in strictly defined circumstances so that the essential interests of the wider market (in terms of competition) were not jeopardised. It is the Commission’s view that member states routinely invoke exemptions such as that provided under article 296 of the Treaty (public defence contracts) or via article 14 (public security contracts) so that the Directive is rarely applied in the defence context.
As a result, the Commission is concerned that defence and security procurement procedures differ significantly from one member state to another. This lack of legal uniformity is perceived as undermining the establishment of a European defence market, contravening fundamental Treaty principles on transparency, non-discrimination and equal treatment.
Proposal for a directive on defence and security procurement
The creation of a European defence equipment market is described as integral to the European Security and Defence Policy. Against that background, the proposed directive looks to create a new framework, more appropriate for the award of sensitive public contracts in the fields of defence and security. It will apply to public contracts for arms, munitions and war material. In addition, it extends to sensitive non-military security equipment regarding protection against terrorism, organised crime, border protection and crisis management operations.
What is said to distinguish this proposed directive from the existing, general procurement Directive 2004/18/EC, is a number of features designed to create a workable balance between the necessity for contracting authorities to safeguard their national security interests and enhancing transparency and openness of the defence markets between Member States.
Key provisions of this proposal include the following.
- Procurement procedures: member states will be able to use the negotiated procedure with prior publication of a contract notice without the need for specific justification. This should provide the requisite flexibility for sensitive defence and security contracts. The restricted procedure and competitive dialogue may also be used. There is also the possibility of the negotiated procedure without publication of a contract notice either in circumstances of urgency or where the contract may only be awarded to a particular tenderer for reasons of protecting exclusive rights.
- Security of information: where the contract will include sensitive and therefore confidential information, member states will be able to specify safeguards in the award procedure. These may include specific criteria for candidate selection (eg the tenderer must be able to demonstrate that it possesses the capabilities to protect the confidentiality of sensitive information) and the contractual requirements that will be imposed (eg the obligation to keep that sensitive information confidential during the contract and after it’s termination or conclusion).
- Security of supply: member states will also be able to specify requirements on security of supply. Again this will be accomplished through the imposition of criteria that must be satisfied in any submitted tender. An example might be that the tenderer has to demonstrate that it will be able to honor its obligations regarding the export of the goods that are the subject of the contract. This could include confirmation from the member state from which the goods are to be exported.
Member states will still have the possibility to use exemptions such as article 296 to acquire defence and security procurement contracts that are so sensitive that even the new rules do not satisfy their security needs.
The legislative process for adoption of the directive by the EU Council and European Parliament could take up to two years.
Commission communication: pre-commercial procurement for R&D services
The Commission published, on 14 December 2007, the communication Pre-commercial Procurement: Driving innovation to ensure sustainable high quality public services in Europe.
The classic approach to public procurement involves buying established products and services to minimise the risks and maximise the benefits to the public purchaser. This communication looks at an alternative to this, with the Commission focusing on the need for procurement of more innovative products and services. To this end, the Commission is promoting the concept of ‘pre-commercial procurement’ in the field of the research and development (R&D) phase before commercialisation.
Why is pre-commercial procurement for innovation considered essential? Climate change, the necessity to improve energy efficiency and the capacity to deal effectively with security threats are among a number of challenges that are likely to require technologically demanding solutions that either do not exist in the current market or are such that there are evident shortcomings requiring new R&D. Despite the role that the public sector should take in driving forward innovation (and with it the competitiveness of the European market), comparison with the wider global markets indicates that Europe is falling behind its major global competitors.
- The US and Japan have significantly reduced the cost of fuel cell stations through R&D procurements, facilitating fuel cell powered buses as a viable energy-efficient public transport option.
- In 2006, China’s national long-range science and technology plan officially introduced public technology procurement in China as a means to encourage innovation.
- The US public sector is spending $50bn per year in procurement of R&D – 20 times higher than in Europe and representing approximately half of the overall R&D investment gap between the US and Europe.
The Commission acknowledges that there are significant differences in the procurement regimes of the EU and other countries – these should be analysed to identify how potential advantages could be transferred to the EU context.
Conventional procurement by the public purchaser is on the basis of ‘exclusive development’ ie the public purchaser reserves all the results and benefits of the development (including intellectual property rights) exclusively for its own use. While there are areas in which it is critical that the public purchaser retains exclusive rights over project results (most notably in defence or security related fields) this is frequently not the case, such that the public purchaser may be just one of numerous potential users of the developed solution.
Procurement exclusivity may hamper innovation (at a time where this is becoming more critical) in the following ways.
- The price: high costs for exclusive ownership of project results reduces the incentive for the public purchaser to share project results with other potential public purchasers.
- Market fragmentation: the development of numerous solutions, none of which, on their own, is likely to provide a composite solution for a global market.
- Barriers to procuring competing developments: the high cost of exclusive development can lead to locking the public purchaser to one supplier.
- Missed opportunities for more innovative solutions: exclusivity imports the R&D risks as well as the benefits, such that the public purchaser may feel compelled to opt for the ‘near to market’ developments, missing the opportunities offered by the development of more innovative solutions that could potentially bring better value for money.
Pre-commercial procurement as an alternative
The Commission is seeking to draw the attention of member states to the existing but under-utilised opportunity of pre-commercial procurement, which is an approach to procuring R&D services in circumstances other than those where the benefits will accrue exclusively to the public purchaser. Under the existing procurement Directives, pre-commercial procurement of innovation is a public service contract because it refers to acquisition of knowledge. As such, where the R&D is fully paid for by the public purchaser without the exclusive retention of its benefits, the R&D public service contract is an exception to the procurement Directives.
Therefore, this procurement route could be more widely used in Europe to improve efficiency and quality of service by bringing new solutions to the market.
How would this work in practice?
The communication is designed to launch a debate on how member states might develop pre-commercial procurement strategies and which areas might be appropriate for R&D research on this basis. That debate should encompass questions such as how the efforts of several public procurers could be pooled and the sharing of the risks and benefits of designing, prototyping and testing new products and services with the suppliers.
As part of this process, the Commission is intending, in the second half of 2008, to propose a set of recommended actions on pre-commercial procurement in areas of policy priority based on relevant impact assessments and it will explore the possible need of new platforms for co-operation on pre-commercial procurement.
The Commission hopes that by developing forward-looking procurement strategies to encompass R&D procurement, new solutions to address challenges such as climate change will be produced. That in turn will enable the public sector to have a significant impact on the long-term efficiency and effectiveness of public services as well as on the innovation performance and the competitiveness of European industry.