Procurement Pulse - April 2016

Procurement Pulse Series

Procurement Update

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The final implementation date for the new EU procurement directives - 18 April 2016 - has arrived.

Clients who participate in government contracting across Europe must now navigate the implementation choices made by different EU member states. Analysis between DLA Piper European offices is showing a number of differences in implementation practice across Europe. For example, whilst implementing legislation in a number of EU member states will provide bidders with a "self cleaning" opportunity where they do not fulfil required selection criteria, other jurisdictions withhold this "remedy" in the case of tax transgressions. Whilst most jurisdictions have retained the option to evaluate a contract on the basis of price only, some have chosen always to evaluate bids on the basis of a best price:quality ratio approach. From 18 April the old directives (2004/17/EC and 2004/18/EC) are revoked, and the European Commission will be entitled to start infringement proceedings against those EU member states who have not implemented, or who have implementing legislation in place which does not conform with the wording of the new directives (2014/23/EU (concessions), 2014/24/EU (public sector) and 2014/25/EU (utilities)). We highlight a case below, where the Commission considered whether Portuguese legislation implementing the old Directive 2004/18/EC complied with the provisions on selection criteria set out in that directive. 

In this edition, we have set out some of the challenges identified in the English implementing legislation in its first fourteen months of operation. England, Wales and Northern Ireland were the first jurisdictions to implement Directive 2014/24/EU in February 2015. We also look at action the EU Commission is taking to counter protectionism, and open up international procurement markets to EU bidders. 

Public Contracts Regulations, 2015 (PCR'15) - reflections on the first fourteen months : To avoid "gold plating", the UK government decided to take a "copy out" approach when drafting its implementing legislation for Directive 2014/24/EU. It has followed the same approach for Directives 2014/25/EU (Utilities) and 2014/23/EU (Concessions). This is a good thing. Whilst there may be some anomalies resulting from the English translation used in the Directives, following the same sequence as the directives assists in analysis, and encourages reference to the Recitals in the Directives - a practice which is not always familiar to UK lawyers. 

This is not to say that "copy out" did not bring its challenges. For example, regulation 34(14) applies to dynamic purchasing systems ("DPS"), and states that "for the purposes of awarding a contract under a [DPS] contracting authorities shall … publish a call for competition". In terms of pure semantics, this indicates that an OJEU notice must be advertised for each "call-off" from a DPS. Logically this does not sit with the DPS process, and we interpret this regulation as only applying to the initial setting up of the DPS 

On balance, the most useful aspect of PCR'15 has been the provisions codifying the Pressetext case, on the extent to which a contract can be varied without need to re-advertise it to the market. First instance advice can now be on the basis of review of the scenarios set out at regulation 72(1)(a) to (f), and the variation "caps" of up to 50% of the original contract value in some of the 72(1) scenarios have generally been seen as generous, and welcomed by clients. Uncertainty in PCR'15 as to the scope of the 72(1)(b) exemption (procurement of additional goods and services without reverting to the market, because of economic and technical reasons) has been ironed out by the Public Procurement (Amendments, Appeals and Revocations) Regulations, 2016 ("the 2016 Regs"). The wording now follows that of the Directive, by using the word "and" to join the two justificatory grounds on which the exemption depends - rather than the word "or". 

Review of the regulation 72(1) scenarios will inform drafting of the new standard form which the EU Commission requires contracting authorities to complete where a contract is varied in reliance on regulation 72(1)(b) (additional supplies) and/or (c) (unforeseen circumstances). At the time of publication of this "Modification Notice", the Voluntary ex ante transparency or VEAT notice was updated such that it now directs its use only where regulation 32 (use of negotiated procedure without prior publication) is relied on, or where a procurement falls outside the scope of the directive. If a properly completed VEAT Notice has been served, a court cannot declare a contract ineffective on grounds of failure to advertise the procurement, pursuant to which the contract was awarded. But what happens if the contents of a Modification Notice do not convince a court that circumstances relied upon in the notice, are sufficient to satisfy the 72(1)(b) or (c) exemptions - and that the variation constitutes a new contract, which should therefore have been advertised? If a VEAT notice has not been completed, and the variation has been entered into, there is a risk that it could be declared ineffective. The logic may be that deficiencies in a Modification Notice, would also be apparent in any accompanying VEAT notice, and case law indicates that it is not the technical act of filing a VEAT notice that will save a contract from ineffectiveness, but the substance of its justificatory content. 

With any amending legislation, there will be a transitional period where some procurements are regulated by the old rules, and post-amendment procurements by the new rules. PCR'15 dealt effectively with this scenario, but failed to acknowledge that procurement legislation (as a result of regulation 72) now regulates, not only the procurement process, but also signed public contracts. It was not clear whether contracts concluded pursuant to procurements started before the PCR'15 implementation date of 26 February 2015, could rely on the regulation 72 exemptions, or must analyse the change by reference to Pressetext and related case law. The Edenred case confirmed that regulation 72 applied, but the 2016 Regs have also (some may say in a rather convoluted fashion) clarified that regulation 72 (and 73(3) on contract termination) will apply to contracts concluded before 26 February. 

Procurement law in the context of public sector contracts, continues to gnaw away at the cherished UK principle of freedom of contract. PCR'15 includes procurement related provisions which do not derive from Directive 2014/24/EU. For example, regulation 113 which includes an obligation to ensure that payments pursuant to a public contract are made within 30 days of an undisputed invoice. Those active in the infrastructure sector will be familiar with the concept of "equivalent project relief" in PPP contracts - a deferred payment mechanism which preserves the finely balanced risk allocation between the public sector and the private SPV (special purpose vehicle), so that payments which must be made by SPV to its sub-contractors, only have to be made once upstream payments from the public sector have been received. This depends on the concept of a "due date for payment" and a "final date for payment", set out in another piece of legislation - the Housing Grants Construction and Regeneration Act, 1996. EPR mechanisms provide for there to be a lengthy period of time (typically 18 or 24 months) between the due date for payment to the sub-contractor and the final date for payment. As a result of regulation 113, this period will have to be significantly reduced to no more than 30 days. 

Clients and consultants have expressed some surprise at regulation 53 of PCR'15, which requires "access free of charge to the procurement documents from the date of publication in the Official Journal …". The definition of "procurement documents" includes the proposed conditions of contract, which may present an impossibility to contracting authorities seeking to work up contractual terms with bidders through a competitive dialogue procedure. However, this provision reflects one of the key drivers behind modernising the EU procurement rules - delivering efficiency benefits. Whilst there may be grounds for challenge if a draft contract is not available at the OJEU date, the principle of proportionality suggests that a court would look favourably on a contracting authority who acknowledges regulation 53, and perhaps as an alternative includes a briefing paper on the likely contract structure; or if a government standard is to be used as the starting point, includes a copy of the standard contract, acknowledging that certain variations are likely to be made. 

Implementation of 2004/18/EC - grounds for verifying selection criteria: In this case Advocate General Wathelet looked at Portugal's implementation of article 48 Directive 2004/18/EC. Article 48 requires verification of the technical ability of a bidder, by means of its customers providing references in relation to contracts entered into by the relevant bidder in the previous three year period. Portuguese implementing legislation required references provided by a private sector purchaser to have been notarised/authenticated by a lawyer. The court considered the wording of article 48 to be clear, such that it could be relied on by a bidder excluded from a procurement process (in place of the national implementing legislation) where the bidder failed to provide notarised references. On the basis of the proportionality principle, the court considered that notarisation of references was "excessively formalistic" and may have the effect of discouraging bidders to take part in a procurement. It also pointed out that Directive 2014/24/EU has removed the requirement for customer references, by requiring only a "list" of relevant supplies made by bidders in the previous three years - though that Directive could not be relied on in this particular case.

Ambisig v AICP - Case C-46/15 Advocate General Opinion 

Countering protectionism by third states: Within the EU Treaty there are specific powers for the Union to encourage the integration of all countries into the world economy, and to contribute to the harmonious development of world trade. The EU procurement rules promote freedom of movement of goods and services across EU state boundaries, and as a result of the WTO Government Procurement Agreement, EU contracting authorities must treat GPA signatory state bidders, no less favourably than their own domestic suppliers, when running a regulated procurement. To the extent that they have signed up to the GPA, GPA contracting authorities will show the same reciprocity to EU bidders wishing to bid for contracts in their jurisdiction. 

However, important economic players such as China, Brazil and India are not parties to the GPA, and the EU Commission estimates that more than half of the world's procurement markets are closed due to protectionist measures. It has therefore proposed an International Procurement Instrument ("IPI") which will enable it to investigate procurement barriers in third countries, and enter into consultations with countries imposing protectionist measures. If consultation does not produce fruitful results in terms of reciprocal trading arrangements, then the Commission is proposing application of "price adjustment measures". In practice price adjustment would be imposed by certain EU contracting authorities in the course of any procurement with an estimated value of EUR 5 million or more, and where the value of goods and services originating from a third country in a bid are valued at more than 50% of the total contract value. Where price adjustment is to be used in a procurement, the Contract Notice must state that will be the case, and (for the purposes of bid evaluation only) the price of any relevant third country bid will be adjusted by up to 20%. The Commission's proposal in its original format was received with concerns by some EU member states - that certain of its provisions would lead third countries to take an even more absolute approach to protecting their markets from foreign players. It remains to be seen whether the new proposal will be accepted. 

In this context, the Commission appointed DLA Piper in collaboration with Innovative Compliance, to provide a legal, economic and statistical overview of the public procurement markets and regimes of China, Russia, India, Brazil, Turkey and Mexico and to identify regulatory and non-regulatory measures, which contribute to restricting access of foreign bidders to those public procurement markets. The results of our review make fascinating reading - where the legal regime in a country appears to allow open access to bid for government contracts, in fact, restrictive practices often prevail over the legal position. If you would like further information on our findings in these EU major trading partner jurisdictions, please see EU Commission's amended proposal for a Regulation on access of third country goods and services to the Union's internal market - COM(2016) 34 final.