By Dr Vitali Gretschko, Head of the Market Design Research Group (ZEW Mannheim) and
Dr Albert Sanchez-Graells, Senior Lecturer in Law (University of Bristol Law School).*
The airport Berlin-Brandenburg, Stuttgart 21, and the Elbphilharmonie have one thing in common. Irregularities in the procurement process and delays in execution led to immense cost explosions to be covered by taxpayers. Thus, given the risks of corruption, favouritism and misuse of public funds, the award and management of public contracts requires a high level of scrutiny to avoid mismanagement and waste.
Moreover, even when things go well, improvements in public procurement law can have significant effects. Today, over 250 000 public authorities in the EU spend around 14 per cent of the GDP on the purchase of services, works, and supplies. Even small relative efficiency gains through carefully crafted rules can therefore result in savings in the billions. Therefore, the design of procurement rules need to reach a balance between safeguarding economic efficiency through competition and ensuring the proper level of transparency and accountability.
EU rules on public procurement have relied on the principle of transparency as a market-making device to support the internal market strategy since the 1970s. Transparency requirements have been expansively interpreted by the EU and domestic courts as a tool aimed to safeguard the procedural rights of the companies involved in public tenders, most significantly after the entry into force of the Charter of Fundamental Rights of the European Union. The European Commission has used this to push for enforcement strategies aimed at facilitating litigation by private bidders. Where public controls are underfunded and perceived to be increasingly slow and ineffective, this litigation emerges as an alternative mechanism to keep the contracting authorities in check.
Further, the importance of transparency is only likely to increase in the future as big data analysis starts to concentrate on the use of public funds through public contracts, such as through the European Commission’s DIGIWHIST project. This is driving a further initiative of the European Commission as part of the October 2015 Strategy for the Upgrade of the Internal Market to create full-cycle procurement registers that would make all procurement documents publicly available online and free of charge. Overall, it is no exaggeration to say that transparency is the procurement sacred cow, which is expected to simultaneously work as an insurance of the probity, integrity, legality, openness and reviewability of procurement.
However, this should not be seen as an entirely satisfactory evolution of public procurement rules. By publishing contracting opportunities ahead of time, disclosing the main conditions for the award of public contracts (including their price) and providing sensitive market information to bidders in these tenders, contracting authorities may unknowingly be fuelling anticompetitive practices that result in higher prices and reduced quality in public sector supplies, services and works.
In order to form a stable cartel, its members need to be able to control whether the cartel strategy is followed and punish deviators. Transparency significantly facilitates the monitoring task and therefore stabilises collusive agreements. The number of bid rigging cases that takes place in public procurement markets in industries such as infrastructure or healthcare are clear proof that collusion is a problem. A particularly prominent case is the lift cartel that was formed by ThyssenKrupp, Otis, Schindler and Kone who fixed prices and rigged bids in procurement processes from 1995 to 2004. In 2004 the cartel was detected and combined fines for the companies came close to one billion EUR.
Consequently, a counterweight for the push for increased transparency in public procurement is needed. The anticompetitive effects of transparency are clearly undesirable and offer good normative foundations to a call not necessarily for reduced transparency requirements in procurement, but for a smarter regulation of procurement transparency. This can be achieved both by making better use of the existing rules and by preventing the adoption of new requirements of excessive transparency.
First, the public sector needs to rely more systematically and carefully on the exceptions to the transparency rules included in the EU Directives, which allow them to withhold sensitive information with the potential to distort market competition. Contracting authorities may be reluctant to do so due to legal uncertainty and litigation risks. However, this is most necessary and may be facilitated through the adoption of guidelines addressed to the public sector, for example with the occasion of the transposition of the 2016 Directive on the protection of undisclosed know-how and business information.
Second, the initiative for the creation of ‘cradle to grave’ online procurement registers needs to be designed very carefully. Given the anticompetitive risks of putting all information ‘out there for everyone to see’, a more nuanced approach is preferable. These registers can make an invaluable contribution to boost public enforcement of procurement rules by oversight bodies and courts of auditors. But this does not mean that the general public, and by implication all market players, should have access in real time to the same level of information. The creation of these registries should be coupled with granular rules determining different levels and timings of access for the public sector, private and third sectors, academia and public at large.
In particular, delaying the release of information would destabilize cartels because deviators from the cartel strategy can enjoy the deviation profits for a longer time, which in turn makes deviation more profitable. Only in this way can we hope to reap the benefits of transparency in public procurement without paying highly for it in the form of non-competitive prices, reduced quality and increased costs of enforcement of competition law.
* A German version of this post was first published by WiWo – WirtschaftsWoche 50/2.12.2016.