A new dawn for public procurement?
Arthur Cox Partner Peter Curran outlines the commercial and legal implications of the new EU Procurement Directive.
There has been a growing awareness in Northern Ireland in recent years of the legal rules governing public procurement and the need to comply with them. The volume of procurement-related disputes and litigation before the courts and the increasing regulatory oversight of procurement activities has created an environment where public bodies can no longer ignore the rules or seek to take short-cuts. Compliance is critical, and yet this can be difficult for organisations to achieve when the legal framework is evolving so quickly, becoming more complex and multi-layered.
The latest significant development is the recent agreement of the European Parliament and the Council of the European Union on the text of a new Procurement Directive. This will replace the current Directive 2004/18 and will soon be the new cornerstone for procurement regulation in the EU. While the UK has two years to implement the new Directive, the Cabinet Office has expressed a desire to transpose it into national regulations within 12 months. This means that very shortly there will be a new statutory framework for procurement in Northern Ireland.
Public bodies should now be familiarising themselves with the new Directive and assessing how their processes will need to be modified. The Directive also offers guidance on what the EU considers to be best practice in certain areas and public bodies can benefit from this before any national regulations are published.
So, what changes will the new Directive introduce?
Simpler, more flexible rules
The Directive aims to simplify the legal framework and make it more flexible in a number of ways. For example, there is an effort to reduce the amount of documentation required of bidders (particularly at the selection stage of the competition where a new ‘European Procurement Passport’ will be introduced) and to make electronic procurement the norm.
Candidates will be able to ‘self-certify’ that they meet selection requirements early in the process, only to be fully checked out later if they stand to be awarded a contract. Time limits are to be reduced to allow for quicker procurement. In open procedures, awarding authorities will be able to change the sequencing of the selection and award stages so they can evaluate against award criteria before checking whether the preferred bidder meets the selection requirements.
As with the current legislation, the new Directive specifies certain grounds upon which an awarding authority may or shall exclude an economic operator from a competition. However, one of the notable features of the Directive is its emphasis on forgiveness rather than punishment. Indeed, it seems that there is virtually no misconduct which an operator can be guilty of (including fraud, tax evasion and money-laundering) that it cannot seek to talk its way out of. If, despite previous misdemeanours, an operator can demonstrate that it has since become reliable (known as ‘self-cleansing’), it cannot be excluded from the competition.
There is a recognition in the Directive that there ought to be more scope for negotiation with bidders. To date, the ability to negotiate has been reserved to the most complex contracts. In the future, the ‘negotiated’ and ‘competitive dialogue’ procedures will both be available when the nature or complexity of a contract or the risks attaching to it require negotiations, or where the authority’s needs cannot be met by an ‘off-the-shelf’ solution.
Helping SMEs
A common complaint is that current legislation does little to facilitate the participation of SMEs in public procurement processes. The prospect of reduced documentation requirements, greater use of electronic procurement and self-certification will certainly assist smaller economic operators. Other developments designed to help SMEs include:
• Greater Use of Lots – If a contracting authority is to award a single contract which it has not sub-divided into lots, the reasons for this will have to be explained in the tender documents. It may be obligatory to break some contracts down into separate lots.
• Turnover Thresholds – High mandatory turnover thresholds can create a barrier for SMEs. In the future, when specifying turnover requirements, an authority will not be able to specify a minimum annual turnover of more than two times the value of the contract – except in duly justified cases where there are special risks attaching to the contract.
• Payment – SMEs are often sub-contracted to work on larger projects and, being last in the chain to get paid, they are often exposed to a disproportionate financial burden. Under the new Directive, member states may provide that sub-contractors can request an authority to pay them directly, subject to there being appropriate mechanisms in place to allow the main contractor to object to any payments that are not properly due.
Greater legal certainty
Procurement law is replete with ‘grey areas’ and lacunae and it is often left to the courts to establish the correct position. The new Directive attempts to codify the case law in a number of areas and thereby provide greater legal certainty.
Certain services, currently known as ‘Part B’ services, are to become subject to the full application of the rules. The existing statutory framework purports to subject such contracts to a lighter regulatory regime. However, in recent years, the courts have decided that in certain circumstances the rules on Part B service contracts are more onerous than the existing Directive would suggest (for example, it has been ruled in Northern Ireland that in certain situations a standstill procedure has to be followed in Part B competitions).
Under the new Directive, there will be no Part B services; all services will be subject to the full application of the Directive, unless they are below specific financial thresholds, specifically excluded or fall into a new category of contracts for certain social services (e.g. health, cultural, community and legal services) above €750,000 for which a lighter-touch statutory regime will persist.
For the first time, statutory guidance will be provided on the circumstances in which public contracts can be modified without having to commence a new competition. These new provisions consolidate and build on the case law of the European Court of Justice.
The basic rule will be that a new procurement procedure is necessary if a contract is amended in in a way that renders it “materially different in character” from the contract which was initially concluded. The Directive provides four instances of contract modifications that will fall into this category and, importantly, five situations where modifications will always be permitted. These new provisions might be considered as a useful guide for public bodies to follow now, even before the Directive is implemented.
Another particular issue which the courts have had to grapple with recently is the exclusion of bidders as a result of their prior misconduct. Awarding authorities frequently find themselves contemplating the award of a contract to persons who have performed poorly in the past.
Under the new Directive, it will be possible to exclude a bidder from a competition where it has shown “significant or persistent deficiencies in the performance of a substantive requirement under a prior public contract, a prior contract with a contracting entity or a prior concession contract, which led to the early termination of that prior contract, damages or other comparable sanctions”. While this new provision is welcome, it remains to be seen how useful it will be in practice, particularly in light of the new ‘self-cleansing’ mechanism referred to above.
The rules concerning framework agreements have always been somewhat unclear in certain respects. Although unfortunately the Directive fails to address some of the more common difficulties that arise, it has clarified that authorities can reserve the right in their framework agreements to later choose between the use of mini-competitions and direct award procedures provided that such choice is made pursuant to objective criteria set out in the framework tender documents.
There is also greater certainty provided on the use of lots. The Directive makes it clear that contracting authorities can limit the number of lots that may be awarded to any one bidder, provided the maximum number of lots that can be awarded is specified in the tender documents and authorities specify the criteria that are to be used to determine which lots are allocated to bidders who win more than one.
The new Directive will also reflect current case-law and provide greater legal certainty in other areas such as the treatment of abnormally low tenders, contracts awarded by one public body to another, and the evaluation of staff qualifications and experience at the award stage.
The Directive offers an important opportunity for public and private sectors to drive efficiencies and promote economic, social and environmental goals. Awarding authorities should be considering how the new Directive will impact on their procurement protocols, documents and future tender processes. There is also specific guidance in the Directive which is reflective of best practice and authorities should be mindful of this now before any national regulations are published.
For further information on the new Directive and how it will impact on you, contact Peter Curran on 028 9026 5889 or at peter.curran@arthurcox.com. This article is for general guidance only and should not be regarded as a substitute for professional legal advice. Such advice should always be taken before acting on any of the matters discussed.
