Public procurement law is based on the free movement principles of the Treaty on the Functioning of the European Union (TFEU). It requires equal treatment and transparency in public tendering.
Competition law seeks to ensure that EU and national markets operate efficiently for the benefit of consumers. It prohibits cartel activity, the abuse of dominance and other arrangements which restrict competition and are not justified by countervailing consumer benefits.
The objectives of procurement and competition law are thus similar and complementary. As the European Court (Stadt Halle (C-26/03)) has recognised, the principal objective of the procurement rules is “the free movement of services … and the opening-up to undistorted competition in all the Member States.” The new Directives adopted in 2014 also recognise an increased role for competition principles, as explained below.
Do the competition and procurement rules apply to different bodies?
The procurement rules (Directive 2014/24/EU) apply primarily to public bodies. There is a special procurement regime for utilities (new Directive 2014/25/EU), which applies to public bodies and other entities carrying out certain utility activities on the basis of special and exclusive rights.
The competition rules apply to entities which are operating in markets (undertakings).
However, certain competition rules do apply specifically to public bodies (for example, the state aid rules) and some entities may be subject to both the procurement and competition rules (for example, certain utilities).
In fact, competition principles must often be considered to work out whether the procurement rules bite and which regime applies. This is seen, for example, in Alstom v Eurostar [2012] EWHC 28 in which it was held by Roth J that Eurostar was not a body governed by public law, due to its commercial character and the expectation of competition emerging in the relevant market for cross channel services.
Most recently, in NATS (Services) Ltd v Gatwick Airport Limited [2014] EWHC 3133, Ramsey J decided that there was a “serious issue” as to whether GAL was a utility on the basis of a special or exclusive right conferred by the original BAA Transfer Scheme and the relevant regulatory authorisations to exploit a geographical area to run an airport at Gatwick. The Judge also relied on a European Commission Communication from 1998 which highlighted the influence exerted by the state over airport operations and the reduced impact of market forces.
Competition principles may also be relied on to gain exemption from the utility rules. Another European airport operator, Flughafen Wien, is currently seeking exemption from the utility rules (Article 35 of Directive 2014/25/EU) on the basis that it is “directly exposed to competition in a market to which access is not restricted”.
How do competition principles affect procurement?
There are many areas of procurement practice where a competition based analysis is required to make sense of the procurement rules (see Public Procurement and the EU Competition Rules, Second Edition by Albert Sánchez Graells). These include material change, the in-house exception and abnormally low tenders. This blog touches on two topical areas:
- The liberalisation of services of general economic interest (SGEIs).
- The design of the tender.
Liberalisation
Directive 2014/24/EU (implemented in the UK by the Public Contracts Regulations 2015 (PCR 2015)) is ambivalent when it comes to competition for SGEIs, such as educational, social and healthcare services. These were previously excluded from the scope of the Procurement Directives, but found by the Court to be subject to general EU principles (under Telaustria) where there were cross border effects. The Directive states at Article 1(4)(2) that:
“This Directive does not affect the freedom of Member States to define, in conformity with Union law, what they consider to be services of general economic interest, how those services should be organised and financed …..”
However, the Directive extends procurement law by requiring former Part B service contracts to be competed via an advertised tender process where they exceed the €750,000 threshold, regardless of cross border interest (Article 75). This poses problems in partially liberalised sectors where SGEIs may be organised in a way which could, absent any applicable exemptions, trigger a tender obligation under the Directive (for example, certain hospital service contracts awarded to a Foundation Trust). Perhaps in recognition of this, there is a transition period under the PCR 2015 which exempts NHS healthcare service contracts until April 2016 (see Opinion, NHS health care services and the draft Public Contracts Regulations 2015).
The liberalisation of markets is competition law territory.
In particular, Article 106, TFEU prohibits State measures relating to public undertakings and undertakings with special and exclusive rights which infringe the competition or other Treaty rules and are not justified (under Article 106(2)) by the need to protect SGEIs. This article has been invoked by the European Commission to require the break up of State monopolies (for example, in telecommunications and airport ground handling).
Directive 2014/24/EU does contain mechanisms which can be used to protect SGEIs against unbridled competition, including the Article 11 exemption for contracts with other contracting authorities enjoying special or exclusive rights and the in-house exemption in Article 12. However, pro-active national measures may need to be taken to dis-apply the duty to tender in order to protect SGEIs in accordance with Article 106(2) and the relevant exemptions in the Directive.
Tender Design
Directive 2014/24/EU states at Article 18(2) (Regulation 18 of the PCR 2015):
“The design of the procurement shall not be made with the intention of excluding it from the scope of this Directive or of artificially narrowing competition. Competition shall be considered to be artificially narrowed where the design of the procurement is made with the intention of unduly favouring or disadvantaging certain economic operators.”
The High Court in England has ruled on the application of the competition rules to tender design in Arriva the Shires Ltd v London Luton Operations Ltd [2014] EWHC 64 (see Article, Giving procurement the competition law treatment). Luton Operations tendered an exclusive concession to run a bus service between the airport bus terminal and central London. It was found to have abused its dominant position by negotiating a seven year deal with the successful bidder when there would have been sufficient capacity for a second operator after three years. The long exclusivity generated a higher return for Luton Operations but was held to be bad for consumers and an abuse of dominance in the buying market.
Any contracting authorities or utilities which are also undertakings will need to take particular care when designing their tender specification and process that they do not abuse a dominant buying position. Breach of competition law can lead to heavy fines as well as damages actions.
However, even contracting authorities which are not undertakings will need to consider the effects of their tender on competition under Article 18 and ensure that they are not intentionally designing it in such a way that will artificially narrow competition. For example, a nation-wide tender for a specialist product that only few market operators could provide may reduce the field of potential bidders and create a monopolist. The authority is required by the provisions on lots (Regulation 46) to consider whether to divide up the contract (for example, into regional lots). A decision not to do so could be said to restrict not only competition for the contract (from regional providers) but also for future contracts in the market and possibly neighbouring markets (into which the successful bidder could leverage its newly gained market power). A well documented objective justification for the tender design may be needed to avoid the implication that the intention was anti-competitive.
Similar considerations may apply where a contracting authority centrally procures a framework (particularly a single provider framework) for a wide range of public bodies. In fact, the commercial return made by some central purchasing bodies may indicate that they are undertakings subject to competition law.
Further, the new Concessions Directive 2014/23/EU has specific provisions (also Article 18) on the permissible duration of concessions which nod to the competition implications of long term exclusivity.
Finally, claimants will also no doubt consider the application of Article 106, TFEU (where there is a cross-border trade effect) to tenders conducted by public bodies which foreclose future competition.
Overall, the boundaries of procurement and competition law are beginning to blur.