Public Contracts Regulations 2015 - Regulation 21 [updated]

Regulation 21 - Confidentiality

UPDATE: Scroll down for update

Regulation 21 transposes Article 21 of Directive 2014/24/EU, establishing the obligation of contracting authorities to respect the confidentiality of any information conveyed by economic operators during tenders. This confidentiality rule is a clear exception to the principle of transparency and leads to some particularities and implications for competitive dialogue (and eventually the new procedure with a negotiation phase).

As for the particularities it is noteworthy that the confidentiality obligation only binds the contracting authority, thus meaning economic operators can chat away whatever they want as long as it does not trip any competition law obligations.* I could argue (and have argued) that explicitly requiring contracting authorities to respect confidentiality was not necessary as they were supposed to do so already via the principles of equal treatment and non-discrimination. So, why do we have an explicit confidentiality rule for contracting authorities and not economic operators if both were already subject to it in the first place? The cynic in me sees no reason for this discrimination, other than it having been pushed hard by industry lobbies.

There is a good reason why industry lobbies would have pushed for this enhanced confidentiality and it is connected how competitive dialogue was used during the last decade. Under Directive 2004/18/EC, contracting authorities where under the obligation of not disclosing confidential information. However, some interpreted this provision as possibly being set aside via a tender rule stating that only non-confidential information could be provided by economic operators. In other words, it was arguable that the confidentiality rule could be rendered useless for competitive dialogue. Not that this was a bad thing in itself, as I have argued ad nauseaum in my Ph.D thesis and subsequent writings (here as well), as a strict view of confidentiality destroys the most useful way a competitive dialogue procedure can be used for (that is, to draft common technical specifications). I know that EU rules are supposed to achieve the internal market (and by definition pro-competition) but transforming the dialogue stage of a competitive dialogue into a zero sum game where any confidential information passed from A to B has to amount to a disadvantage for the first and an advantage for the second is bonkers.

With this new confidentiality rule an economic operator can simply classify all its documents and information as confidential, without the contracting authority being able to challenge this classification as this classification does not depend on any substantive reasons for the confidentiality classification. All the contracting authority can do is on the most egregious cases to state that branding all information as confidential goes beyond the objective of the confidentiality rule and violates the principle of transparency. But even this option leaves the contracting authority on the back foot.

Ok, Pedro you made your point, what about the new Regulation then?

Paragraph 2 restricts the confidentiality exception under circumstances such as specific rules on advertising awarded contracts, the Freedom of Information Act 2000 or other rules that may impose disclosure obligations on confidential information.

The final paragraph gives the contracting authority the possibility of imposing confidentiality upon information it transmits to economic operators. Once more this is an exception to the principle of transparency and needs to be interpreted restrictively. It does mitigate the dual standards complaint I mention above but does not foreclose the possibility of economic operators talking between themselves. Furthermore, this paragraph 3 is not a blanket imposition of confidentiality but one that needs to be justified case by case. Yet again a double standards problem in my view.

* I will leave for Albert the explanation of what tends to happen when economic operators talk to each other during a tendering procedure...

[update] - Albert's excellent entry is here. I fundamentally disagree with his conclusions about the overarching impact of transparency in collusion, but is important to know his view and where he is coming from as he makes some very good points. Plus, he knows a lot more about competition law than I do.

My perspective is that in markets where collusion is likely (*cough* construction *cough*) or competition limited ("small markets"), more transparency does indeed make life easier for colluders as argued by Albert. However, I think that everywhere else that is not the case, particularly if a lot more transparency is introduced and/or a lot more suppliers suddenly become interested in a market that was serviced by a small number of suppliers. In this case, the extra transparency negates (or at least abates) the negative effects by increasing competitive pressure and the risk that completely new suppliers will enter a market where a cartel is operating. I also do not agree with the claim that disclosing the winning tender is fundamentally unfair. Au contraire, if that happens everywhere all the time it is just the price of doing business and everyone is being treated equally, it just means that the price of the previous winner is another variable to take into account in the next tender.

What has eBay done for online commerce? Or Amazon? Or AliBaba? Or TaoBao? Those markets are so big and liquid that there is simply no space for collusion between sellers or bidders. Price transparency reduces arbitrage and does make markets more efficient or else the stock market would have never have evolved to provide so much transaction price transparency. I am well aware that this is an apple and oranges comparison, but so far at least in Portugal where there is a lot of price transparency in public procurement the market (number of suppliers, average price, SME participation rate) is not on a worse position. That is not to say that under the right circumstances (namely reduced number of suppliers) the changes introduced in Portugal have not facilitated collusion, but the tradeoff so far has been positive with more suppliers coming into the market than in the past and SMEs winning a bigger share of the pie. If the argument stands up to scrutiny if and when proper research is done in Portugal, that is a different story.

There is a reason why suppliers in far flung regions where competition is low due to lack of advertising and transparency are so vocal against any measure that changes the status quo. And yes, I have been on the receiving end of those arguments when introducing the simplified open procedure. In addition, let's think about framework agreements. By definition these are the least transparent way of awarding contracts (bar direct awards) currently available. No one really knows what happens inside them, so an anti-transparency view would argue that this is good as it reduces collusion. Whereas it may indeed reduce collusion (I will not claim the opposite...) it also shunts out of the market all other suppliers and reduces competition significantly. Avoiding collusion is not an end in itself and a wider view of other competition-impacting aspects needs to be taken into equation.

For me the underlying critical question is: are we better off with limited transparency and information sharing or with the opposite? With the first (current model), insiders have a critical advantage as it reduces the attractiveness of small markets for far flung suppliers. With the second, on the markets which remain small we will be worse of, but probably better everywhere else.