Rethinking the procurement Directives: Making the case for a Regulation

For the first entry into this series about rethinking the procurement Directives, I am starting with the choice of legislative instrument since it shapes all regulatory decisions contained within as well as (hopefully) their enforcement.

With this proposed change I am not arguing that changing legislative instrument will magically solve all of procurement's problems. Far from it and in fact I stand by that the most important elements for that are capacity and resources at the hands of contracting authorities. But that would cost money that does not exist and cannot be subsumed to a legal text that is now being revised.

Legal basis and raison d'etre

Looking at the current round of Directives, their legal basis is underpinned by Articles 53(1), 62 and 114 TFEU, that is, core internal market primary law grounds: right of establishment, freedom to provide services and approximation of laws for the purpose of achieving an internal market. Their raison d'etre is to open up public procurement markets so that bidders can participate in public procurement tenders wherever they want to within the EU. This is non-contentious, it is why we currently have public procurement rules not necessarily what people would like the rules to be, as that's something different.

Harmonising national procurement rules is thus a pre-condition to achieve an internal market in public procurement, or better said, so that public procurement is part of the single market. With this in mind, are Directives the most appropriate legal framework for achieving this goal?

Looking at the data for direct cross-border procurement and import penetration and the answer is: probably not. I am not cherry picking data here, since I have been compiling data from multiple studies over the last 20 years and these two are simply the most recent ones and those painting a rosier picture:

After more than 50 years of secondary legislation all it has for show is a success rate of less than 5% of contracts being awarded to foreign firms even as the economies of member States get more and more interconnected. Looking at import penetration also does not help either. The reasons for this lack of success of foreign bidders are always going to be far and wide and certainly not solvable simply by a silver bullet of any kind.

The Commission prefers to point towards indirect cross-border procurement numbers as these are higher. The problem with that approach is simply that indirect cross-border procurement cannot be ascertained as happening due to the influence of procurement rules but instead other areas of EU law regulation starting with the four freedoms.

Therefore - answering the first question of the Commission's consultation - the directives have not been effective in achieving their objective of opening up the single market, let alone guarantee a high level of competition. But what about the final question about EU valued added by the Directives helping harmonise national procurement laws and practices and whether they have brought expected benefits?

Directives shortcomings as a regulatory instrument for public procurement

Focusing back on the lack of direct cross-border procurement my view is - and has been for some time - that part of the problem resides in the choice of legal instrument. Directives work as a de minimis harmonisation tool (even when imposing maximum harmonisation) since they always require each member State to take their legal commands and objectives and decide how best to pursue them within the national legal framework. And when that is done, then naturally differences occur leading to ever so slightly inconsistent legal regimes and different 'bureaucracy' for lack of a better word. Multiple successive of ever more detailed and prescriptive Directives have not made those differences disappear and they remain there. The experience of bidding is not identical (and probably not similar) if you are doing it in Portugal or in Poland. Part of said difference will always be cultural, but there is more we can do really harmonise the legal regime. That, however, cannot be done with a suite of Directives which are by default unable to standardise rules across member States. We discuss in the literature the different methods and approaches to transpose them, how member States go about doing things differently, and even if this or that provision needs to be transposed or not (art 18(2) I'm looking at you)!

Moving from Directive(s) to a Regulation is not unheard of

Real harmonisation - and standardisation - of procurement law can only be achieved with a change in legislative instrument. It is time to consider a Regulation for public procurement. It is not the first time that in the history of EU law that an area originally regulated via a Directive moved on to being regulated instead by a Regulation. The most obvious example is data protection with the Data Protection Directive 95/46/EC giving way to the General Data Protection Regulation (Regulation 2016/679), due to the failure of the former and a renewed policy ambition from the Union in this space. But this is far from the only example in recent decades, with plenty of others just in the last 15 years. It can and has been done when the legislative instrument is not delivering on the expected policy goals.

The data protection example is fascinating because the substantive rules have not changed significantly. Yes, fines are heavy and enforcement 'easier' (while still far from perfect) but the substantive elements of that legal regime have changed less than people think. It is not that data protection was not clearly regulated pre-GDPR: it was, but the system was messy so compliance wasn't great. This is not to say all is well with the GDPR of course, just that the regulatory equilibrium it has reached is better than if it had been a Directive once more.

Harmonisation and standardisation of rules and practices

The benefits arising from standardisation of rules (and practices) in fostering cross-border trade are well known, with plenty of examples from the shipping container, to internet protocols, to ISO standards. Standardisation simplifies the life of those operating in that space. And we have also seen it being deployed to take out non-tariff trade barriers: the single market (with all its failings), customs unions or currency unions like the euro. In what concerns procurement, multiple Directives after multiple rounds have failed to deliver on that.

One should not underestimate the layer of abstraction afforded by the act of transposition of a Directive. A legal command poorly transposed will provide contracting authorities a degree of latitude in complying with the wrongful transposition vs complying with the original command arising from a Directive. We all EU lawyers know about direct and indirect effect of Directives, but reality on the ground (and in the courts sometimes) is very different. Whether we like or not those transpositions amount to national 'translations' of legal commands and on each translation, some meaning is lost. Now imagine 27 (actually, 30) translations of each single command and it is easy to perceive the amount of ambiguity that is built into the legal system arising just from the choice of legal instrument.

In addition, we all know how the transposition game is played. Compliance with Directive transposition across the EU is spotty (but improving), but even in the last round of procurement Directives we had a number of countries failing to transpose within the deadline (as usual) and at least one moving to change national laws after the transposition effectively choosing to selectively not to comply with elements of the procurement Directives. By then, the Commission's watchful enforcement eye was distracted elsewhere and frankly the approach to remedies makes it relatively easy to create space for non-compliance as long as it does not trigger an economic operator to move against it.

Therefore, the conclusion for me is obvious, Directives have failed as a legal instrument to open the single market. If we are to have a single market for public procurement then the first step to deliver it is to change the legal instrument. The Commission has an opportunity to send a clear message it wants procurement to be part of the single market and can do so right at the beginning of the legislative process.

PS: If you would like a more visual example of what I am trying to describe, just think about the experience of driving a car through multiple countries. What is being regulated is the same, rules are similar but not identical and suddenly you're struggling with those small differences on speed limits, how to pay for tolls, if you can have a drink or not, traffic light behaviours, etc etc. All those small differences add up and suddenly you're sweating and stressed out.

PS2: Ironically - for me at least - a Regulation would make it a lot easier to enforce additional objectives via public procurement. But more about those at a later stage.