Electronic copy available at: http://ssrn.com/abstract=2534496
University of Leicester School of Law Research Paper No. 14-35
Impact of public procurement aggregation on competition.
Risks, rationale and justification for the rules in Directive 2014/24
Albert Sànchez Graells
Senior Lecturer, University of Leicester
Ignacio Herrera Anchustegui
PhD Candidate, University of Bergen
Abstract:
This paper assesses the risks, rationale and justification for the rules on centralisation and
aggregation of public procurement in Directive 2014/24. The paper explores the justifications
advanced for the aggregation of purchasing and the countervailing risks it generates. In both cases, it
focusses in economic and administrative aspects. It then proceeds to a summary overview of the
new rules for the aggregation of public procurement in Directive 2014/24, and emphasised how the
Directive is expressly recognising possibilities that clearly exceed the more modest approach in
Directive 2004/18. Moving on, it then focusses on the potential justification for certain activities now
permitted by the 2014 rules, and engages in a critical assessment of their competitive impact. The
paper briefly highlights the far-reaching and not necessarily positive implications that a maximisation
of the centralisation and aggregation possibilities under Directive 2014/24 could have, and proposes
that strict competition law enforcement will be necessary to avoid undesired consequences. Some
suggestions for further research are provided by way of conclusions
Keywords: Public procurement, competition, centralisation, aggregation, central purchasing bodies,
economies of scale, professionalization, services of general economic interest, state aid,
modernisation, Directive 2014/24.
This text may be downloaded for personal research purposes only. Any additional reproduction
for other purposes, whether in hard copy or electronically, requires the consent of the author(s). If
cited or quoted, reference should be made to the following:
A. Sànchez Graells, I. Herrera Anchustegui, Impact of public procurement aggregation on
competition. Risks, rationale and justification for the rules in Directive 2014/24, University of
Leicester School of Law Research Paper No. 14-35.
© 2014 Albert Sànchez-Graells, Ignacio Herrera Anchustegui
University of Leicester School of Law Legal Studies Research Paper Series
Electronic copy available at: http://ssrn.com/abstract=2534496
1
Impact of public procurement aggregation on competition.
Risks, rationale and justification for the rules in Directive 2014/24
Dr Albert Sanchez-Graells
1
and Ignacio Herrera Anchustegui
2
I. Introduction
Purchasing aggregation strategies have proven to be a popular,
3
and arguably efficient, tool when
procuring public goods or services to achieve best-value for money. In particular aggregation
techniques such as central purchasing bodies, framework agreements, dynamic purchasing
systems, electronic catalogues and auctions have been widely used and of increasing importance
in procurement practice. This tendency has been recognized in recital (59) of Directive 2014/24,
as “[t]here is a strong trend emerging across Union public procurement markets towards the
aggregation of demand by public purchasers, with a view to obtaining economies of scale,
including lower prices and transaction costs, and to improving and professionalising
procurement management.”
4
Such popularity made aggregated procurement techniques to be
chosen as one of the focus areas of the newly adopted 2014 public procurement directives.
5
This
chapter aims at discussing what are the economic and administrative benefits, consequences,
risks and challenges posed by strategies of aggregated purchasing vis-à-vis the status quo of
decentralized competitive processes in public procurement.
Our discussion is focused on a European-wide perspective in an interdisciplinary manner by
combining macro and microeconomic theory with the legal discussion. The chapter is limited to
aggregated purchasing techniques within the scope of the still current Public Sector Directive
2004/18 and the new rules in Directive 2014/24. This, however, does not preclude extrapolating
the conclusions herewith presented to procurement activities under the 2004/17 and 2004/25
Utilities and 2014/23 Concessions Directives, with some minor adjustments.
We submit that, if properly employed, aggregated procurement strategies can be effective tools
for reaping the benefits of intense competition in tender procedures. This should translate into
better prices, terms and conditions and quality for contracting authorities and ultimately end
users and tax payers. The regulatory constraints generated by aggregated purchasing and the
1
a.sanchez-graells@le.ac.uk. Senior Lecturer in Commercial Law, School of Law, University of Leicester. Member
of the Centre for European Law and Internationalisation (CELI).
2
Ignacio.Herrera-Anchustegui@jur.uib.no. PhD Candidate, Faculty of Law, University of Bergen. Member of the
Bergen Centre for Competition Law and Economics (BECCLE).
This research has been carried out in the framework of the Research Project “Contratación pública y transparencia:
alcance y límites de los principios de publicidad y libre competencia”, sponsored by the Ministry for the Economy
and Competitiveness. Government of Spain (Ref: DER2012-39003-C02-02).
3
EUROPEAN COMMISSION (2012: 25); OECD (2011); PUBLIC PROCUREMENT NETWORK (2010); and
ibid, (2009). This has been recognised in rec (69) of Directive 2014/24/EU of the European Parliament and of the
Council of 26 February 2014 on Public Procurement and repealing Directive 2004/18/EC [2014] OJ L 94/65
(hereinafter, the “Directive 2014/24” or “dir 2014/24”).
4
Rec (59) dir 2014/24.
5
The instruments and tools for aggregated procurement are regulated in Chapter II of dir 2014/24. For a review to
the changes introduced in the new directives see, inter alia, RISVIG HAMER (2014) in totum.
Electronic copy available at: http://ssrn.com/abstract=2534496
2
buying power that they allow central purchasing bodies to exercise vis-à-vis economic operators
can, however, also thwart the competitive process and constitute breaches of EU competition law
as consequence of the unavoidable abuse of a dominant purchasing position (art 102 TFEU), or
even of anticompetitive agreements (art 101 TFEU). We also submit that the ‘public service’
exemption is unavailable because centralised purchasing activities cannot be properly configured
as a service of general economic interest (SGEI, art 106(2) TFEU), which triggers State aid risks
(art 107(1) TFEU). Thus, adopting aggregated purchasing strategies demands awareness of their
implications and the employment of mechanisms to avoid undesired legal, administrative and
economic consequences.
Furthermore, we advance that the current regulation of the existing aggregated procurement
strategies raises consistency and coherence problems with the rest of public procurement
regulation and in particular the principle of competition embedded in article 18(1) of Directive
2014/24. Lastly, we put forward that an increasing tendency towards creation of central
purchasing bodies on national level is likely to be replicated in a supranational level with the
creation of regional or even European-wide central purchasing bodies. Such centralization
tendency, however, poses serious risks that ought to be taken into account and that appear to be
overlooked by legislators and procurement practitioners.
The structure of the chapter is as follows. We firstly explore the justifications advanced for the
aggregation of purchasing (II) and the countervailing risks it generates (III). In both cases, we
focus in economic and administrative aspects. We then proceed to a summary overview of the
new rules for the aggregation of public procurement in Directive 2014/24 (IV) and emphasise
how the Directive is expressly recognising possibilities that clearly exceed the more modest
approach in Directive 2004/18. We then focus on the potential justification of certain activities
now permitted by the 2014 rules and engage in a critical assessment of their competitive impact
(V). We then briefly focus on the far-reaching and not necessarily positive implications that a
maximisation of the centralisation and aggregation possibilities under Directive 2014/24 could
have, and propose that strict competition law enforcement will be necessary to avoid undesired
consequences (VI). Our conclusions summarise our findings (VII).
II. Justifications for aggregated purchasing
Aggregation strategies may grant benefits to direct and indirect participants of public tenders, the
contracting authorities and taxpayers. Aggregation strategies can generate positive effects over
the competitive process in the adjudication of public contracts by fostering competition between
economic operators, lowering purchasing prices, suppressing duplicated procedures, generating
operational economies of scale and reducing public expenditure with the aim of achieving better
value for money in public procurement.
6
However, it is our view that the benefits potentially
generated by aggregated purchasing will only take place if competition as a process is truly
preserved and proper administrative and policy decisions are taken in order to minimize the
pernicious side effects generated by aggregated purchasing. Thus, the benefits we discuss infra
6
Rec (15) of Directive 2004/18/EC of the European Parliament and of the Council of 31 of March 2004 on the
Coordination of the Procedures for the Award of Public Works Contracts, Pubic Supply Contracts and Public
Service Contracts [2004] OJ L134/114.
3
may only be achieved in aggregation is properly implemented as discussed in detail in sections
IV and V, so that the risks spelled out in section III are minimised.
1. Economic benefits
The economic rationale behind strategies for aggregated purchasing is grounded on the
accumulation of public purchasing market power by exerting bargaining power
7
and the creation
of bureaucratic economies of scale.
8
Accumulation of public market power is carried out in two
different ways.
9
On the one hand, by employing a single contracting authority that will be
responsible for making purchases for other contracting authorities, such as is the case with
central purchasing bodies (CPBs).
10
On the other hand, by means of public-public collaboration
through occasional joint procurement, where two or more contracting authorities either enter into
an agreement and collectively coordinate their purchases, or engage in minor forms of
collaboration, such common preparation of tender documentation or entrusting one contracting
authority with the management of the procedures.
11
Additionally, aggregated purchasing
techniques, in particular centralised purchasing framework agreements or dynamic purchasing
systems, generate bureaucratic economies of scales as the transaction costs and the total amount
of tenders is reduced, thus promoting operational efficiency.
A) Bargaining power
In economic terms, aggregated purchasing aims at pooling public purchasing market power, in a
same manner as a purchasing cartel among undertakings seeks to achieve it in order to maximize
its profits.
12
In accordance with microeconomic theory, by adopting purchase aggregation
strategies contracting authorities acting as a single entity are able to exert buyer power vis-à-vis
its suppliers and obtain better terms and conditions when entering into public contracts.
13
Such
buyer power, however, can take two different forms: monopsony power and bargaining power.
14
Only aggregated purchasing that fosters the creation of non-abusive bargaining power has sound
economic justifications. Aggregated purchasing that generates monopsony effects, on the
contrary, will tend to be inefficient.
15
If aggregated purchasing strategies are successful—ie they lead to the increase of purchasing
market power, leverage negotiation advantages and increase technical knowledge–bargaining
power will be generated. Consequently, the buyer will then be a competitive constrain to the
7
CHARD et al. (2008: NA26).
8
Also supporting this view that aggregated procurement techniques achieves “economies of scale” see CMA (2004:
paras. 1.43-1.51); RISVIG HAMER (2014: 201). See also rec (59) dir 2014/24.
9
Somewhat similarly and distinguishing two mechanisms for achieving purchasing aggregation in the healthcare
sector, see RACCA (2010: 121).
10
Rec (69) dir 2014/24.
11
Rec (71) dir 2014/24.
12
Paradoxically, anti-competitive agreements between competing undertakings are strictly forbidden under EU/EEA
competition law in accordance with art 101 TFEU. For a discussion, based on US law, see CARSTENSEN (2010).
13
This would be the case of bargaining power, see OECD (2009: 22).
14
The term buyer power is used in this contribution as an umbrella term covering both monopsony and bargaining
power, despite their very different welfare consequences. For a similar use of the term, see inter alia: OECD (2009);
CHEN (2007). Cf with Noll who uses buyer power as a synonym of monopsony power in NOLL (2004-2005).
15
CHEN (2007: 28).
4
suppliers and will be able to obtain more favourable terms and conditions than those offered to
other contracting authorities or undertakings acquiring the same goods or services.
16
This, on the
other hand, presupposes that aggregated purchase strategies are able to neutralize seller market
power, thus acting as countervailing power.
17
This neutralizing force can make competition more
vigorous by lowering prices paid and passing on the benefits to tax payers in the form of cheaper
and better quality public services. To realize those benefits, however, the supply side must have
some previous degree of market power allowing them to charge a price above pure competitive
levels (ie the price under “perfect” market conditions).
18
Otherwise, providers will be unable to
bring forth better terms and conditions than already offered and will opt for not taking part in the
tender procedure. In this perspective, bargaining power generated by aggregation techniques acts
as a countervailing force neutralizing the market power of economic operators and forces them to
offer the most competitive prices and conditions to contracting authorities.
However, these benefits generated by bargaining power ought to consider exercising public
buyer power differs from its exercise by a private entity profit making driven, and therefore, not
all assumptions hold true in our case.
19
Firstly, the public buyer is constrained in its acting by EU
and national public procurement rules which make exercising buyer power more difficult due to
compliance with the principles of equal treatment, non-discrimination and the derived obligation
of transparency. Tender procedures themselves impair the full exercise of buyer power because
the contracting authority cannot set a purchasing price. Instead, the price is offered by the
tenderers. Secondly, buying decision-making of the public sector must take into account other
variables than in the private sector, such as being more risk-averse, it cannot (or ought not)
compromise availability of goods or services (particularly when they are directly used in the
provision of services to the public and where minimum quality standards are applicable) and, by
and large, tends to be more conservative. Thirdly, contracting authorities do not aim at
maximizing profits and, consequently, will be less oriented towards exercising buyer power.
20
Summing up the idea, by exercising bargaining power through demand aggregation, contracting
authorities will be likely to obtain better contractual terms than if they were negotiating only by
themselves vis-à-vis economic operators. These buyer power derived benefits will be obtained
only if the market is not fully competitive (ie suppliers hold selling power that is resulting in
supra-competitive equilibria), the contracting authority is aware of its purchasing power and the
purchasing tools are employed in a way that does not preclude its exercise. In welfare terms,
extra profits and inefficiencies generated by supply-side market power are then reduced or
altogether eliminated. This implies two effects: a welfare distribution between suppliers and
buyers and overall increase of efficiency and welfare.
21
16
CMA (2004: para. 1.10).
17
CMA (2004: para. 1.16). Countervailing power as a regulatory mechanism was introduced by GALBRAITH.
18
OECD (2009: 21).
19
Also recognizing this difference with the private buyer power, see CMA (2004: para. 1.13).
20
This latter general idea links back to the concept of x-inefficiency in the public sector. This concept was developed
in the seminal work of LEIBENSTEIN. The concept is broadly accepted, although not by all, and still used in the
shaping of EU economic policy. See AFONSO et al. (2010).
21
In this case, arguably, the increase in welfare will be positive regardless of the benchmark standard being that of
consumer or total welfare. From a pure supplier perspective bargaining power is detrimental because it reduces
“monopoly profits”.