Regulation 37 – Centralised purchasing activities and central purchasing bodies

Commentary

Centralised purchasing activities and central purchasing bodies are subjected to the rules of Regulation 37 of the Public Contracts Regulations 2015 (PCR2015), which transposes Article 37 of Directive 2014/14/EU without any material deviation. Occasional joint procurement is treated separately (see Regulation 38 PCR2015) [CROSSREF], and there are some additional rules regarding cross-border centralised purchasing (Regulation 39 PCR2015 CROSSREF). Generally, on the functional alternatives, GL Albano and M Sparro, ‘Flexible Strategies for Centralized Public Procurement’ (2010) 1(2) Review of Economics and Institutions art 4. For an overview of the rules, see S Arrowsmith, Law of Public and Utilities Procurement. Regulation in the EU and the UK, Vol. 1, 3rd edn (London, Sweet & Maxwell, 2014) 373–77 & 535–40). 

Along the general lines of facilitating public-public cooperation, but in relation to ‘cooperate-to-buy’ decisions instrumented through either centralised procurement or occasional joint procurement, Directive 2014/24/EU regulates certain possibilities that go beyond the primitive rules on centralisation of purchases and the creation of central purchasing bodies contained in article 11 of Directive 2004/18/EC (for discussion of certain practical difficulties, see G Racca, ‘Collaborative procurement and contract performance in the Italian healthcare sector: Illustration of a common problem in European procurement’ (2010) 19 Public Procurement Law Review 119–33). 

Central purchasing bodies have been the “next big thing” in public procurement for a number of years (decades?). In the UK, the Crown Commercial Service  appears to be the largest body undertaking centralised purchasing, but other governments are paying attention to it as well. In 2014 Wales set up the National Procurement Service to centralise common repetitive spend. As far as we know the standard modus operandi for both is to carry out centralised procurement by offering framework agreements to the public sector at large, although there is talk of migration towards more intense use of dynamic purchasing systems in the future. Whether we like it or not, the new procurement rules (and practice) require a degree of knowledge, experience and skills that will be hard to give to all procurement officers out there, which connected with ever smaller operational budgets provides a degree of incentives for smaller contracting authorities to outsource the heavy lifting of procurement where possible.

In view of the general adoption of centralised procurement techniques, the new rules of Regulation 37 are bound to have significant effects very quickly.  On this please see Commission Staff Working Document, Annual Public Procurement Implementation Review 2012 (SWD(2012) 342 final) 25–26, where it is clearly indicated that most Member States have implemented this option in their national legislation, with the exception of Estonia, Germany and Luxembourg.

Centralised procurement and competition

The justification for the increased detail in the regulation of centralised and collaborative procurement can be found in recitals (69) and (70) Directive 2014/24/EU, where the increasing relevance of these procurement techniques is echoed, and an interesting direct reference is made to the potential increase in competition that can derive from the use of these techniques (C Risvig Hamer, ‘Regular purchases and aggregated procurement: the changes in the new Public Procurement Directive …’ (2014) 23 Public Procurement Law Review 201, 207–10). 

However, it must be borne in mind that generally, the centralisation of procurement activities also creates significant risks of distortions of competition, which is acknowledged in recital (59): ‘the aggregation and centralisation of purchases should be carefully monitored in order to avoid excessive concentration of purchasing power and collusion, and to preserve transparency and competition, as well as market access opportunities for SMEs’. This issue is discussed in detail in GL Albano, ‘Demand aggregation and collusion prevention in public procurement’, in G M Racca and C R Yukins (eds), Integrity and Efficiency in Sustainable Public Contracts (Brussels, Bruylant, 2014) 155–70). Hence, this is an area where particular care should be exercised in trying to avoid distortions of competition.

The goals of professionalisation, modernisation and increased competition (leading to higher value for money and potential savings) are ranked very highly by Member States in their public sector reform and modernisation agendas, particularly in the aftermath of the financial crisis. As such, the push for centralisation runs the risk of blindly changing the way procurement is conducted without paying sufficient attention to the risks it poses and the negative impacts it can have in the medium and long term. In view of those risks, the desirability or otherwise of centralisation and aggregation of procurement in all or some cases deserves some comments, most of which are extracted from Albert’s  Public Procurement and the EU Competition Rules, 2nd edn (Oxford, Hart, 2015) 254-57; all references are to Article 37 Directive 2014/24/EU, but they apply equally to Regulation 37 PCR2015).

It is important to stress that the rules of Directive 2014/24/EU deviate in significant ways from what would be desirable from a competition perspective. Central purchasing bodies are now clearly assigned two alternative roles under Directive 2014/24/EU. On the one hand, they can act in support or on behalf of contracting authorities (ie ‘act as intermediaries by awarding contracts, operating dynamic purchasing systems or concluding framework agreements to be used by contracting authorities’) and, on the other hand, they can act as the actual providers of other contracting authorities (that is, ‘act as wholesalers by buying, stocking and reselling’). This second role should make them fall completely under the umbrella of competition law, but the first one has more diffuse competition law implications. It is now clear that both of these roles are expressly regulated in article 37(1) of Directive 2014/24/EU (which suppresses any legal uncertainty derived from the silence of dir 2004/18). It is also worth stressing that Member States can make the recourse to the central purchasing body mandatory (art 37(1) in fine dir 2014/24). This latter possibility creates very difficult to anticipate competition effects, as it makes the supply of the goods, works or services to the public sector depend on the running of a ‘two-sided’ platform by the central purchasing body. In that case, depending on the way in which demand is aggregated or bundled, the exclusionary effects on (particularly smaller) suppliers can be very relevant. Moreover, generally, there seems to be no good reason to impose recourse to the central purchasing body if a given contracting authority can obtain better conditions (ie, better value for money) from an alternative provider. In that case, the principle of competition would require carving out an exception from the rule of obligatory recourse to the central body when it is not the one offering the most economically advantageous tender although, admittedly, this would create practical difficulties if the contracting authority just decides to rely on the central body without carrying out any independent market consultation, under Regulation 40.

To their credit, both the Regulations (paragraph 6) and the Directive try to clearly divide the responsibilities of both the central purchasing body and the contracting authority which will benefit from what is being purchased, by leaving squarely in the shoulders of the second the responsibility for the parts of the procedure it conducts, such as awarding the contract or conducting a call off on a framework agreement. Regarding the rest, we suspect it will have to be negotiated and contractually agreed between the central purchasing authority and the beneficiary. Indeed, according to the rules in article 37 of Directive 2014/24/EU, recourse to a central purchasing body exempts the contracting authority from complying separately with public procurement rules (on the assumption, obviously and unavoidably, that the central purchasing body is the one bound by them in its market interactions), unless it directly carries out one or more of the phases involved in the procurement process (as indicated in Article 37(2) of Directive 2014/24/EU). Moreover, contracting authorities can award a public service contract for the provision of centralised purchasing activities to a central purchasing body without applying the procedures foreseen in Directive 2014/24/EU. Such public service contracts may also include the provision of ancillary purchasing activities, which implies that there can be an element of remuneration of the service provided by the central purchasing body.

Therefore, recourse to central purchasing bodies is fundamentally excluded from the scope of application of Directive 2014/24/EU in a sort of special case allowing for the use of the negotiated procedure without publication (or by analogy with Article 32 of Directive 2014/24/EU), which has a dubious justification, particularly if the centralised purchasing body is a body governed by public law with private capital participation. Under the rules of Directive 2014/24/EU, centralisation of procurement is seen as a clear device to allow (small) contracting authorities to achieve savings (K Karjalainen, ‘Estimating the cost effects of purchasing centralization—Empirical evidence from framework agreements in the public sector’ (2011) 17(2) Journal of Purchasing and Supply Management 87–97), as well as higher standards of professionalization, and to reduce the administrative burden of running procurement procedures by having recourse to the services of the central purchasing body—in a sort of intermediate solution between a public-public cooperation scheme (for which there would clearly not be a sufficient cooperative element) and an in-house arrangement (for which the control criterion would probably be absent). From the competition perspective, this possibility basically moves the focus of the competition concerns to the market activities of the central purchasing body and increases the likelihood of distortions of competition, and it may as well result in the central purchasing body engaging in a sort of ‘market regulation’ activity that is difficult to align with the general requirements of the principle of competition. Consequently, it is a development that causes significant source for concern in terms of the development of a pro-competitive public procurement system.

In our view, these concerns require careful consideration of the implications of procurement centralisation, as well the possibilities available to create ‘competition-checks’ for the activities of the centralised body. Centralisation can have significant impacts in the way procurement is carried out on a day to day basis, as well as altering the competitive structure of the markets in which the central purchasing body is active. There is thus a clear and increasingly pressing need to strike a proper balance between the expected benefits (economies of scale, professionalisation, increased competition for contracts) and the potential detriments of centralisation (loss of administrative granularity, increased systemic risk, increased litigation risk, knock-on and waterbed effects, limited SME access).

In the UK, for example, the National Audit Office (NAO) published a report on Improving government procurement (2013) where it made it clear that the Cabinet Office will have to lead a major cultural shift across government if the centralising of buying goods and services is to deliver the significant benefits on offer. NAO’s report focussed primarily on administrative and governance issues. There are other important economic risks linked to centralisation (please see A Sanchez-Graells & I Herrera Anchustegui,  “Impact of Public Procurement Aggregation on Competition: Risks, Rationale and Justification for the Rules in Directive 2014/24” (December 5, 2014) University of Leicester School of Law Research Paper No. 14-35).

Centralised procurement and frameworks

As mentioned above, most centralised procurement seems to be carried out by means of framework agreements, which requires some particular attention to the interaction between the rules in Regulation 37 and those of Regulation 33 PCR2015 [CROSSREF]. One of the things that struck us as possible when reading the Regulations is that call offs can be done differently inside the same framework agreement depending on who is organising the call off. For example, some contracting authorities could decide to select just a few suppliers to submit a bid (or just one…) whereas others may adopt a rota system or pick suppliers randomly. We cannot decide if this is a good or bad thing. On the one hand, we could argue that this leads to unequal treatment and that framework agreements are at the very least still subject to the procurement principles. On the other hand, it may actually be good for competition as it inserts a degree of uncertainty in the framework because suppliers will not know for sure who may ask for bids, when and under which format. Having said that, we still see framework agreements operated by centralised purchasing bodies, especially if mandatory, to have the potential of being particularly nefarious for competition as discussed above and on Regulation 33. We would be a lot more comfortable if central purchasing bodies moved from the “best practice” of framework agreements into dynamic purchasing systems, as they seem to be considering, at least in the UK.

Some final points deserve comment. The Regulations depart slightly from the Directive in paragraph 10. Whereas the Directive contains a cross-reference to the definition of central purchasing activity contained in Article 2, the Regulations contain the actual definition in Regulation 37 instead. As we mentioned before the Regulations took a haphazard approach to cross-referencing of definitions: sometimes they are contained in Regulation 2, sometimes they have been included in the appropriate Regulation as it happened here. Personally, we think this is a bad legislative technique and we would have been better off with a consistent approach: either all definitions are on Regulation 2 or none is.

Another difference between Regulation 37 and Article 37 is that, once more the Directive gave Member States the possibility to mandate the use of centralised procurement for certain contracts. Once more, the UK Government passed on that opportunity.

Proposed citation: Albert Sanchez-Graells & Pedro Telles, (2016) Commentary to the Public Contracts Regulations 2015, available at: www.pcr2015.uk.

Last modified: September 5, 2016 by Pedro Telles

37.—(1) Contracting authorities may acquire supplies or services, or both, from a central purchasing body offering the centralised purchasing activity referred to in paragraph (10)(a).

(2) Contracting authorities may acquire works, supplies and services, or any one or more of them, by—

(a) using contracts awarded by a central purchasing body;

(b) using dynamic purchasing systems operated by a central purchasing body; or

(c) to the extent set out in regulation 33(5), by using a framework agreement concluded by a central purchasing body offering the centralised purchasing activity referred to in paragraph (10)(b).

(3) Where a dynamic purchasing system which is operated by a central purchasing body may be used by other contracting authorities, this shall be mentioned in the call for competition setting up that dynamic purchasing system.

(4) A contracting authority fulfils its obligations under this Part when it acquires supplies or services from a central purchasing body offering the centralised purchasing activity referred to in paragraph (10)(a).

(5) A contracting authority also fulfils its obligations under this Part where it acquires works, supplies or services by—

(a) using contracts awarded by the central purchasing body;

(b) using dynamic purchasing systems operated by the central purchasing body; or

(c) to the extent set out in regulation 33(5), by using a framework agreement concluded by the central purchasing body offering the centralised purchasing activity referred to in paragraph (10)(b).

(6) However, the contracting authority concerned shall be responsible for fulfilling the obligations imposed by this Part in respect of any parts of the procedure that it conducts itself, such as—

(a) awarding a contract under a dynamic purchasing system which is operated by a central purchasing body;

(b) conducting a reopening of competition under a framework agreement that has been concluded by a central purchasing body;

(c) determining, under regulation 33(8)(a) or (b), which of the economic operators, party to the framework agreement, shall perform a given task under a framework agreement that has been concluded by a central purchasing body.

(7) All procurement procedures conducted by a central purchasing body shall be performed using electronic means of communication, in accordance with the requirements set out in regulation 22.

(8) Contracting authorities may, without applying the procedures provided for in this Part, award a public service contract for the provision of centralised purchasing activities to a central purchasing body.

(9) Such public service contracts may also include the provision of ancillary purchasing activities.

(10) In these Regulations, “centralised purchasing activities” means activities conducted on a permanent basis in one of the following forms:—

(a) the acquisition of supplies or services, or both, intended for contracting authorities;

(b) the award of public contracts or the conclusion of framework agreements for works, supplies or services intended for contracting authorities.