From Basildon to Berlin

Although the European Union began introducing its public procurement regime as long ago as 1971, EU Directives on the subject were widely ignored and there were often few remedies available to tenderers when they were breached. The European Commission’s response to this problem, Directive 89/665, represents one of the rare examples of an EU-wide enforcement scheme for a community directive and was incorporated into the law of member states during the following few years. The organisers of commercial seminars then found a ready market for papers on the new procurement regime.

After the first excitement died down, however, there followed a long period when it appeared that the UK public procurement regime was operating satisfactorily – if success could be measured by the number of claims generated. Since then, the issue has achieved greater prominence with the recent Harmon case, in which it was held that EU procurement rules had been breached on the fenestration of a new parliamentary building for the House of Commons. Elsewhere in the EU, challenges to public procurement rules have long been a fact of commercial life. Denmark, for example ended up in the European Court of Justice in 1993 over claims it favoured Danish contractors for the “Great Belt”, the ambitious project linking Sweden and Denmark. This enshrined for the first time the principle of non-discrimination.

Other cases in Denmark have extended the principle of non-discrimination to exclude any tenderer who has taken part in the preparation of contract documents. Similarly, a tender procured for the design of a school was held to be illegal as a selection criterion was that the tenderer should have experience in the local area.

There has also been extensive litigation in a number of countries over the invoking of the exceptions to the EU Directives. These enable a negotiated procedure to be used where, for example, all bids are considered to have been too high. According to (possibly unreliable) statistics, Germany has used exception procedures in as many as 40% of cases.

Germany is also the source of two further developments in the procurement field that could set a precedent for action here. The first concerns the procurement procedure for the new Berlin-Brandenburg International Airport. This ambitious project provides for the private sector to build and operate a single airport that would replace the three now in operation. Once the shares in the public sector vehicle for the new airport have been sold, the scheme will represent the most extensive airport privatisation on the European mainland.

This project is Germany’s belated awakening to the possibilities of public-private partnerships. So it was a particular source of embarrassment that in August 1999, the Brandenburg courts ruled that the procurement procedures used were unlawful. The grounds for this decision were based on the principles of non-discrimination developed in the Danish cases. Here, those responsible for awarding the contract included individuals with management responsibilities both in the client and in companies with an interest in one of the bidding consortia. However, this decision went a lot further than the Danish cases. From now on, even the suspicion of partiality is to be avoided, and forthcoming federal legislation in this field is likely to incorporate the decision of the court.

The other decision worth noting goes to the essence of the commercial interests underlying the procurement regime. In the Harmon case, Judge Humphrey Lloyd awarded substantial damages. In practice, though, what the contractor with a legitimate complaint wants is to secure the contract itself. Unfortunately, while courts in the UK and elsewhere in Europe have the power to prevent a contracting authority from entering into an agreement in breach of the regulations, if a contract has already been signed it may be too late.

This, at least, is the position under UK and German regulations. A recent ECJ decision, however, is likely to herald a change. In the case of Alcatel Austria, decided last October, the ECJ held that it was the responsibility of member states under directive 89/665 to ensure that there was an opportunity to review a contracting authority’s decision before a contract was formed. The case also held out the possibility of a claim against the member state concerned if it failed to provide such an opportunity.

In Germany, the legal position is, in principle, even less favourable to disappointed tenderers. Under the German law on the award of contracts, once a tender has been awarded, it cannot be withdrawn: the contract is, in effect, formed as soon as a contract award is made.

Now the Federal Cartel Office has stepped in. It has extended the statutory legal protection of the bidder by requiring the contracting authority to give all bidders 10 days’ advanced warning before awarding the contract. To reflect this, the federal legislation now under preparation is expected to include a mandatory period for notifying losing bidders. Such a period will allow a disappointed bidder to apply to the court for review. Finally, one might be forgiven for thinking that the regulation of public procurement is a peculiarity of the EU. In fact, there are extensive regimes governing public procurement in Eastern Europe, and the operation of these rules is now coming under sharper focus following the opening up of public-sector markets to private bidders. The rapidity with which public procurement is evolving has in some instances left the existing rules far behind.

In a recent case in Budapest, for example, the courts held that Hungarian procurement rules do not apply where the relevant project requires no expenditure of public funds. The case concerned a private finance initiative-style deal where the developer was required to replace existing buildings, use them for 10 years and then surrender them to the local authority without payment. The court held that in that case, public procurement rules did not apply.

As construction becomes more global, the control of public procurement will become increasingly prominent. In later columns, we will look at other aspects of regimes across Europe.