DISCUSSION PAPER ON DUAL SYSTEMS FOR PUBLIC PROCUREMENT

Transcription

1 HARMONISATION OF PUBLIC PROCUREMENT SYSTEM OF UKRAINE WITH EU STANDARDS DISCUSSION PAPER ON DUAL SYSTEMS FOR PUBLIC PROCUREMENT Steen Bruun- Nielsen April 2015 A Project funded by the European Union and implemented by a Consortium led by Crown Agents Ltd

2 The contents of this Report are the sole responsibility of the Crown Agents and its consortium partners and the opinions expressed in this Report are not to be understood as in any way reflecting an official opinion of EUROPEAID, the European Union or any of its constituent or connected organisations. 2

3 ABBREVIATIONS CJEU EC ECJ EU ECR MEDT NGO OECD OJ PCA PFM PPL TED TFEU UPL Court of Justice of the European Union European Community European Court of Justice (see also CJEU) European Union European Court Reports Ministry of Economic Development and Trade Non- Governmental Organisation Organisation for Economic Cooperation and Development Official Journal (of the European Union) Partnership and Cooperation Agreement Public Finance Management Public Procurement Law: Law of Ukraine On the implementation of Public Procurement (No VII) of 10 April 2014 Tenders Electronic Daily Treaty on the Functioning of the European Union Utilities Procurement Law: Law of Ukraine On the Specific Regulation of Procurement in Certain Spheres of Economic Activity (No VI) of 24 May

4 TABLE OF CONTENTS Page Executive Summary 5 1. Introduction 7 2. Key considerations regarding dual systems in public procurement 9 3. Dual systems in EU Member States and Associated countries Conclusions and Recommended Topics for Discussion 22 ANNEX European Communication on Community law applicable to contract awards not or not fully subject to the provisions of the Public Procurement Directives (2006) 26 4

5 EXECUTIVE SUMMARY The EU funded Project Harmonisation of Public Procurement System in Ukraine with EU Standards commenced work in Kyiv on 11 November The general objective of the Project is to contribute to the development of a solid and consistent public finance management through the establishment of a comprehensive and transparent regulatory framework for public procurement, an efficient public procurement institutional infrastructure, the accountability and integrity of public authorities in regard to public procurement and the development of the Ukrainian state aid system. In the context of the Project s assistance to the Ukrainian authorities in regard to the further approximation of Ukrainian legislation to align with the EU Public Procurement Directives, this Report is intended to provide a basis for discussion on the design of rules for low value contracts, i.e. contracts below the thresholds of the EU directives. This is important in the overall process of the alignment of Ukrainian public procurement rules with the directives; primarily because the contract value thresholds (above which the EU directives apply) are high in Ukrainian terms and the thresholds for the application of the Ukrainian Law on Public Procurement (PPL) are relatively low in EU terms. In addition, certain EU rules apply to public procurements below the thresholds of the EU directives largely as a result of the case law of the European Courts. In this situation, Ukraine has options that need to be considered in the process of further legislative alignment with EU public procurement norms in fulfilment of its commitments under the EU- Ukraine Association Agreement. In brief, the core issue is whether or not Ukraine wishes to create different thresholds for the application of simplified rules for low value contracts and the application of more sophisticated rules for more significant higher value contracts. Such an approach would create a dual- system in the PPL. The Report examines the differences of thresholds between those of the EU Directives and the Ukrainian PPL. It also considers the overall advantages of a dual system, while noting the risk of circumvention via contract splitting and how this can be regulated. CJEU case law of relevance is described and the Report illustrates how the TFEU policies on economic integration apply to all contracts regardless of size - provided that they are of cross- border relevance. The case law is based especially on the EU principles of transparency and equal treatment. The case law as well as interpretative input from the EU Commission has provided an outline of requirements for low value procedures, not least as regards publication, technical specifications, setting of criteria in advance and the possibility for judicial review. The Report describes and comments on special schemes for low value contracts in three countries, Serbia, Poland and Denmark. It concludes that the national schemes in many cases may allow more scope for choice than it would be feasible to introduce in the Ukrainian context, at least for the time being. In the light of the research on dual systems and the present discussions in Ukraine on e- auctions, the Report concludes that none of the dual system approaches prescribes a certain procedure as generally mandatory. In the light of CJEU case law, the Report concludes that any general mandatory rule, allowing only one criterion (for example lowest price), restricts competition by preventing procuring entities from choosing quality aspects as parameters in the competition. The case law therefore does not prevent the use of lowest price as a sole criterion; such use only 5

6 becomes problematic if it is turned into a mandatory rule covering contracts in a general manner. Finally, the Report makes a set of recommendations as regards the structure of low value contract rules in the PPL. This includes simplified versions of the open and restricted procedure, request for price quotations and the possibility for a non- mandatory free- standing e- auction procedure. Other recommendations concern the application of simplified rules to utilities sector contacts and the extent to which the normal rules of the PPL concerning complaints, technical specifications, pre- qualification and award criteria should apply fully to low value contracts. 6

7 1. INTRODUCTION The EU funded Project Harmonisation of Public Procurement System in Ukraine with EU Standards commenced work in Kiev on 11 November The general objective of the Project is to contribute to the development of a solid and consistent public finance management through the establishment of a comprehensive and transparent regulatory framework for public procurement, an efficient public procurement institutional infrastructure, the accountability and integrity of public authorities in regard to public procurement and the development of the Ukrainian state aid system. As regards public procurement support activities, the Project is focusing on expert advice on policies, legislation and institutional structures and operations together with a range of training activities and awareness raising events. The urgency of actions in this respect is confirmed by the several instances in which international donors have indicated the inadequacy of the current approach to the reform the public procurement sector and the relevance of real reforms in the wider context of public finance management. Public procurement legislation essentially obliges the public sector to make especially larger procurements subject to competitive tender under conditions that ensure optimal competition. The regulatory tools in this respect are publication requirements, various procedures suitable for various types of contracts, requirements concerning types of criteria and specifications to be used during the process and safeguards to ensure that such procedures can be effectively reviewed. Public procurement regulation may have the main purpose of contributing to proper financial management in the public sector and in this context ensure value for money. In the specific context of EU, the regulation has the additional important purpose of promoting cross- border competition within EU. Until recently, the legal framework for EU- Ukraine relations was the Partnership and Cooperation Agreement (PCA) which entered into force in Subsequently, the European Neighbourhood Action Plan of 2005 further elaborated certain relevant points as regards priorities and progress in applying certain PCA provisions. In regard to public procurement, the provisions of Articles 51, 52 and 55 of the Agreement essentially required co- operation under the Agreement to develop conditions for the open and competitive award of contracts for goods and services (in particular through calls for tenders) and the gradual approximation of Ukrainian legislation with EU law in regard to public procurement. The EU- Ukraine Association Agreement includes a dedicated Chapter 8 on public procurement, comprising Articles and an associated Annex XX1. Essentially, the Agreement provides for progressive mutual access to the public procurement markets of the EU and of Ukraine on the basis of planned, phased and supervised progress in the approximation of the public procurement legislation in Ukraine with the EU public procurement acquis; accompanied by institutional reform and the creation of an efficient public procurement system based on the principles governing EU public procurement. The Agreement entered into force provisionally on 1 November 2014 and the economic and trade provisions (which include Articles and Annex XXI) officially enter into force on 1 January The Ukrainian Government is currently developing a strategic Road- Map to outline its intended planning for the full implementation of the public procurement requirements of the Agreement. In parallel, it can be noted that public procurement reform in Ukraine is seen as part of the wider 7

8 reform of public finance management. In that regard, the Ukrainian government commenced a reform of public finance management in its Economic Strategy for This envisaged steps to improve control over public expenditure and to make the public finance system more transparent at every stage. These initiatives were further reflected in the Public Finance Management Strategy and its related Action Plan adopted by the Cabinet of Ministers in August Under Chapter VI of the Action Plan, the further approximation of Ukrainian public procurement legislation with EU laws and standards is envisaged. These targets will in the near future be complemented with the very specific targets of the Road- Map for the implementation of the public procurement provisions of the Association Agreement. Earlier Project Reports raised the issue of the possible introduction of a dual system in the PPL as further approximation to EU standards proceeds in line with the requirements of the Association Agreement 1. In brief, the core issue is whether or not Ukraine wishes to create different thresholds for the application of simplified rules for low value contracts and the application of more sophisticated rules for more significant higher value contracts. Such an approach would create a dual- system in the PPL. It is the purpose of the present Report to provide the basis for considering this priority in detail. THE PRESENT REPORT AND THE PROJECT APPROACH This Report is intended to provide a basis for discussion on the design of rules for low value contracts, i.e. contracts below the thresholds of the EU directives. This is important in the overall process of the alignment of Ukrainian public procurement rules with the directives; primarily because the contract value thresholds (above which the EU directives apply) are high in Ukrainian terms and the thresholds for the application of the Ukrainian Law on Public Procurement (PPL) are relatively low in EU terms. In addition, certain EU rules apply to public procurements below the thresholds of the EU directives largely as a result of the case law of the European Courts. In this situation, Ukraine has options that need to be considered in the process of further legislative alignment with EU public procurement norms in fulfilment of its commitments under the EU- Ukraine Association Agreement. Accordingly, the aim here is to provide the MEDT and other stakeholders with an overview of the merits of a dual system and some key considerations as to how such a system could be designed. The Report is based on a review of the problems that such a system should solve together with an examination some dual systems currently operating within the EU and in other associated countries. On this basis, the Report provides a number of recommendations on the issues and options that need to be discussed in Ukraine if a dual system is to be developed. 1 Report on the Planning Approach and Format for the Further Approximation of the Ukrainian Public Procurement System to EU Standards, Steen Bruun- Nielsen, June 2014 and Report on EU Gap Analyses of the Ukrainian Public Procurement Legislation, Steen Bruun- Nielsen & Olexandr Shatkovskiy, July 2014, accessible at 8

9 2. KEY CONSIDERATIONS REGARDING DUAL SYSTEMS IN PUBLIC PROCUREMENT INTRODUCTION The EU- Ukraine Association Agreement, in its dedicated Chapter on public procurement, provides for progressive mutual access to the public procurement markets of the EU and of Ukraine on the basis of planned, phased and supervised progress in the approximation of the public procurement legislation in Ukraine with the EU public procurement acquis; accompanied by institutional reform and the creation of an efficient public procurement system based on the principles governing EU public procurement. The scope of these provisions covers contracts covered by the five main EU public procurement Directives 2. Article 149 indicates the following thresholds of the main EU public procurement Directives (Public Sector Directive and Utilities Procurement Directive): 133,000 for most public supply and service contracts awarded by central government authorities 3 ; 206,000 in the case of all other public supply and public service contracts; 412,000 in the case of supply and service contracts in the utilities sector; 5,150,000 in the case of public works contracts and concessions; 5,150,000 in the case of works contracts in the utilities sector. These thresholds are adjusted every second year. The above amounts represent the level of thresholds at the time of the adoption of the Association Agreement and must according to the Agreement be adjusted at the moment of its entering into force to reflect the thresholds then in place under the directives. The above figures are therefore subject to adjustment and serve as a base reference point of the scope of the directives in terms of contract value 4. Under the current provisions of the Law on Public Procurement (PPL) and the Law on Utilities Procurement (UPL) 5, the following thresholds apply in Ukraine: Public Service Contracts for goods or services 100,000 UAH 2 Subject to an updating of Annex XXI of the Agreement, which is currently in process, the relevant Directives are: Directive 2014/24/EU of 26 February 2014 (the new Public Sector Directive); Directive 2014/25/EU of 26 February 2014 (the new Utilities Procurement Directive); Directive 89/665/EEC of 21 December 1989 (the Remedies Directive applying to general public sector procurement); Directive 92/13/EEC of 25 February 1992 (the Remedies Directive related to utilities procurement in the water, energy, transport and telecommunications sectors);and Directive 2014/23/EU of 26 February 2014 (on the award of Concession contracts). 3 Public service contracts defined in Directive 2004/18/EC Article 7. b. 3rd indent, concerning certain types of telecommunication and research and development activities, benefit from the higher threshold of 249, The new directives of 2014 include further adjustments of thresholds as well as new types of levels in connection with, for example, the special flexibilities allowed for regional procurement. 5 Law of Ukraine On the Specific Regulation of Procurement in Certain Spheres of Economic Activity (No VI) of 24 May

10 Public Service Contracts for Works 1,000,000 UAH Utilities Contracts for goods or services 1,000,000 UAH Utilities Contracts for Works 5,000,000 UAH Allowing for the recent and significant devaluation of the UAH, the first of these thresholds currently amounts to less than 4,000 (3% of the base thresholds of the EU Directives), the second and third thresholds to less than 40,000 (0.7% of the base thresholds of the EU Directives), and the Utilities Works threshold is just below the level of 200,000 (or 4% of the base thresholds of the EU Directives). Thus, it is clear that the contract value thresholds (above which the EU directives apply) are high in Ukrainian terms and the thresholds for the application of the Ukrainian Law on Public Procurement (PPL) are very low in EU terms 6. The Project s earlier Report on the Planning Approach and Format for the Further Approximation of the Ukrainian Public Procurement System to EU Standards included an outline of what is required as part of the Road- Map under Article 152 of the Agreement 7. This and other requirements of the Agreement specifically concern contracts at or above the threshold values set by the directives. Thus, an important conclusion of that Report was the following: This raises the question of introducing a dual system in Ukraine whereby the approximation planning for the purposes of the Association Agreement could be focused on large contracts and a separate more flexible system could be introduced that would be more suitable for the low PPL thresholds. (..) Article 151 on basic standards ( ) only covers above- threshold contracts. However, some of the basic standards of this provision are indeed so basic that they would apply to contracts below these thresholds, including many of the contracts covered by the PPL with its relatively low thresholds. Such general application of the basic standards follows from CJEU case- law according to which it is exactly expressed that certain basic standards apply to all contracts, including those below the EU thresholds 8. In the same vein, the Project s Gap Analysis Report set out the following in its main conclusions as regards thresholds: The thresholds of both the PPL and the UPL are significantly lower than those of the directives. Such low thresholds do not run counter to the EU directives; but clearly the directives are meant to be used in regard to much bigger contracts. In fact, many EU Member States have introduced more flexible rules for contracts below the thresholds of the directives. Such rules are still built around the basic EU Treaty principles of equal treatment, transparency and proportionality and may be flexible as regards, for example, procurement methods (allowing simplified procedures such as requests for quotations), publication requirements and time- limits. The issue of thresholds thus raises a more general question of having a dual system with more simple rules for smaller contracts. 6 In March 2015, the MEDT and its Working Group on updating the PPL were considering raising the present thresholds to 200,000 UAH for goods and services and 1.2 million for works contracts. 7 Op.cit. Section See the analysis of relevant case- law in COMMISSION INTERPRETATIVE COMMUNICATION on the Community law applicable to contract awards not or not fully subject to the provisions of the Public Procurement Directives COM 23/ The analysis is annexed this Report. 10

11 Against this background and on the basis of these findings, it was agreed with the Ministry of Economic Development and Trade (MEDT) that a discussion paper should be developed to assist in advancing policy considerations as regards how to proceed on this specific point in the overall setting of planning the implementation of the public procurement requirements of the Association Agreement. Developments in the meantime have also revealed a need to examine the scope for introducing a special mandatory regime below the EU thresholds and this is dealt with in Chapter 4 of this Report. THE ADVANTAGES AND DISADVANTAGES OF A DUAL SYSTEM The points made in the previous section highlight that a dual system can be a way of handling the challenge of the EU approximation under the Association Agreement by ensuring that the more complex EU rules only apply to contracts of certain value. A dual system would allow for a set of simpler, basic rules for smaller contracts, which dominate the public procurement market in Ukraine. It is also clear that the EU directives are not intended to be used in respect of smaller contracts. From the perspective of time and resources, they are not at all suitable for such contracts. It can also be noted that, for the purpose of developing special rules for smaller contracts, ample guidance to be found in the Association Agreement and in the principles of wider application developed by the case law of the Court of Justice of the European Union (CJEU). In recent years, Ukraine has experienced a problem of legislative attrition, whereby there are constant and continuing attempts made by parliamentarians (for a range of reasons) to limit the scope of the PPL by the introduction of additional specific exemptions. This problem could be partially solved by a dual system. One probable reason for some of the initiatives to have specific contracts exempted from the public procurement legislation is that the effect of the present legislation is highly burdensome in regard to smaller contracts in particular. Much of this burden could be relieved by a dual system with simplified rules for smaller contracts 9. Ultimately, the main advantage from the introduction of a dual system is the saving of administrative costs of procurement procedures coupled with an improved ability to quickly address daily and typically spontaneous public sector requirements for goods and services. One risk with a dual system is the risk of circumvention. This is the case where contracts that are governed by the rules and procedures for larger contracts are artificially split to allow them to be awarded using the procedures for smaller contracts. This risk is present also in the existing legislation but it could increase where several thresholds are in operation. This risk can be addressed by regulating the the valuation of contracts. However, the current PPL contains no rules on contract valuation and this is a major shortcoming in the context of approximation with the EU directives 10. The PPL only includes a prohibition against the artificial division of contracts. However, such a prohibition is of little value without the specific valuation rules covering various contract types as set out in the EU directives. The application of existing thresholds has so far relied on national budgetary rules. However, the view here is that the introduction of the valuation rules of the EU directives is a necessary complement to a dual system, at least in the longer 9 The introduction of centralised procurement arrangements for highly standardised contracts, irrespective of value, would also clearly contribute to halting this trend. 10 See commentary on this in Report on EU Gap Analyses of the Ukrainian Public Procurement Legislation, op.cit. 11

12 term. DOES EU LAW APPLY ON SMALLER CONTRACTS? In legal terms, the EU Public procurement directives are hierarchically subordinated to the Treaty on the Functioning of the European Union (TFEU) and have the essential purpose of facilitating the practical application of the principles of free movement of goods, services and workers and the ban on trade barriers that follows from Articles 34, 45, 56 and 49 of the Treaty concerning the free movement of goods, workers and services and the right of establishment. The case law of the CJEU specifically addressed the question of what the TFEU requires in the case of contracts that are not covered by the directives. This may be because a contract is a service concession (and therefore not covered by the directives), or it may be because it is fully or partially exempted from the directives because it is a special type of exempted service contract or because it is a small contract below the directive thresholds (or low value contracts ). Focus will in the following be on these low value contracts. Before considering the EU case law, a few points should be borne in mind. First, the situation in the context of the EU- Ukraine Association Agreement is different because the Agreement explicitly does not cover contracts below the EU thresholds. Thus, the TFEU provisions on economic freedoms and the associated CJEU case law will only apply fully to Ukraine if it becomes a member of the European Union. This means that Ukraine is not formally obliged to observe the CJEU requirements related to TFEU principles when regulating low value contracts 11. However, there may be some practical value in paying attention to the requirements flowing from the TFEU e.g. in the perspective of possible future EU membership and in regard to the need for legislative consistency. Looking specifically at the EU case law on low value contracts, the CJEU case law essentially obliges certain basic requirements to be met in carrying out procedures for such contracts, even if the directives do not apply. This is clearly stated in Case C- 59/00, Vestergaard where the CJEU found that technical specifications requiring the use of specific standards or brands were not allowed even for low value contracts. Procuring entities must therefore accept equivalent brands and standards in the same way as in the case of contracts covered by the EU directives. The Court was particularly concerned about the trade barrier effect arising from any requirements for specific standards/brands may not only deter economic operators using systems similar to that product from taking part in the tendering procedure, but may also impede the flow of imports in intra- Community trade, contrary to (.) the Treaty, by reserving the contract exclusively to suppliers intending to use the product specifically indicated. In another part of the judgment the CJEU makes it clear that: the mere fact that the Community legislature considered that the strict special procedures laid down in those directives are not appropriate in the case of public contracts of small value does not mean that those contracts are excluded from the scope of Community law. This line of thinking was developed further in Case C- 6/05, Medipac where the following point is made: 11 The position is different above the EU thresholds where, in accordance with Article 153 of the Association Agreement, approximation shall take due account of the corresponding case law of the European Court of Justice and the implementing measures adopted by the European Commission. 12

13 .According to settled case- law, even if the value of a contract which is the subject- matter of an invitation to tender does not attain the threshold of application of the directives (.) and the contract in question therefore does not fall within the scope of application of those directives, contracting authorities awarding contracts are nevertheless bound to abide by the general principles of Community law, such as the principle of equal treatment and the resulting obligation of transparency. The decision in Medipac refers to other CJEU cases concerning not just smaller contracts but also other contracts falling outside the directives. In Case C- 507/03, An Post, the CJEU applied the same approach even in regard to the types of services of social, cultural and educational nature which are presumed to be of purely local interest and therefore virtually 12 excluded from the directives despite their size. The CJEU also made the point in this case the public procurement directives merely have the purpose of facilitating the application of the TFEU economic freedoms. The CJEU then went on to conclude that:.it follows that the advertising arrangement, introduced by the Community legislature for contracts relating to services coming within the ambit of (such local interest services) cannot be interpreted as precluding application of the principles resulting from (the TFEU trade barrier provisions), in the event that such contracts nevertheless are of certain cross- border interest. More guidance on the procedures required is found in Case C- 231/03, Coname, where they are described as those: which, without necessarily implying an obligation to hold an invitation to tender, are, in particular, such as to enable an undertaking located in the territory of a Member State other than that of the (procuring entity) in question to have access to appropriate information regarding that concession, so that, if that undertaking had so wished, it would have been in a position to express its interest in obtaining that concession. Clearly, the requirements are focused on the cross- border situation and they do not entail any obligation to organise tender procedures. Prior publication is required to allow for participation in the award process and not just a publication after the event to allow for complaints against the contract award. Accordingly, even if an actual tender is not required, the procuring entity must foresee some kind of procedure for selecting between several interested suppliers in cases where more than one interested party responds to the publication. It is also clear that the application of EU principles and CJEU requirements to a low value contract requires that contract to have cross- border relevance i.e. be of potential interest to participants from other EU Member States. As EU law is focused on preventing trade barriers, the TFEU only applies to such smaller contracts that have an intra- EU trade relevance. The directives are clearly based on the presumption that large contracts (at or above the thresholds) have such relevance. As a result, as regards other contracts, cross- border relevance may be difficult to determine and this point must be evaluated on a case by case basis. Some of the CJEU case law provides indications of what cross- border relevance is. In Case C SECAP, the CJEU started with another issue - by finding that national legislation on the automatic exclusion of abnormally low bids contravened Treaty provisions and general principles. This was according to CJEU because the automatic exclusion: may constitute indirect discrimination since, in practice, it places at a disadvantage operators 12 Only the directives requirements concerning technical specifications and publication of award notice apply. 13

14 from other Member States which, as they have different cost structures, may benefit from significant economies of scale or, intending to cut their profit margins in order to enter the market in question more effectively, would be in a position to make a bid that was competitive and at the same time genuine and viable but which the contracting authority would not be able to consider as a result of that legislation. The CJEU then went on to make the point that such discrimination would only be relevant in the case of contracts with cross- border relevance. The CJEU held that that it is: in principle for the contracting authority concerned to assess whether there may be cross- border interest in a contract whose estimated value is below the threshold laid down by the Community rules, it being understood that that assessment may be subject to judicial review. The CJEU then makes the point that it is possible for national legislation to lay down criteria for cross- border relevance and that such criteria could:.. be, inter alia, the fact that the contract in question is for a significant amount, in conjunction with the place where the work is to be carried out. The possibility of such an interest may also be excluded in a case, for example, where the economic interest at stake in the contract in question is very modest (.).However, in certain cases, account must be taken of the fact that the borders straddle conurbations which are situated in the territory of different Member States and that, in those circumstances, even low- value contracts may be of certain cross- border interest. What are then the specific procedural requirements for contracts with cross border relevance? In the EU Commission analysis from an attempt was made - on the basis of the case law available at that time - to clarify what is actually required in terms of publication and award procedures in case of low value contracts. The analysis highlights the following points: 1. a non- discriminatory description of the subject- matter of the contract; 2. equal access for economic operators from all EU Member States; 3. mutual recognition of diplomas, certificates and other evidence of formal qualifications; 4. appropriate time- limits; 5. more generally a transparent and objective approach; this means essentially that the procedure must be known to the participants in advance and thus established in advance 6. the possibility that the impartiality of the procedure can be reviewed by the courts. The analysis is obviously made from the perspective of EU membership and the broad set of obligations that EU Member States are subject to. Thus, for example point 3 as regards mutual recognition is not derived from directly related case law but follows from general Treaty obligations of EU Member States. The same is the case as regards review by the courts where the Remedies Directive only applies to contracts covered by the directives but where there are general obligations for EU Member States to ensure that any EU law is subject to review. An important issue that the CJEU has not as yet had the possibility to determine is whether the TFEU principles also apply in cases where the contracting entities are not traditional public sector entities but public enterprises or private enterprises with special or exclusive rights. The European Commission s 2006 analysis does not provide any guidance on this question. 13 See Annex to this Report. 14

15 The CJEU case law provides some general guidance as to best practice approaches to rules for low value contracts, especially in a free- trade environment. Further guidance can be derived from the actual legislation in force in several EU Member States and associated countries and these examples provide a good basis for determining in more concrete detail what could be the dual system solution for Ukraine. The following Chapter focusses on specific national solutions. 15

16 3. DUAL SYSTEMS IN EU MEMBER STATES AND ASSOCIATED COUNTRIES Dual systems exist in several EU Member States and, in 2010, OECD/SIGMA made a comprehensive study based on questionnaires 14 of the types of procedures that apply to low value contracts. The OECD/SIGMA analysis includes the following overall finding: The OECD/SIGMA Synopsis Dual systems in EU Member States ( ) the study shows that the majority of Member States regulate public procurement above and below EU thresholds within the same act, and require that contracts below the EU thresholds be based on open, fair and competitive procedures These procedures essentially have similar features to those applicable under the EU Directives. Member States with no regulation still promote the use of competitive tendering below the EU thresholds.(.) The simplification normally includes the shortening of time limits for submission of applications and tenders and less demanding rules for publication and selection of tenderers. In some cases, more relaxed rules apply to the use of negotiated procedures and to the use of direct invitations to tender, but then usually also include requests for either prior publication or a minimum number of tenderers to be invited. Otherwise, the rules on technical specifications, selection and award criteria and the right to file complaints are basically the same for contracts below the EU thresholds as for contracts above. In the context of a discussion of dual system design in Ukraine, it is noticeable when reading the OECD/SIGMA study in detail that few countries seem to allow e- auctions to any larger degree for low value contracts than for contracts above the thresholds. Poland is one of the few examples. The study also shows that the rules differ considerably as regards inclusion of utilities operators. In order to get a more detailed view of the regulatory approach, some examples have been selected here to be examined as regards the legislation applicable today. The countries include one old EU Member State (Denmark), a new EU Member State (Poland) and an EU candidate country (Serbia). The Dual System in Poland The Polish public procurement legislation 15 allows a number of flexibilities for low value contracts. Contracts below the equivalent of 30,000 are completely excluded from the law 16. For other 14 OECD/SIGMA: SIGMA Paper #45 Public Procurement in EU Member States The Regulation of Contracts Below the EU Thresholds and in Areas not Covered by the Detailed Rules of the EU Directives, 27 May Act of 29 January Public Procurement Law (Journal of Laws of 2013, item 907, 984, 1047, 1473, of 2014 item 423, 768, 811, 915, 1146 and 1232). The text is available on 16 This applies also to certain contracts below the EU thresholds when they concern certain research and development, cultural and educational activities. 16

17 contracts between 30,000 and the EU thresholds, the rules essentially provide for the same procedures as the directive but with some flexibilities. These rules do not cover contracts for utilities operators. The flexibilities include the possibility for using a negotiated procedure with prior publication on the same level as an open and restricted procedure. And the request for quotation procedure, which is not allowed according to the directives, is allowed for smaller contracts. The publication of notices, including award notices and the publication of amended tender dossiers only need to take place in national media. On various points, there are possibilities for shorter, more flexible time limits. This applies, for example, to bid submission and, earlier in the procedure, as regards the time limit for bidders to request clarifications on tender dossiers. The period following award within which the contract cannot be signed (the standstill period) can be halved and in some cases avoided altogether in the case of low value contracts. Similarly, the scope for complaints is limited to certain issues and the time limit for making complaints is also shorter. At the same time, the Polish Law (almost uniquely) allows for the use of a free standing e- auction procedure. The Law draws a distinction between e- auctions as a complementary procedure according to the EU directives and e- bidding. E- bidding is also a reverse auction but is an independent procedure that can only be used for low value contracts. Unlike the e- auction, the e- bidding procedure is not excluded in any cases, such as for artistic or scientific services, and in turn it is not a mandatory procedure in any case. For both procedures, however, the Polish Law includes quite similar requirements to ensure bidder identity and the integrity of the entire process. A very flexible arrangement introduced quite recently applies in Poland in the case of the so- called Annex II B services identified in the 2004 EU Public Sector Procurement Directive as services typically of only local interest and where the directive only requires award notices and the application of the rules on technical specifications. Such services include hotel and restaurant services, health and social services, educational, legal and medical services. Essentially, and for such contracts from 30,000 and above, all that is required is publication of relatively limited notices, a manner of contract award that is objective, transparent and non- discriminatory and publication of the award. Comments on the Polish rules on low value contracts The low value rules are fully integrated in the Law in the sense that first of all normal procedures are available with some explicit procedural flexibilities. It is only in the case of certain services of a purely local character that a separate set of very simple rules is provided based on quite general requirements and principles. The free- standing e- bidding procedure is available as an option for low value contracts and is not limited to specific contracts or circumstances. This means that it is for the procuring entity to decide when this procedure should be used, e.g.in cases of standard supplies on markets where there is a high degree of competition. As regards the Annex II B services mentioned above, the new directives (2014/24/EU on Public Sector and 2014/25/EU on Utilities Sectors) introduce a new approach to such contracts according to which they are subject to actual regulation but only when they are of a particularly high value The new EU directives introduce a new so called light regime where such contracts are covered but only beyond very high thresholds and according to quite simplified rules. The light regime requires contracting 17

18 The idea is that the international (cross- border/intra- EU trade) relevance of such types of contracts cannot be excluded if their value is sufficiently high. This then raises the question whether the special Polish rules on such local contracts should now be abolished. The CJEU decision in Case C- 507/03: An Post mentioned in Chapter 2 means that the limited application of the directives to such local interest contracts does not mean that these contracts are beyond the reach of EU law. Moreover, if the purpose of a dual system is to maintain competition on the national market; then it makes perfect sense to regulate such local contracts by low value contract rules. It can even be argued that there is no justification for a distinction between local and other contracts at all. On the local market the commercial interest among local enterprises would presumably be the same and would not warrant different procedures. Furthermore, the very vague requirements as to the award process of a separate light regime may be difficult to apply in practice. As will be seen below concerning the Danish rules, another solution here is to apply almost identical rules. The Dual System in Denmark In addition to the rules required by the EU public procurement directives, Denmark has had a legislation covering below threshold works contracts for many years. The Danish Tender Law 18 covers all works contracts below the EU thresholds and prescribes as a main rule procedures similar to open and restricted procedures. There are requirements broadly similar to those of the directives - but less detailed - as regards the publication of notices, time limits and selection and award criteria. Negotiations are allowed with the lowest bidder when lowest price is the only criterion and with maximum the three best bids when qualitative criteria are used. The structure of the process must be communicated to the participants in advance and the process must fulfil basic requirements as regards equal treatment and transparency. The rules do not spell out these requirements in actual procedural details. It is an important modification that the negotiations must not result in changing the characteristics (technical specifications) or the award criteria. For works contracts below the equivalent of 400,000 it is allowed to use a procedure similar to the negotiated procedure without publication. This procedure can also be used for contracts above 400,000 (but below the directive thresholds) in cases similar to the ones where the directive allows negotiated procedure without publication. The rules set a maximum of three participants for such procedures. It is possible to include four participants if the one extra is from outside the local area. As regards supplies and service contracts, the Tender Law applies to contracts above the equivalent of 67,000 and below the thresholds of the EU directives. The Law does not apply to supply and service contracts required by utility operators. The directive exempts - as mentioned earlier in the comments to the Polish law - certain types of services assumed to be of only local interest (the Annex II B services mentioned earlier) from actual competitive procedures. The Tender Law, for reasons of compliance with CJEU case law (Case C- 507/03 considered in Chapter 2), explicitly includes these services. As in the case of the Polish Law, the effect is to promote competition in these local interest areas. The Law includes very general rules as regards procedures. Essentially, they consist of three components: authorities to publicise contracts of a value of at least 750,000. The regime is called light because the directives essentially leave it to the EU Member States to set the detailed requirements in the context of the basic principles of transparency and equal treatment. 18 Law No. 338 of 18 May 2005, as amended by Law # 572 of 6 June

19 an obligation to publish a notice with basic requirements concerning the description of the contract, contact details of the procuring entity, time limits for bid/candidature submission, the relevant address as well as the criteria for selection/award; a requirement to ensure that the selection of bidders and/or bids is based on objective, relevant and non- discriminatory criteria and that bidders are treated equally; an obligation to inform bidders as soon as possible about the outcome of the procedure, including the reasons in the case of annulment and an obligation upon receiving a request to inform bidders about the reason for the rejection of their bids. Complaints regarding any contract covered by the Law can be made to the same Complaints Board that is competent as regards contracts covered by the EU directives. In a recently presented draft Tender Law transposing the new EU Public Sector Directive 19 into Danish law, the rules just described are proposed to remain virtually unchanged as regards supplies and service contracts below thresholds. Another set of even simpler rules is proposed for low value supplies and service contracts without cross- border relevance. In the case of contracts without cross- border value, the earlier minimum threshold of 67,000 has been retained. As seen earlier, to decide whether a contract is of cross- border relevance or not, the procuring entities must make quite a difficult evaluation involving not just value but also other aspects related to market, competition and geographic location. If the contract is evaluated as having no cross- border relevance, the consequence following CJEU case law is that the contract is not covered by EU law, including not just the directives but also the overall provisions and principles of the TFEU. However, the new Danish draft maintains some general requirements based not on EU law but on principles of Danish administrative law concerning correct administration. These include the principles of equal treatment, proportionality and prudent economic administration. The rules for low value contracts without cross- border relevance do not require publication or the use of criteria but allow various options for ensuring that the conditions of the procurement reflect conditions in the market. This is assumed to be the case if the procuring entity: 1) contacts one enterprise based on soundings of the market, 2) contacts two or more enterprises; or 3) publishes a tender notice on the official web portal or on its own website. In the case of option 1) the procuring entity must be able to document the market soundings. In the case of option 2) if the procuring entity contacts more than three enterprises it must inform the enterprises in question about the reason for this procedure and can be asked to indicate the maximum that it is intended to contact. A competitive procedure under one form or the other virtually imposes itself in cases where the contacts result in the receipt of more than one bid. In such cases, the procuring entity must inform 19 The draft does not include the Utilities Directive or for that matter the Defence Procurement Directive. These directives remain applicable in Denmark as they stand by means of special Danish implementation rules. The same approach has been used until now for all procurement directives and this is where the draft Tender Law introduces a change as regards the public Sector Directive and the remedies Directives. It is envisaged that similar Danish codification will happen as regards the other directives, including the newly adopted Concession Directive. 19

20 the bidders about the award decision and must, on request, inform them of the reason for the decision. This is obviously easiest when there are certain criteria to refer to. Under the Draft Law, there is no access to the public procurement complaints mechanism for contracts without cross- border reference. Furthermore, in line with the new directive, the Draft Law introduces light regime rules which apply to service contracts at the high threshold of 750,000 and above. The rules are quite similar to the existing simple rules for supplies and services contracts below thresholds except that the light regime is subject to the normal standstill period requirements of the Remedies Directive. Consistent with the CJEU case law (especially Case C- 507/03 An Post) the Draft Law must be understood as covering these services below the threshold as well by means of either of the low value procedures depending on the concrete circumstances. Comments on the Danish rules on low value contracts The Danish rules on low value contracts are not, as in the case of Poland, integrated in the normal rules as flexible versions of normal procedures and the rules otherwise applicable. Rather, both the existing and the new draft rules lay down quite simple schemes where it is for the procuring entity to decide matters relating to e.g. types and technical specifications and the criteria to use in the process. As mentioned in connection with the Polish Law, this may not be a suitable way forward in the Ukrainian context where procuring entities may be less familiar with the practical application of the principles of equal treatment and transparency when developing the tender material. The Danish approach to local interest services (under Annex II B of the 2004 EU directive), differs from the Polish Law in that these contracts are subject to the same simplified rules as for other services contracts. The requirements of the Law also fulfil the future requirements for a light- regime laid down in the new directives. It was therefore a straightforward option in the new Draft Law to have similar rules for both situations. Structurally, it was necessary, however, to separate the light touch regime, since this regime is now covered by the directive whereas the below threshold contracts are not. The regulation of low value supplies and service contracts without cross- border relevance is, as a result of the logic of the CJEU rulings mentioned in Chapter 2, not based on EU principles but on virtually identical Danish administrative principles. As a somewhat formalistic consequence, these procedures are not subject to the same review procedures as the other procedures covered by the draft Tender Law. This means that the position of bidders is relatively weaker where there is no cross- border relevance. The Dual System in Serbia The Serbian Public Procurement Law 20 includes a quite simple procedure, which applies to supplies, works and service contracts below the equivalent of 25,000. The procuring entity is basically obliged to invite at least three bidders and to publish a notice on its own website or on the official web portal. A time limit of at least eight days from publication must be allowed for bid submission and the award decision must be taken within ten days counting from the opening of the bids. Both these periods are well below the normal limits of the Law. 20 Public Procurement Law, Official Gazette No. 124/12. The text can be found on 20