Quality, innovation and sustainability in the award of public contracts

The price isn’t everything

published in sb 4/2018

Author    Michael Below, Lawyer, Heuking Kühn Luer Wojtek, www.heuking.de

 

 

 

 

The award of public contracts is often associated with the wish to give special consideration to issues of sustainability or the promotion of innovation. The eligibility of these so-called strategic goals in the procurement procedure was for a long time a bone of contention. In 2014, the European Union therefore opened its public procurement directives to strategic goals in the environmental, social and innovation fields in order to advance its Europe 2020 strategy for smart, sustainable and inclusive growth. In German procurement law, “quality, innovation, social and environmental factors” have now also been accorded new status, starting with the reform of procurement law in 2016. Initial experience is now available. An overview from Michael Below.

Background

Conventionally, the purpose of the procurement procedure is to ensure that public funds are spent efficiently.

The first European directive in this area, the Public Works Contracts Directive, was passed in 1971 with the goal of creating a single European market for public works contracts. It envisaged that, for public works contracts exceeding a threshold value of 1,000,000 units of account (the forerunner of the euro), the contract should be awarded either for the lowest price or the economically most advantageous tender. Deviations from this principle were only permitted under certain circumstances when the preconditions for a subsidy were satisfied.

In 2001, the European Commission saw the chance to include environmental factors in the procurement procedure, alongside the product or service specification, particularly if “by resorting to these factors an economic advantage from the product or service that is the subject-matter of the contract yields economic benefit to the contracting authority”, possibly in connection with an analysis of the product’s life-cycle. Against the background of the environmental goals in Article 6 (as it was then) of the EC Treaty, the EuGH (European Court of Justice) then, in 2002, showed itself to be more open to green award criteria: namely, for example, to the weighting of emissions as an assessment criterion in inner-city bus transport and, in 2003, to the appropriate weighting of the sourcing of electricity from renewables.
Legal decisions remained stricter in relation to social criteria. In 2008, for example, the EuGH considered the clause concerning the observance of collective agreements in Lower Saxony procurement law to be incompatible with European Union law, reasoning essentially that an arrangement solely for public works activities cannot be justified with employee protection. Up until 2014, this argumentation was upheld in relation to the equivalent provision in procurement law in North-Rhine/Westphalia.

In the course of the reform of EU procurement law in 2014, the EU public procurement directives were opened to admit so-called strategic goals. The reform actively encouraged the realisation of strategic goals in the environmental, social and innovation sectors with the means of procurement law in order to achieve the goals of the Europe 2020 strategy for smart, sustainable and inclusive growth. On this account, it is essential that the pursued goals in the sectors mentioned are related in some way with the subject-matter of the contract, e.g. in connection with the process for the creation of the product or service or with a different stage in its life-cycle. It is not necessary for the factors to have effects on the material properties of the subject-matter of the contract.

Referring to the goals expressed in the reform of EU procurement law, but without specific guidelines under European law, the new Article 97, Section 3, GWB (Restriction of Competition Act) was introduced as a “general clause” for the implementation of strategic goals in the cited areas on the occasion of the reform of German procurement law by the 2016 Procurement Law Modernisation Act. For so-called sub-threshold procurement, corresponding standards were adopted in 2017 – albeit not yet bindingly throughout Germany – with a formulation in Article 2, Section 3, UVgO (Sub-threshold Procurement Ordinance) with essentially the identical wording of Article 97, Section 3, explicitly with the goal of achieving a parallel arrangement.

 

Criteria of procurement law

In German procurement law, the aims of Article 97, Section 3, GWB and Article 2, Section 3, UVgO – i.e. quality, innovation, social and environmental factors – are accorded equal status with the satisfaction of economic needs. In this respect, we can no longer speak of “aims extraneous to the award”. In view of the practical significance of these strategic goals, it is nevertheless important to point out that specific implementation always depends on the framework of the procedural rules in question.

a) Quality

The required quality factors are the focus of the product/service specification, which precedes the procurement procedure proper. The contracting authority can however also name award criteria referring to the quality of the product/service offered.

The additional reference to quality in Article 97, Section 3, GWB is intended to ensure as high a quality as possible and raise the level of quality of public procurement.

b) Innovation

In the decisive EU directive, the concept of innovation is defined as “the implementation of a new or significantly improved product, service or process, including but not limited to production, building or construction processes, a new marketing method, or a new organisational method in business practices, workplace organisation or external relations inter alia with the purpose of helping to solve societal challenges or to support the Europe 2020 strategy for smart, sustainable and inclusive growth”. It should be noted here that, as part of the Europe 2020 strategy, innovation is to be considered not only in the technical field, but also in the social field.

To advance such innovation, contracting authorities, according to the will of the EU, are to request innovative products/services, as often as possible permit variants with the aid of defined minimum requirements and possibly initiate the development of corresponding products, among other things through the newly introduced means of innovation partnership.

Another important tool for the promotion of innovation is the functional product/service specification, i.e. the description of a product/service on the basis of the anticipated success.

Particularly in the context of the functional product/service specification and in connection with so-called “school-marks legal decisions”, there has been a contentious debate in the last few years on how a sufficiently transparent award decision can be achieved and which requirements in this connection are to be met by the initial specification of the award criteria and their assessment. The German Federal Court of Justice has now made it clear that the contracting authority’s requirements have to be made obvious to the tenderer in the procurement documents, but – at least in the context of a functional product/service specification – it is not obligatory in all cases to specify in advance the criteria on which the score to be achieved in the assessment of the various aspects of the strategies submitted by tenderers is based, as the contracting authority might otherwise run the risk of suggesting possible components to tenderers. In fact, it is precisely the tenderer’s job to develop such components in the context of a functional product/service specification.

c) Social factors

Social factors can be formulated both in the context of the product/service specification and in the form of award criteria and performance conditions. They can be found first of all in the circumstances immediately characterising the product/service, i.e. accessibility for disabled persons or “design for all”. These last-mentioned requirements will even become the rule as a result of Article 121, Section 2, GWB for products and services intended for use by individuals (“natural persons” in legal parlance).

However, account can also be taken of social factors with criteria that are merely associated with the performance of a contract. This could be, for example, the employment of long-term jobless or trainees, the wages paid, or compliance with the core labour standards of the ILO (International Labour Organisation) or with applicable labour law, as well as the preferable treatment of women or helping to reconcile family life and work.

d) Environmental factors

Among the strategic goals of the award, environmental factors are a principal focus.

Performance and functional requirements can therefore be tied to such labels as the Blue Angel or the FSC (Forest Stewardship Council) label. Since the modernisation of procurement law in 2016, the furnishing of the respective labels can itself qualify as proof of the desired characteristics, while previously the specifications of the label had to be included. At any rate, the contracting authority is however compelled to accept (demonstrably) equivalent labels of quality, or proof that the tenderer has been unable to obtain a label in the time available although his tender is equivalent.

Another factor of the environmental goals is energy consumption, as can be adopted in the award criteria in connection with a life-cycle costing approach. Under the old law, such an estimate was initially only compulsory for road vehicles. This requirement was then generalised as a recommendation for other areas in the then Article 4, Sections 4 to 6b of the Procurement Ordinance back in 2010, together with the equally optional requirement “the highest performance level of energy efficiency and, if available, the highest energy efficiency class under the terms of the Energy Consumption Labelling Ordinance”. Since the reform of procurement law in 2016, these requirements have gained further weight.

The introduction of certain environmental management systems can also be demanded of the tenderer, i.e. the European EMAS (Eco-Management and Audit Scheme) or other recognised standards. Another widely recognised standard in this context is the international environmental management standard ISO 14001 (currently adopted in Germany as DIN EN ISO 14001:2015-11).

Also worth mentioning are the waste-related procurement requirements that find expression in the various waste laws, e.g. on the national level in the Circular Economy Act and also in the Waste Act of the Land of North-Rhine/Westphalia. According to this, on the national level it is essential to at least examine whether and to what extent the product/service is durable, repair-friendly, reusable and recyclable. Also the type and quantity of the generated waste and the scope for using products made of recycled materials are to be examined in this connection as well as the possibility of the subsequent recycling of the wastes arising after use.

For contracting authorities, Germany’s Environment Agency provides extensive information on the adoption of environmental factors in procurement (www.beschaffung-info.de). Through the admission of variant tenders, it advises encouraging the tenderer to quote prices for environment- and climate-friendlier alternatives, for example

Implementation in the award process

The consideration of strategic goals is a continuous theme throughout the award process.

The ascertained needs should be questioned particularly in the light of environmental factors. Here less is often more.

The decisive stage in the award process is the product/service specification. For this the contracting authority gains extra scope for assessment which can only be checked to a limited extent. It is the contracting authority’s prerogative to decide for himself whether and what object to procure in what way.

A central element in the implementation of strategic goals is in this connection Article 31, Section 3 of the Procurement Ordinance, which explicitly states that the features demanded in the product/service specification can also affect these strategic goals, even if the factors concerned are not a material constituent of the product/service.

What is necessary, however, is a material reference to the requirements relating to the subject-matter of the contract, possibly in respect of the production process or the life-cycle, inclusive of the production chain. The requirements must not be disproportionate to the contract value or procurement goal. The larger the contract volume, the more that can be demanded of the tenderer.

In the product/service specification, it is also important to observe the prohibition of discrimination. In the context of the strategic procurement goals, this enjoys special importance as innovative solutions beneficial in terms of sustainability are often initially only offered by a single tenderer. An invitation for tenders effectively geared to one or only a few products is only permissible if the reasons for this arrangement are pertinent and contract-related. Nevertheless, this cannot obstruct a solution that is worthy of preferential treatment for sustainability reasons. Against the background of the opening of the procurement process to strategic goals of equal status, such reasoning must also be acknowledged.

In connection with grounds for exclusion, it is also optionally possible to take issue with a tenderer’s demonstrable infringement of environmental, social or labour law obligations (Article 124, Section 1, No. 1, GWB). This comprises all relevant obligations applicable to the company, i.e. legal provisions of the European Union and standards of individual states, as well as international agreements like the Vienna Convention for the Protection of the Ozone Layer.

The contract is to be awarded to the most economically advantageous tender. However, to determine the best value for money, reference can also be made to quality, environmental or social factors. In accordance with the arrangements for the product/service specification, a connection to the subject-matter of the contract is in turn required; be it in production in compliance with the ILO core labour standards or the use of energy-efficient machines. A contract can also be awarded on the basis of the lowest cost over the entire life-cycle and by taking account of the external effects of the environmental impact.

Further factors can be specified in the performance provisions, such as the use of raw materials or compliance with the ILO core labour standards.

Result

The consideration of strategic goals in the procurement process is taking shape. Contracting authorities have obviously been given an important tool for promoting sustainability. However, when it comes to the details of implementation, the – in some case contentious – debate continues.