Promoting economy: electronic reverse auctions under the ec directives on public procurement
| Published date | 01 March 2004 |
| Pages | 340-374 |
| DOI | https://doi.org/10.1108/JOPP-04-03-2004-B002 |
| Date | 01 March 2004 |
| Author | Ohad Soudry |
| Subject Matter | Public policy & environmental management,Politics,Public adminstration & management,Government,Economics,Public Finance/economics,Texation/public revenue |
JOURNAL OF PUBLIC PROCUREMENT, VOLUME 4, ISSUE 3, 340-374 2004
PROMOTING ECONOMY: ELECTRONIC REVERSE
AUCTIONS UNDER THE EC DIRECTIVES ON PUBLIC
PROCUREMENT
Ohad Soudry*
ABSTRACT. The reverse electronic auction is a new competitive bidding
procedure adopted by the recently enacted European Community (EC) directives
on public procurement. It is submitted that the electronic reverse auction has the
potential to reduce the tension between the European Commission and national
policies of procurement, as it can decrease contracting costs, increase
transparency and achieve better economic outcomes as a result of increased
competition. This paper relies on auction theory in order to support such
statements. A comparison between the traditional sealed-bid method and the
reverse auction is further provided.
INTRODUCTION
Public procurement can be defined as the supply chain system for the
acquisition of all necessary goods, works and services by the state and its
organs when acting in pursuit of public interest (Bovis, 1998, p. 11). In
order to perform their legal duties, most governments in western
countries resort to the ordinary markets and procure via means of
contractual arrangements in order to meet their needs.1 A recent report
conducted by the European Commission (EC) estimates total public
procurement in Europe in the year 2002 as amounting to €1.5 trillion,
representing 16.3% of the Union’s GDP.2
Public procurement was identified as a key obstacle to intra-EU trade
in the European Commission’s (1985) White Paper, “Completing the
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* Ohad Soudry is a Ph.D. candidate at the Institute of Law and Economics,
University of Hamburg, Germany, and currently a visiting scholar at Columbia
Law School, New York. His research interests are public procurement and Law
and Economics.
Copyright © 2004 by PrAcademics Press
ELECTRONIC REVERSE AUCTIONS UNDER THE EC DIRECTIVES ON PUBLIC PROCUREMENT 341
Internal Market.” The paper dedicated a substantial size of the report to
public procurement and highlighted it as “one of the most evident
barriers to the achievement of a real internal market” (European
Commission, 1985, p. 23). Despite the enormous progress of economic
integration in Europe since then3 and the establishment of the internal
market, recent empirical data suggests that direct cross-border
procurement in Europe accounts for only 3% of the total number of bids
submitted by the sample firms, and no more than 30% of indirect cross-
border penetration (i.e., foreign firms using local subsidiaries) (European
Commission, 2004, p. 2).
Against this background, the legal discussion on public procurement
in the EU focuses primarily on ways and means to dismantle preferential
purchasing patterns of member states in order to open up the market for
effective competition between entrepreneurs without fear of
discrimination on grounds of nationality. Transparency and equal
treatment in public procurement play a central role in the effort to
establish the single market, as envisaged by the Treaties of Rome and
Maastricht. The directives on public procurement, adopted in order to
achieve these targets, are based on principles such as community-wide
advertisement of contracts, the banning of discriminating technical
specification, and the requirement that contracts will be awarded on the
basis of objective criteria. The latter is achieved through the application
of commercial criteria such as value for money, efficiency and
competitiveness. However, from the EC’s perspective, these alone are
not objectives of the directives (Arrowsmith, 2002).
On March 31, 2004, after extensive consultations with contracting
authorities and businesses, the European Parliament and the Council
have adopted a new legislative package on public procurement, which
aims at modernizing, simplifying and rendering more flexible the
existing legal framework.4 The directives, which follow the debate
launched by the 1996 Green Paper on public procurement (European
Commission, 1996), try to mitigate the developing tension between the
Commission’s goals to support non-discrimination, transparency and
openness of procurement procedures which has been done by complex
and rigid procedures- and the quest of contracting authorities at the
national level to promote commercial and non-commercial policies such
as efficient procurement process, value for money, and social or
environmental considerations.5
342 SOUDRY
One of the fields in which the new directives adapt to modern
administrative needs is the use of information and communication
technologies and the adoption of fully-fledged electronic procurement.
The new directives have recognized the advantages of using electronic
auctions as means to allocate contracts in a more efficient and
transparent way and have adopted specific rules governing the use of
such a procedure.
Economic theory suggests that, if used properly, auctions have the
potential to improve value for money, efficient allocation of resources,
and transparency in the process of awarding contracts. This paper is an
attempt to shed additional light on the advantages of auctions as a means
to award contracts. This is done by studying economic theory, which
treats auctions as games with incomplete information, in which players
make rational and strategic decisions, depending on decisions made by
all other players. A comparison between the electronic auction and the
traditional procedures is also provided.
COMPETITIVE BIDDING AND EC PUBLIC PROCUREMENT POLICY
Interestingly, almost all national, regional and international
regulations of public procurement use the same procedural regime to
govern procurement practices, which is the requirement to conduct
competitive tendering. At state and local levels, competitive bidding is
used to provide the public with low-priced, high-quality contracts, to
fight corruption, and to provide equal opportunities to all firms to enjoy
the benefits of a contractual relationship with the government. One of the
main objectives shared by most national public procurement systems is
‘value for money,’ which requires that contracts be awarded to tenderers
who offered best terms of contracting possible. This, of course, does not
mean that a contract should be always given to the tenderer who offered
the lowest price, but rather that the total evaluation of all elements which
compose the offer would be the most suitable for the authority’s
requirement and would be the most favourable in terms of cost and
quality evaluation. Competitive bidding plays an important role in
pursuing value for money, as it has the capability to generate competition
on the supply side and thereby allow contracting authorities to enjoy, at
least in some cases, a monopsonistic position.6
At the European level, public procurement is first and foremost
subject to the general provisions of the EC Treaty, such as the four
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