#17 - Grith Skovgaard Olykke (Copenhagen Business School)

Abnormally low tenders in public procurement


Interview with Dr. Grith Skovgaard Olykke, Associate Professor at the Copenhagen Business School about abnormally low tenders in public procurement and mixed methods research (law and economics).

 

Transcript

It’s great to finally have you here, and I’m very grateful that you accepted the invitation to be on the programme, and also to be one of the referees in the Early Career Research conference that we’re setting in for early March, and I was very happy with the kind of work that you did on selecting the participants.

Oh you’re welcome, and thanks for inviting me to participate.

 

Yeah, I’m looking forward to the conference, but we’ll leave that for the end of the show. Speaking about abnormally low tenders, this is your, I would say, your main area of research so far in your career, can you start by explaining us a little bit what are abnormally low tenders?

Well that’s a very good question to start with because there’s no clear answer, and that’s why it’s such an interesting research topic, I think. Basically there’s some agreement that there’s no definition of abnormally low tenders, which means that there’s a lot of discretion with authorities and with the national review bodies. Basically I think the idea is that the tenders are perceived to be abnormal though they don’t appear serious. But, then again, that’s a lot of discretion into defining what serious means. A general idea is also that there might be a risk that the contract might not be performed on the terms, and that could also indicate an abnormally low tender. The Courts of Justice has not been asked specifically what an abnormally low tender is, and hence my interest in this topic.

 

Yeah, I agree with you. One of the things that has always surprised me about abnormally low tenders, in addition to the fact that it’s not very well-defined, and the fact that is a very important limitation, a very important consideration in the whole area, what I find interesting as well is that even if a tender is found abnormally low, there is no obligation from the contracting authority to actually exclude such tender from the contract, it can still keep it.

Yeah but that was sort of the 2004/18 approach. Now with the new directive there’s actually an obligation to verify and to reject abnormally low tenders under certain circumstances. So that’s going to be very interesting to see what’s going to happen with the case law on this topic in the future.

 

Well, I hope it changes the practice because, for me, it never made much sense in the old directive that we would have a situation whereby a tender may be abnormally low but there would be no consequence for such tenders, so let’s keep an eye open for the near future on that area. In terms of the research that you’ve already done on abnormally low tenders, what have you found out that is important about this area?

Yeah well, to begin with, with my thesis, when I started, I was fascinated by this lack of a definition, so I set out to actually find out, with an EU law perspective, what is an abnormally low tender, and what I started out with was to think about where else do we have rules on low pricing. Obviously this would be competition law. What I did was to try to argue that a well-developed legal tool from competition law could probably be transferred into public procurement law, so I’m not talking about using competition law, I’m talking about utilising a tool developed in competition law to assess pricing in a procurement context. I call this the coverage of cost approach, because obviously competition law talks about you have to cover certain costs. So I tried to sort of transfer this into a procurement context. I think the approach is appropriate, in particular regarding arguments of coherence in the EU legal system, because if there is a difference between an abnormally low tender and a situation where a low price breaches competition law, there will be a risk of exploitation, of the public procurement context to distort competition and exclude competitors. So I think there needs to be coherence here, and that was one of my basic arguments.

 

In addition to that, and moving on a little bit to the work that you’re doing today, what has changed in the way that you are treating abnormally low tenders or the way that we should be treating abnormally low tenders?

I think so far we’ve had a situation where you couldn’t really do anything in these cases, unless the tender had been rejected. What I’m looking at the moment is Danish case law and Swedish case law on abnormally low tenders, and I see, a lot of these cases were the acceptance of low tenders has been challenged, but with no success because there’s no obligation to reject such tenders. I think it’s interesting to see what’s going to happen now with the obligation in the new directive where actually sometimes, having to reject abnormally low tenders when they’re low on certain grounds. That’s the Article 18(2)[?? 06:06] grounds, the social, developmental and labour law obligations that need to be adhered to. When you’re pricing a tender, obviously your price needs to reflect these costs . I think what we will be seeing, is going to be a massive change because now you’ve got a right to challenge the award to a low price tender, and this could be very interesting to see what’s actually going to happen. I think we’ll see a lot of case law and also think that the approach that I proposed in my thesis is actually supported by the new obligation to reject tenders, because as I mentioned, the tender has to reflect social and economic obligations. So, I think it’s a very interesting time for this topic.

 

What jurisdictions are you covering in the current project?

The current project is an interdisciplinary project, so I’m working together with Swedish economists. The law part is looking at what is the concept of an abnormally low tender in Denmark and Sweden, and there are differences I can already feel are there. And the economist is going to look at what kind of strategies might be identifiable in these cases, so what kind of strategic pricing might we see, and together then we’re going to look at how should strategic pricing that we see in these cases be handled legally, and also we’re going to try to say something about what’s going to change with the new provision and the obligation to reject.

 

On that note, do you think that there’s a relationship there between abnormally low tenders and what economists call the winner’s curse in auctions?

That’s not what we see.

 

It’s not what you see?

No, it’s not what I’ve seen in the cases that I have looked at so far. What I see in the case law is more the economic concept of unbalanced pricing, maybe?

 

Sure.

So some prices high, some prices low, according to what you expect demand might be, and it’s all the prices are collected in the assessment of the price, then you could have a good score on the price, even though your tender is actually going to be more expensive for the contracting authority because you’ve higher priced some of the items, that’s going to be demanded a lot, or that’s going to be the main part of the contract, but since other price items weigh the same in the assessment, then you have a very good price and you score well on the price. So I think that’s what I’ve seen so far, but I’ve only just started to go through the Swedes’ case law now and there’s a lot of judgments . It’s also acknowledged by the Swedish court that we see strategic pricing and basically that it’s OK.

 

Well, that reminds me, it connected with something that we’ve not talked about, which is additional works. I mean that reminds me, when I was a lawyer, and this was before the directive 2004/18 was [?? 09:05 resposed] into Portugal, I remember being a procurement lawyer and having discussions with clients, both private and public, about the sustainability of certain bits, and pretty much everyone in the specific sector, which I’m not going to disclose, obviously, they always under-priced their bids at least 25% because the Portuguese law at the time allowed them to, during the contract performance, to find ways to claw back those 25% legally. Things changed a little bit and the Portuguese law now imposes a 5% limit, so I don’t know if that’s changed the practice in Portugal or not. Now, what may happen nowadays, which, if I recall correctly in the directive, there’s not a hard limit or very strong limitation on additional works as it was in the past, what you may see is that there will be a tendency for suppliers to under-price their offers, their bids, precisely because they think that once they get the contract, they may try to make it up in additional works in, or additional services.

Yeah, yeah, I agree. You are referring to Article 72 on amendment of contracts,? I agree, and I think maybe the obligation to reject abnormally low tenders sort of goes in the other direction, because at least you have to share that some of the specific costs are covered in the tender, otherwise it would not make sense having an obligation to reject. So it could go both ways I think, but you’re right that the discretion to change the contract after it’s been entered into, puts at risk that you have to pay extra for the same.

 

Yeah, I agree with you in that as well. So looking a little bit further down the line, into the regulation, what do you think that we should do regarding abnormally low tenders? Do you think that the decision by the lawmakers, including mandatory exclusions of abnormally low tenders in the current directive, is a good thing or we should move back to the old system?

Oh, I think it’s a very difficult question, and I’m not sure that I’ve actually made up my mind.

 

That’s fine.

I think we have to see what happens, you know, what kind of cases we’re going to get. I know that in the Swedish practice I’ve been looking at, this is very preliminary research results, we already have quite a lot of cases on hourly wage, you know, you should have a specific hourly wage in your tender, and that’s sort of, something that I think we’ve got to discuss in the future, and I don’t know quite how this is going to end. So I think I’ll sit back a bit and watch and see what happens before I make up my mind.

 

Let’s explore that a little bit because that is a topic that is creeping up here in the UK as well, and at least some, I would say, some guidance, and if I’m not wrong as well, at least in the Scottish position of the directive, which is an effort to put the floor on the wages, which might be different than the minimum wage here in the UK.

Yeah.

 

Is that what’s happening in Sweden as well?

Sweden’s a bit complex because they’ve got a “problematic” collective agreement system. They’ve been challenged with the Laval case, and they’ve made some changes. It’s the same here in Denmark, we don’t really know what the minimum wageis. So we’ve got some issues. I think what they have been doing is trying to sort of fix a minimum hourly wage but not necessarily with reference to collective agreements, and some of the tenderers arguments in the case law that I’ve read is that we are actually adhering to the collective agreement but the minimum wage set by the contract unfortunately was higher than this. But it’s not really been explored by the courts, so I think maybe it’s the same trend we’re seeing in the UK, but there’s not been any arguments regarding the posting of workers directive, etc, because it’s been national cases.

 

Yeah, OK, makes sense. Moving onto the second topic that I would like for us to focus on today, which is your experience with interdisciplinary research. So as I said at the start, you have a mixed law and economics background, I think that it’s a very interesting mix of skills and approaches. What has been so far your experience in trying to bring those two different, let’s say, frameworks of thought into research?

Yeah, I guess I’m a bit biased because, as you said, I’ve got this business administration and commercial law education, and I’ve got difficulties letting economics, leaving economics completely out of my mind-set, not that that’s a necessarily good thing to do. So, I’m always thinking economics when I’m doing my research, and what I’ve tried to do recently is to team up with economists to do interdisciplinary research. I’ve focused mainly on law myself, but I’ve got some ideas of the economics that could be interesting to do as well, and then I’ve teamed up with an economist to do that part, and that’s been really fruitful and interesting for me.

 

So why do you prefer to bring on board an economist instead of doing it yourself, the economist’s bits, so that you can focus on law? Why do you do that? What is the benefit?

Well the benefit for me is that I’ve majored in the law since I finished education in 2006, so my economics is a bit rusty. I’ve got some of the general ideas and I just want to make sure that if I do research then the economics should be an appropriate level as well.

 

Yeah, that makes sense. I mean, that’s one of the things I’ve noticed which is there’s only so much you can do coming in from a different discipline.

Yes.

 

It’s good if you are able to bring, let’s say, some tools off a different discipline into our own. So for example, for my PhD I used social sciences research methods, and certainly I would like to use quantitative research methods in the future, with my research. But at the end of the day I’m also very aware of my own limitations.

Yeah, exactly.

 

And mine are even more pressing than yours because you have an education, an economics background, you have an education in economics, I don’t, so I left maths and all that section of knowledge in my education when I was 15 or 16.

Yeah.

 

So I think that is a very important shortcoming in my view about legal education in general, is that it does not foster in the students the development of those quantitative skills, and that’s something that, for example, I would like to work for in the future as well. But going back to the research, as time goes on, one of the things I’ve noticed is that, especially for us lawyers or legal minds, it’s very hard to have, I wouldn’t say complete but a realistic view about the problem if all the skillsets that are brought to bear in that research, are legal skills.

Yeah, I agree with you, I think it’s very important to have alternative disciplines or other disciplines having a look at the problem as well. Sometimes it’s completely new perspectives and I think it’s very important to actually get one step further, or, not just one more, but some steps further by bringing in another discipline. A very good example of this is a paper that has just been published in the European Journal of Law and Economics, which I co-authored with an economics professor on the concept of services of general economic interest, because it was something that I’ve been wondering about for a while, and I know that different people have tried to say something about, what are the services of general economic interests, from a legal perspective. So I talked to this professor, whom I taught a course with, that also concerned services of general economic interest, and we decided to try to work out what would be the economic point of view on this concept, and we ended up doing a very interesting article, I think, I had good fun doing the research, and we had great discussions on how we could bring economics into this concept which was mainly legal.

 

I agree with you because in my own research, what I’ve seen, and this is, as I said, an idea that has developed, that I’ve developed as time goes on, is that in the end, I mean, the legal perspective, it’s a means to an end, and that’s something that to me, as lawyers, sometimes miss out, we think that law is an end in itself. So when you’re drafting the laws, you’re thinking about the legal implications and not the wider implications of the law, and when we’re interpreting it, we’re just looking at the legal issues and the legal consequences instead of looking at actually what are the real consequences of whatever legal interpretation we are suggesting.

Yeah, we’re limited in that way, aren’t we?

 

We are, we are, but we’re so full of ourselves [?? 18:03] think, no no, what is relevant here is the legal solution, is the legal issue, and I said, no, I don’t say that’s the truth, the truth is, yes, there may be a legal issue and there may be a legal solution, but they are means to an end.

To solve this question.

 

Yeah, if we just bring the legal frameset into discussion, we are limiting ourselves in the way that we can actually make any changes and make an interpretation that is not only, let’s say, legally irrelevant but also relevant and consistent with what is out there in the world.

Yeah, yeah, exactly. And I think there’s a problem with the law in general because the law is sort of a democratic outcome, you might say. Sometimes you spot that there are inconsistencies and different incentives combined in the same legislation, which doesn’t make sense at all. And we can use economics as well to look at the inconsistency.

 

I find that interesting as well. So one of the things I say, or I did say when I was teaching procurement law to students was if you look into the old [?? 19:26] services, you can easily find out who are the strongest lobbies in Brussels.

Yes.

 

And I’ve always been amazed, for example, with the exclusion of legal services, I mean, there is no actual difference, in the end, that would justify the special treatment.

Yeah, yeah, true.

 

So I find that interesting, so that is more of a criticism to our shared background in law than anything else.

I think it’s more politics than law, isn’t it?

 

Yeah it is, it is more politics than law, but the thing is, again, it’s more politics than law but it ends up in law.

Yes, exactly.

 

So, to finish it off, what have you been able to get from having economists working with you in your research that you have not been able to get by yourself, even though you have an economics background?

I think it’s the insurance that economic methodology is correct, you know, there are experts on the topic, and you can choose an economist for what you need in your research, OK, because they’re so specialised on their specific theories and methodologies. So I think by bringing economists in you get an expert on a specific methodology or theory that you couldn’t bring in yourself, even though you have some ideas about economics and you’ve read all the general theories. And I think that’s very important. And they’ve also got, the people that I’ve been working with, some skills in, for example, handling of data that I’ve not been exposed to during my education. I think, they are specialists as well as we are, you know, so I think it’s appropriate to acknowledge this and bring economists in rather than just feeling that we can do it all ourselves by sort of general assumptions or reference to general theories of economics. I feel limited, you know, in economics because I focus so much on law. Even though, maybe I could study or maybe I could read up on things but I would be sure to miss something, so I’d rather bring in an expert from another discipline.

 

Yeah, I think that’s a very sensible approach. One of the things I’ve noticed as well is there’s a huge gulf between our language, the legal language, also the economist’s language, so sometimes it’s difficult to bridge that gap, and looking at your CV, the kind of work that you’ve done with economics, and obviously perhaps because you’ve had an economics background, it’s clear to me that you are able to communicate and bring together and draw out the knowledge from economics by using, [?? 22:04] from economics but also being able to develop your own ideas, you know, research by having good conversations with them.

Yeah, yeah, true. That’s one of the advantages of my background, I think, because I know what they’re talking about and I think it’s interesting to actually try to bridge those different terminologies between law and economics and just sort of an anecdote, the first job I had was actually as an economist in a consultancy house, and I was brought in in order to bridge the terminological or linguistic gap to the lawyers, you know. So that is a real issue where I think you have to be really open and ready to discuss these issues, but be open to the other approach from economics and other disciplines.

 

Yeah, I think that’s, again, a very sensible approach, and a great way to end the interview. So, thank you very much Grith.

You’re welcome.