Legal report on the compliance of below-cost bids in service concessions with public procurement principles

Professor José María Gimeno Feliú, Chair of Administrative Law at the University of Zaragoza, considers that below-cost bids in service concessions are legally unviable.

This is due, among other reasons, to the fact that in public service concessions the idea of an optimal level of management must prevail, and therefore a risk model based on below-cost bids is not admissible, as it calls into question the sustainability of the partnership model and compromises the public interest.

In the concession model, especially when linked to “public service” provisions, the general interest must prevail over business strategies, and therefore a bid that jeopardizes the proper provision of the public service can in no way be accepted as valid.

Professor Gimeno Feliú recalls that European public procurement law now uses the qualitative component of the service as an element in deciding the most advantageous bid. This is a highly significant change, and explains why the new regulation under Article 146 of the LCSP (Public Sector Contracts Act) no longer includes price as the main concept, but rather costs or profitability. In this context, it is clear that below-cost bids, pursuing an aim that is far removed from the very rationale of the public-private partnership model, find no legal justification whatsoever, as they compromise the public interest and the principles of competition law.

Furthermore, the possibility of submitting below-cost bids departs from (or breaches) the regulatory principles of public procurement — particularly those linked to the general interest in concession models — and could, through a secondary market for concessions, foster a “subprime bubble” in the concession sector, whereby service concessionaire companies would take on economically unviable portfolios. This would jeopardize the proper fulfillment of the service and, consequently, the public interest, which is why a below-cost bid should be considered illegal and grounds for rejection by the contracting authority.

Setting prices below market value, within the balance and tension that must be maintained between the principles of efficiency and competition, must prevent below-cost bids from causing dumping aimed at eliminating competitors — a practice that, as is well known, is prohibited under competition law and effectively results in unequal treatment among bidders.

Based on all of the above, Professor Gimeno Feliú states that the tender specifications themselves should include an express provision that below-cost bids or predatory pricing will not be accepted, as they compromise the proper fulfillment of the concession’s objectives.