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The impact of the new Transparency Act on public procurement

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In June, the Norwegian Parliament passed the Act relating to companies' transparency and work on fundamental human rights and decent working conditions (the Transparency Act). When the Act enters into force, it will be important for both public contracting authorities that announce competitions and for companies that want to participate in those competitions.

The impact of the Act on public procurement

The Public Procurement Act Section 5 already requires contracting authorities to have suitable routines for promoting respect for fundamental human rights in public procurement, but does not provide any further guidelines on how this is to be done in practice. The new Transparency Act can thus affect competitions for public contracts in several ways.

First, it is likely that the Act will set a standard for contracting authorities' ethical requirements. It will be easier for contracting authorities to have a statutory standard to lean on instead of designing their own requirements. This will mean that also companies that initially are not covered by the Act must comply with the law when entering into contracts with the public sector. Even before the Act has entered into force, we have seen that some contracting authorities set ethical requirements close to the requirements pursuant to the Transparency Act. Sykehusinnkjøp HF's acquisition of wholesale goods is an example of such practice. Sykehusinnkjøp required the suppliers to perform due diligence related to employees' rights in their own company and in the supply chain, follow-up of findings and policies in the contracts with subcontractors and requirements to report any findings to the contracting authority.

Second, censurable conditions that are revealed as a result of the reporting requirements may lead to the supplier being rejected from tender competitions. According to the Procurement Regulation Section 24-2 (2) f), the contracting authority shall, for example, reject suppliers that have participated in human trafficking or child labour and have not carried out sufficient "self-cleaning" in accordance with Section 24-5. The Procurement Regulation Section 24-3 c) gives contracting authority the right to reject suppliers that do not comply with provisions on the environment, working and social conditions as stated by the Norwegian law. The Transparency Act will make information about such matters more accessible, and it is therefore likely that these rejection rules will be used more often in the future.

Duties, subjects of duty and entry into force

The Act applies to all larger companies that sell goods and services in Norway, as well as Norwegian companies that sell goods and services abroad. The Act requires the companies to carry out due diligence related to human rights and decent working conditions, to publish annual summaries of these assessments and to provide access to anyone who so wishes. The reporting obligation includes both own business, business partners and subcontractors.

The purpose of the Act is to promote companies' respect for fundamental human rights and decent working conditions in connection with the production of goods and services, and to ensure that the public has access to information on how negative consequences of these rights are handled.

Companies that, for example, have subcontractors in countries where child labour is widespread, must investigate whether subcontractors use such labour. If that is the case, the company must report the violation and take measures to cease the practice. Such measures may, for example, involve setting requirements for the subcontractor, offering training or, at worst, changing subcontractor.

The Act defines "larger companies" as companies that are either covered by the Accounting Act Section 1-5, or that meet two of the following criteria: Sales revenue of MNOK 70, balance sheet total of MNOK 35 and/or have employed more than 50 man-years. However, as mentioned above, the Act may also affect the suppliers that are not regarded as "larger companies" if contracting authorities choose to implement similar requirements in their contracts.

The Act applies from the date determined by the King in Council. No official signals have yet been given as to when the commencement will take place. In comparison, the German Transparency Act, which was passed at about the same time as the Norwegian one, enters into force on 1 January 2023.

What should suppliers to the public sector and contracting authorities do now?

Suppliers that participate in competitions for public contracts may have to implement and/or make adjustments in their systems to ensure protection of human rights and employees' working conditions. Most large companies already have compliance programs that require to comply with human rights and fundamental employees' rights. Moreover, larger companies will also have experience in reporting on social responsibility pursuant to the Accounting Act Section 3-3 letter c, and in providing access to information concerning the environment pursuant to the Environmental Information Act Section 16.

Nevertheless, many companies will probably have to adapt their management documents and routines somewhat to ensure compliance with the Transparency Act in its entirety. In particular, the right to information will probably require compliance officers to set aside resources and time to deal with potential requests for information from journalists and human rights organizations. The Act requires that such inquiries are normally answered within three weeks, or two months in case of extensive information requests.

A first step may be to go through the Norwegian Agency for Public and Financial Management high-risk list to examine which risk factors one is exposed to. There are also several useful links that can provide an overview of country-specific risk, such as MVO's CSR Risk Check.

Since the duty to provide information also applies to subcontractors, and subcontractors' conditions may also affect the main supplier's opportunity to participate in competitions for public contracts, it may be necessary to ensure that agreements with subcontractors give Norwegian companies the right to receive information on how the company complies with human rights and employees' rights in the countries they are active in. The Norwegian Agency for Public and Financial Management has prepared draft contract terms that can be used for this purpose. These are admittedly designed for contracting authorities, but can also serve as a starting point for contracts with subcontractors.

It will be important for contracting authorities to reflect on which reporting requirements will be feasible in practice. The general principle of proportionality in procurement law means that the contracting authority cannot set requirements that are unreasonably burdensome in relation to the value of the procurement. If the contracting authority wishes to set more detailed requirements for information and reporting than the statutory minimum requirements, the scope of these requirements should be formulated as precisely as possible. This ensures equal treatment and predictability. Such specific requirements may be relevant if the contracting authority is aware of industry-specific risk factors entailing particularly high risk.

Furthermore, it is important that contracting authorities ensure to follow up the requirements that were set after the contract has been entered into. If it turns out that the selected supplier in practice does not live up to these requirements for risk analysis and reporting, this may constitute a breach which means that continued use of the supplier will be an illegal direct procurement, unless the contract contains sanction mechanisms that are used by the contracting authority. Employees who are responsible for following up the contracts should therefore have good routines for assessing whether the requirements are complied with, and whether sanctions should be imposed.

The requirements for businesses related to compliance with human and labour rights have come to stay. In addition to the Norwegian Transparency Act, several countries are considering similar regulations. EU is also working on the Human Rights Act for businesses. The earlier business adapts, the easier compliance will be.

This article was first published on Anbud365.no

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