7.1 Introduction
Buyers and sellers, producers and consumers, investors and traders: all these entities can be defined as market actors in as much as they play a role in the market by interacting with each other to exchange goods, services, works, financial instruments and information. This interaction may result in determining, conditioning or influencing the supply and demand, the prices and, more in general, the market dynamics and efficiency, the distribution of benefits and costs and ultimately the very existence or behaviour of other market actors.
Whereas, however, the role played by states, firms or individuals in shaping the market has been extensively researched and studied, there is virtually no research and speculation on the hypothesis that international organizations can be market actors and have an impact on the market and on the single entities which are part of it.
The immediate objection to this last statement is, of course, that there are international organizations that have as institutional and primary mission, precisely that of regulating markets – the World Trade Organization among others – or of providing rules for regulating market exchanges (the UNCITRAL, for instance) and that these organizations, as well as the function performed by them, have been analysed and discussed in the literature.Footnote 1 Indeed, it is not these organizations, nor their specific institutional mission that are the primary focus of this chapter, although they will be part of the analysis.
Rather, the scope of the chapter is transversal and includes international organizations in general, so also those whose institutional mission does not pertain to markets at least prima facie and, rather, is guided by a wider range of political and social objectives, in addition to the economic ones, that international organizations may pursue, from peace and security to humanitarian aid, from environmental protection to food security.
In line with an approach more sensitive to the economic aspects of international organizations,Footnote 2 the questions that this chapter aims to address are, thus, first and foremost, whether there is a connection between international organizations and the market – including those organizations that do not have institutional objectives directly related to the market; and, more precisely, whether international organizations can be considered to be market actors and to what extent they have an impact on the market and on other market actors. If this is ascertained, the following question should be how international organizations shape the market; in other words, what are the means and mechanisms through which international organizations inform the behaviours of other market players? Finally, if the impact on the market is significant or at least non-negligible, a problem of accountability emerges which needs to be discussed: are international organizations accountable in shaping the market?
These questions do not stem from a theoretical and generic hypothesis about the connection between international organizations and the market, possibly based on an analogy between international organizations and governments (and their influence on the market). Rather, they originate from the empirical observation of a growing but overlooked phenomenon, that of the relationships between international organizations and private businesses, mainly for procurement purposes, that is, to procure goods, services and works for, directly or indirectly, carrying out the international organizations’ mission.
Procurement by international organizations has been, in fact, the subject matter of some studies.Footnote 3 These have provided an analysis from the point of view of the relationships between international organizations and private subjects, assessing the extent of the rights and duties originating from this relationship.
The present contribution intends to build on these analyses and enrich those findings by adding a different perspective, that of the market. The aim is to bring the conceptualization of international organizations a step further, adding a new dimension to the existing analyses and exploring the role of international organizations as market actors, beyond the specific institutional mission of some of them.
In order to do that, the chapter is structured into three parts. Section 7.2 discusses the existence of a relationship between international organizations and the market, laying down its main features and identifying the different roles played by international organizations vis-à-vis the market. Section 7.3 explores the means and tools through which international organizations shape the market. Section 7.4 deals with the problem of accountability and assesses the effectiveness of the mechanisms through which international organizations are held accountable when shaping the market. Section 7.5 then provides some conclusions and suggests a way forward.
7.2 International Organizations and the Market: An Unexpected Relationship
International organizations such as the World Trade Organization, the World Customs Organization and the United Nations Conference on Trade and Development, but also the International Organization for Standardization or the International Maritime Organization, have as institutional mission to, directly or indirectly, promote and facilitate free international trade. They remove tariffs and barriers to trade by setting common rules and standards globally or regionally and, in some instances, by providing fora to resolve conflicts related to protectionist domestic policies. The idea underlying these organizations is an evolution of the liberal economic theories that connect free trade policies with higher productivity and economic well-being and, ultimately, with peace and security.
In order to carry out their institutional mission, however, all international organizations – and not only those committed to specifically promoting free trade – go on the market to procure goods, services and works. To do so they deal with private businesses following a set of rules and procedures that have been gradually and slowly developed and codified since the 1980s, and that only recently have acquired external relevance and publicity. In this way, international organizations create markets for certain type of goods, services, and works, and for businesses worldwide or established in some specific geographical area.
These institutional and legal phenomena, that is, first, the establishment, existence and functioning of specific international organizations whose institutional mission is to regulate the market and, second, the procurement by all international organizations, are the two main ways through which international organizations create a link with the market, influencing, conditioning or determining the behaviour of other market actors.
We could define the first type of relationship between organizations and the market as a direct institutional relationship, in that it is based on the institutional mission of the organizations and is directed to have an impact on the market, and the second type as an indirect instrumental relationship, being a consequence of an instrumental activity of the organizations, that of procurement and having an indirect impact on the market.
The relationship between international organizations and the market has, thus, two main manifestations which differ in several respects, namely the function of the international organization vis-à-vis the market, the market players that are involved in the relationship, the values and interests guiding this relationship and its economic impact. It is worthwhile to identify and discuss these differences.
7.2.1 Function: International Organizations as Market Creators, Regulators and Adjudicators
With regard to the function,Footnote 4 three main functions of the relationship between international organizations and markets can be identified: international organizations can create the market ex novo, can regulate it and can adjudicate disputes arising from the regulations.
International organizations whose institutional mission is to ensure and facilitate free trade mainly perform a market regulatory function and, some of them, a conflict resolution function. These organizations provide for principles, rules and procedures to facilitate trade and set the conditions for free markets. At the same time, some of them also add to this a function of resolving disputes arising from a possible violation of those standards, rules and procedures. In relation to the market, the function of these organizations is not to create a market ex novo, but to ensure that the market, potentially created by the interaction between individuals and companies from different states, functions in a certain way and under certain conditions, namely those of free trade. In other words, it opens up and expands markets that were there already, even if not fully accessible. Thus, the function is not related to the creation of a market but to the manner in which market dynamics are regulated and shaped; and to the compliance with the rules and procedures ensuring these dynamics. In this way, the function of creating the market remains in the hands of states and companies, while the function of regulating it is partly delegated to international organizations.
In contrast, in international organizations that do not have an institutional mission directly related to the market, the link between the organizations and the market responds to two different, yet interrelated, functions. As mentioned in Section 7.1, organizations turn to the market to obtain goods, services and works needed to carry out their institutional mission, whatever that may be. In doing so, they create a market, that of public procurement, which goes beyond state boundaries and is untied, at least apparently, from state decisions. Thus, international organizations create new market sectors as a by-product of their own procurement needs. The new market sectors, moreover, are regulated by the organizations themselves: they set the procurement rules and procedures and, in so doing, also define the way these sectors of the market operate. For example, they may be competitive or, conversely, driven by preferential or protectionist goals. A secondary function is, hence, to regulate these market sectors and provide market opportunities for local enterprises or, on the contrary, for enterprises incorporated in the countries financing the organizations. All international organizations, therefore, to a different extent, perform a creative function stricto sensu, that is they create a market sector and a regulatory function, restricting or expanding the commercial opportunities related to such sector.
In this type of relationship, however, regulation is not directed at states, as in the first type of relationship, but is addressed at the organization itself (and the bodies responsible for implementing procurement) as well as at companies or individuals.
Also, states intervene only indirectly in the rulemaking phase, as opposed to the other type of relationship in which market regulation is shaped by states themselves within the international fora of debate and negotiation.Footnote 5
Finally, a dispute resolution function is very rarely attached to this type of relationship. As we shall see in Section 7.4, very few organizations have established judicial or para-judicial bodies competent to oversee compliance with rules and procedures and, thus, indirectly also to ensure that organizations provide market opportunities consistent with those rules and procedures.
7.2.2 Market Players
Turning to the market players involved in the relationship between international organizations and markets, it has been mentioned that, in both types of relationships, the direct institutional relationship and the indirect instrumental relationship, international organizations, states and private actors are involved. The role played by each and their reciprocal dynamics, however, changes in the two relationships.
In the direct institutional relationship, the organization acts as a catalyst for states and their economic and trade policy options, defining shared standards, rules and procedures and, to some extent, ensuring compliance mechanisms to which states themselves are bound. Given the highly political and economic relevance of the subject matter of regulation, the rulemaking phase formally takes place within the organizations but substantially is the result of the negotiations between representatives of the states.Footnote 6 Furthermore, the implementation of the relationship between organizations and the market takes place through the activity of states.
On the one hand, states formally cede sovereignty to organizations in the definition of standards, rules and procedures, and this cession of sovereignty is consistent with the very object of regulation, namely the market: the goals of increasing market opportunities and making possible trade between companies incorporated in different states explain the necessity of an international forum for rulemaking.
On the other hand, states retain, on their own territory, a significant margin of discretion in the implementation of those standards, rules and procedures. The conflict resolution mechanisms set up in the organizations aim precisely at controlling the exercise of this discretion and ensuring that it is exercised within the framework of the standards, rules and procedures set up.
Finally, companies and individuals are the recipients and, in theory, also the ultimate beneficiaries, of market policies and rules, set by international organizations and implemented by states. The cross-border nature of trade obviously also creates a wide-ranging system of extraterritorial implementation: the implementation by states of these market standards, rules and procedures has an impact not only on the private entities incorporated in the state itself, but also on foreign private entities.
In the indirect instrumental relationship, the actors are, again, the organization, states and companies or individuals, but with different roles and scopes of activity. The organizations dictate rules and procedures, the implementation of which pertains to the direct responsibility of the organizations in direct procurement and of the states (but supervised by the organizations) in indirect procurement.
In this type of relationship, states and, in particular, the major funding states, certainly have an influence in the rule-making phase. Rulemaking, however, is formally the product of the international organization and their secretariats.
Furthermore, the role of states in the implementation phase of the rules and procedures is not institutionalized, at least in direct procurement. In indirect procurement, the implementation phase is entrusted to the states but is guided by the principles set forth by the organizations. That is to say, the relationship between international organizations and private entities is immediate, and not mediated: the rules and implementation by international organizations have an impact on private entities and on the market that is not formally mediated by states.
It should, however, be added that there are informal and primarily political forms of influence by states both in the rulemaking phase and in the implementation of procurement rules and procedures, and that these influences have the effect of widening or narrowing the market, making it more competitive or conversely more protectionist. So, while the impact that organizations have on the market is formal and direct, and, as seen, can create the market as well as regulate it, it cannot be ignored that states play a substantive and informal role in setting the direction of procurement policies and, thus, of the market.
Thus, comparing the role of the institutional actors, and in particular international organizations and states, similarities and differences can be detected. In the direct institutional relationship, where the market is already created by the states and they aim mainly to regulate it and eventually open it, it is the states that retain decisive decision-making power, albeit such power is exercised within an international forum and is subject to negotiation. The international organization maintains a role as a facilitator of confrontation and dialogue among states, as well as a role as a body that formally adopts standards, rules and procedures based on the legitimacy derived from its international nature and the delegated authority from states.
When, on the other hand, the organizations create a market from scratch and then regulate it, as in the case of the indirect functional relationship, the role of states is less obvious and takes place mostly ‘behind the scenes’. It is possible, however, to distinguish two stages. The market creation stage is almost entirely the result of an internal determination of the international organization: the market, as mentioned in Section 7.1, arises from a need for the international organization to function. In this stage, states have, if anything, a preliminary role in the moment they give their funding to the organization, enabling the organization to operate. In the market regulation phase, created by the operational needs of organizations, the source of regulation remains the organization. However, states exercise forms of influence, mainly through non-formal channels of representation. Rule-making takes place in collegial fora where the administrative officials of the organizations sit. These fora, even where they do not house formal state representatives, are nevertheless not impervious to state influences. States retain de facto power in guiding the direction towards which regulation might tend. Their influence is, moreover, present in the implementation phase of both direct and indirect procurement. By the implementation phase, we mean the phase during which contracts are awarded. The awarding of contracts is conditioned, within a certain extent and especially with reference to contracts of greater economic value, by the indications of certain states, in particular the financing states.
7.2.3 Values and Interests
Different values and interests underlie the two types of relationships between international organizations and the market. The direct institutional relationship is linked to the mission with which international organizations are entrusted. The underlying idea of these organizations is that a global market, with harmonized rules, without internal barriers or with barriers allowed only exceptionally, can contribute to increasing collective material well-being by giving firms opportunities for trade and exchange across national borders. These opportunities come from the aggregate of consumers pertaining to foreign states, whereas in the indirect functional relationship trade opportunities come from the organization itself. Of course, these guiding values may be counterbalanced by the interests of states that, from time to time, in specific circumstances or for certain sectors, prefer to maintain protectionist policies.
The values and interests underlying the indirect instrumental relationship, on the contrary, are not necessarily those of the free market. Instead, at least three different set of values and interests can be identified. The first is closely related to the operating needs of the organizations. In carrying out their procurement activities, there are internal interests that drive the organizations and have an impact on the market: economy of resources and efficiency of administrative action generally have a restrictive impact on the market. Economy and efficiency, in fact, result in faster, less publicized, non-competitive and hard-to-access procedures, and the market is, thus, limited and accessible to few companies.
These underlying interests, however, pertain to the international organization as an administration. When one shifts the focus from international organizations as administrations to international organizations as political entities and institutions promoting policies for growth and development, then one also sees how, in procurement and in the market created by procurement, administrative interests combine with institutional and political values. Indeed, the values underlying the regulation of the market derived from procurement are infused with those deriving from the mission carried out by the international organization. For example, in some cases procurement procedures are regulated in such a way as to favour market access of local economic operators through preferential treatment. In this way, employment of the population and development of the area should be promoted, at least in theory. This is the so-called domestic preference in procurement contract award.
Values related to the organizations’ institutional mission then intersect with the economic interests of the actors involved, including the organizations themselves. For them the need to exist and operate plays a determining factor; and this possibility depends on funding from member states. It becomes, therefore, crucial to secure the support and funding of some states. At the heart of this type of relationship between organizations and the market are, therefore, again the states, particularly the funding states. Their interests are to ensure that the market created by the organization guarantees a return on the funding and translates into business opportunities for their companies. For example, making a contractor selection process highly competitive can favour large companies from developed countries over small local companies from developing countries. But the opposite can also happen, that is, carrying out opaque procedures to favour companies from donor countries.
The market, created by the organizations, is thus regulated within this triangle of influences in which the values associated with the mission of the organizations can be distorted by the varying synergies between the autonomous administrative interests of the organizations, the interests of the organizations related to state funding and the interests of the funding states. The picture is, therefore, much more articulated, nuanced and dynamic than in the direct institutional relationship.
7.2.4 Economic Impact
Another of the dimensions of the relationship between international organizations and the market is the economic impact the former produce on the latter. Of course, economic impact is a varied concept that can include the movement of monetary flows and the complex of business opportunities for individuals and firms, but also the conditioning on the operations of companies.Footnote 7
Thus understood, the economic impact of international organizations on the market differs depending on whether it is a direct institutional relationship or an indirect instrumental relationship.
With reference to the first type of relationship, the economic impact that organizations have on the market is broad, varied and difficult to measure. There are, however, attempts to quantify this impact. For example, if one takes the WTO, the overall economic impact will be given by the economic and trade policies that each of the member states has adopted in response to the international organization’s rules on barriers to trade. So, the measurement of the impact comes from comparing economic flows before and after each state joined the organization. Research by the UK Department of International Trade,Footnote 8 for example, highlighted how all WTO member states, albeit with differences, experienced significant economic growth subsequent to joining the organization:
[f]rom 2000 to 2016, the overwhelming majority (79%) of WTO members experienced a significant decrease in trade (export and import) costs as a result of WTO membership. … For a sample of 43 WTO members all these countries saw increases in both relative (compared to the rest of the world) aggregate exports and aggregate welfare as a result of WTO membership. The average increase in exports for this sample as a result of membership was 35%, from a high of 129% (Mexico) to a lower bound with 4% (Lithuania).Footnote 9
The economies that have benefited most from the organization’s membership have been those of developing countries, while those most resistant to the organization’s economic impact are the economies of former Soviet countries and small states.
The WTO is, of course, only one example, although one of the most relevant given its wide and varied membership and significant effects on the economy. Studies have been devoted to the economic impact of the European Union, even beyond the borders of the member states. Adopting a broader perspective, the theory of the ‘Brussels effect’Footnote 10 argues that European rules, in addition to creating a single market among member states, also shape the international business environment. Of other supranational organizations, as well as of development banks, something similar can be hypothesized, although to a lesser extent.
In general, the economic impact related to the direct institutional relationship has at least two main features.
The first is that the genesis of such economic impact is varied and multifactorial. Indeed, on the one hand, some studies have succeeded in drawing a causal link between the organization and market, measuring the impact of the former on the latter. On the other side, this impact is always produced in the context of a concomitance of factors that are also external to the international organization and that are decisive in enhancing or reducing its effect. As mentioned, WTO membership led to significant economic effects in developing countries but was almost irrelevant for former Soviet countries. In this first type of relationship, therefore, the impact of the organization is not autonomous: its effectiveness depends on competing factors pertaining inter alia to state size, the policies adopted by states and their macroeconomic choices.
The second feature is related to the first and pertains to the role of states. The impact on the economy of the direct institutional relationship has at least two generative factors, neither of which is in isolation sufficient to produce that impact: the first is the regulatory role of markets played by the international organization, the second is the implementation role by states, which are both advocates of their own economic policies and recipients of the effects produced by the policies of other states. The latter is crucial to ensuring the effectiveness of the former.
Shifting to the indirect instrumental relationship, it should be noted that the economic impact of this second relationship is, first of all, more easily measurable. Indeed, it can be hypothesized that it corresponds to the organizations’ expenditure on both their direct and indirect procurement. This expenditure is intended to be channelled through contracts concluded by international organizations or by states under the organizations’ supervision. It, therefore, corresponds to the set of business opportunities offered to companies and individuals by the organization (or states under the organization’s supervision) and, thus, to the market sector created.
In numerical terms, from 2012 to 2022, the United Nations agencies, for example, overall went from spending more than $15.3 billion on goods and services to spending $29.6 billionFootnote 11, a constant increase that followed a similar trend in the previous decade. Statistics also show which market has taken most advantage of the organizations’ resources. In 2022, for example, the companies that benefited the most from resources channelled through procurement of UN agencies were, in order, from the United States ($2.4 billion), Belgium ($1.7 billion), the United Kingdom ($1.3 billion), Denmark ($1.3 billion) and Switzerland ($1.1 billion)Footnote 12. In addition, the market sectors that got expanded by agency procurement were health, which remains the largest procurement sector of the UN system and obviously peaked in 2021 due to the COVID-19 response) ($7.6 billion), food and farming ($4.2 billion), construction, engineering and science ($3.5 billion)Footnote 13.
In contrast, the market created by indirect procurement, that is, procurement conducted by states under the supervision of the international organization and in compliance with its rules, is linked to individual projects funded by the organizations. For the World Bank, for example, the companies that benefitted most from the resources distributed by the Bank between 2000 and 2019 were Chinese companies, followed by Indian companies and Brazilian companies.Footnote 14 About half of the resources allocated to Indian companies went to companies in the United Kingdom and the United States, which are the fourth and fifth largest marketsFootnote 15 after China, India and Brazil. Although, therefore, indirect procurement seems to create significant market slices, mainly in large developing countries, it also creates significant market space for some developed countries, such as the United States and the United Kingdom.
So, overall, the economic impact of the indirect instrumental relationship has been positive especially for developed country markets that have benefitted from direct procurement and some, United States and United Kingdom, also from indirect procurement.
In this sense, the two features defining the economic impact of the direct institutional relationship are shaped differently in the indirect instrumental relationship.
The first feature, the one pertaining to the genesis of economic impact, is much easier to identify because it is mono-factorial, or at least weakly multifactorial, in the indirect instrumental relationship. In other words, while for the direct institutional relationship the impact of the organization on the market depends on the organization but also on many other factors connected to the state and inter-state relations, in the indirect instrumental relationship it is first and foremost the organization, its functional and operational needs and its internal policies that create, define and direct the market, especially in direct procurement.
The second characteristic, namely that pertaining to the role of states, is much more nuanced in the indirect instrumental relationship. In the direct institutional relationship, the reach of the economic impact of the organization is defined explicitly primarily by the states and their autonomous implementation policies. In the indirect instrumental relationship, on the contrary, the power that states have over the organization travels indirect paths and manifests itself in terms of influence, rather than as an autonomous determination of the policies that regulate the market. This influence is related to the type of relationship each state has with the organization: as the above statistics show, in direct procurement, and to some extent also in indirect procurement, the largest funding states are also those where the organization’s positive economic impact is mostly produced. In indirect procurement, the influence of the funding states is mixed and combined with that of the large developing economies, which, while not among the major funders of the organizations, claim their portion of the market by virtue of the institutional objectives of the organization; in the case of the World Bank, for example, growth and development of disadvantaged areas (Table 7.1).
| Direct institutional relationship | Indirect instrumental relationship | |
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| Function |
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| Market players (and their role) |
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| Values and interests |
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| Economic impact |
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7.3 How International Organizations Shape the Market?
Mention was made in Section 7.2 of the tools that international organizations use to create and regulate the market. It is worthwhile, however, to dwell on this point because the analysis of these tools and the understanding of how they work are useful with respect to the reflection on the accountability of organizations in their market relationships.
The distinction between direct institutional relationship and indirect instrumental relationship is central also in the identification of tools and their functioning: the two relationships the instruments put in place, while having a common basis, differ in their legal sources, structure, actors involved, effects, nature and content.
These tools have one common feature: they are set forth and regulated by rules, which translate policies. However, if we look at the sources of the rules we can identify some differences: in the direct institutional relationship the rules providing for these tools are included in the founding treaties of the organizations – market regulation is indeed one of the institutional objectives, set in the international agreements that eventually implement the institutional objectives and in the state rules that implement the international rules.
In the indirect instrumental relationship, on the other hand, the rules are set in secondary and internal regulatory sources of the organizations, such as, for example, financial rules and regulations and procurement manuals. In addition to these sources, there are no state legal sources in direct procurement. Within a certain extent, there may be state rules in indirect procurement but these can be applied only insofar as they are compatible with the principles and disciplines of the organization and under the organization’s supervision.
The difference is relevant from the perspective of transparency and accountability. Primary rules, such as treaties and international agreements, tend to be formed and decided in international fora, with the participation of states and the publication of both the preparatory works and the final outcomes. The same cannot be said of rules produced internally by the organizations: they are shaped in the context of meetings, whose proceedings are not made public, and which are composed of officials of the organizations without formal state representation.
Thus, in the direct institutional relationship rule-making for the market is characterized by greater transparency vis-à-vis the public, and by inter-institutional accountability, guaranteed by the representations of the states. In contrast, rule-making for the market that originates from the indirect instrumental relationship appears more opaque and more untethered from accountability mechanisms.
Looking then at the structure of regulation, this takes the form of a double layer structure in the direct institutional relationship and single layer in the indirect instrumental relationship. In the first type of relationship, in fact, market regulation is the result of a double layer of rules: those dictated by the international organization and those adopted by states to fulfil the obligations arising from membership in the organizations. In the second type of relationship, there is a single layer of rules that are dictated by the organization. It is possible, as mentioned, that in indirect procurement there is a double layer of rules, those of the organization and of the states receiving funding, but the latter are not adopted to implement the organization’s rules. Rather they are pre-existing domestic rules that the organization allows us to use but only insofar as they are compatible with the organization’s principles and discipline.
The double layer of rules in the direct institutional relationship allows for different forms of democratization of the rule: the international rule is the result of negotiation between representatives of member states, delegated on the basis of a democratic albeit very indirect mechanism; the domestic rule that implements the international rule should, a fortiori, result from the activity of democratic legislative procedures.
In contrast, the single layer structure of the indirect instrumental relationship falls outside the democratic circuit, being entirely internal to the international organization and unaccompanied by state-level implementing legislation that would have some democratic legitimation.
From the legal sources and structure, it is also possible to deduce who are the actors involved in the rulemaking that governs the relationship between organizations and the market. In the direct institutional relationship, although it is the organization that formally adopts the discipline, it is the states, through their representatives, that take part in the negotiations from which the rules then emerge. States, then, are also the recipients of these rules and the filter that allows the discipline to become effective and to produce effects on the market and, therefore, on companies. In parallel, in the indirect instrumental relationship, organizations produce the rules, but these rules are directed at regulating the activities of the organizations themselves, and their interactions with other market actors. Insofar as they are produced by and directed to the organizations, one would be inclined to think that the transparency and accountability of these rules are secondary issues. This, moreover, is one of the justifications implicitly underlying the lack of transparency and accountability in the rulemaking process.
The criterion for assessing the adequacy of existing transparency and accountability mechanisms, however, is not only the subjects towards whom the rule is directed, that is, the subjects to whom the rule dictates certain requirements, but globally all the subjects on whom the rule produces its direct and indirect effects. If a norm impacts on other economic actors and the market, although it is a norm produced by the organization for itself, transparency and accountability of these norms and their enforcement practices should also be ensured with respect to non-institutional actors and, thus, to economic actors and the market more generally.
Finally, if we look at the nature of these rules, a distinction can be drawn between substantive and procedural rules. In the direct institutional relationship, the rules contained in treaties and related international agreements are predominantly substantive in nature and relate, often, to free market objectives. There is also a procedural component, but it remains at a general level, especially in treaties. In the indirect instrumental relationship, on the contrary, the procedural component is dominant and takes the form of detailed rules, designed to regulate the activities of international administrations.
The substantive and procedural character of the rules is not, however, the only element that differentiates their nature. The other element is their bindingness, understood as the ability to conform a conduct. In the direct institutional relationship, bindingness should be ensured by a system of horizontal controls between states that provides for the possibility of sanctions and retaliation measures. In some cases, judicial or para-judicial bodies, established by the organization, can judge on the violation of these norms, such as for instance the appellate body of the WTO. There is almost no need to say that the existence of a control system or judicial bodies can be more or less effective, but nevertheless they are in place.
In contrast, there are no bodies of an adjudicative nature, nor systems of control, except merely internal (intra-administrative), in the indirect instrumental relationship. Very few organizations have established bodies of a quasi-jurisdictional nature, for example the European Space Agency, but the para-judicial review mechanisms are rudimental. The monitoring of compliance is conducted by bodies within the administration that are hierarchically superordinate to the procuring entity and are scarcely accessible for economic operators through more or less informal bid protest procedures. This has also led in practice to a high level of non-compliance with the rules and a significant hiatus between the rules and practice.
7.3.1 The Rules and Practices in the Indirect Instrumental Relationship and their Impact on the Market
While the substance of the rules and practices affecting the market in the direct institutional relationship has been the subject matter of general studies regarding specific organizations, such as the WTO, less explored is the content of the rules and practices that influence the market in the indirect instrumental relationship.
Rules and practices in the direct institutional relationship pertain primarily to the removal of barriers to trade and the related implementation policies adopted by states. Their analysis has been the object of analysis and critique, although not under the specific lens of the relationship between international organizations and the market. Instead, it is worth focusing on the content of the rules and practices adopted by organizations in the indirect instrumental relationship because these and their impact on the market have been overlooked.
One of the characteristics of these rules is that they are primarily procedural in nature, and they pertain mainly to the vendors’ selection phase.
The regulation and enforcement practice of vendor selection procedures affect the market and economic operators in several ways, such as the choice of the procurement method, waivers, splitting contracts, extension of long-term agreements and domestic preference. First, the size of the market created by the organization depends on the procurement method chosen. Traditionally, for example in the public procurement of European Union member states, three types of procurement procedures are set: open, restricted and negotiated procedures.Footnote 16 Open procedures are tenders open to any operator who is interested and wants to submit its offer.Footnote 17 Restricted procedures are those in which any economic operator may request to participate but whereby only those economic operators invited by the procuring entity may submit an offer.Footnote 18 Negotiated procedures are procedures in which the contracting authorities consult companies of their choice and negotiate the terms of contract with one or more of these.Footnote 19 The EU public procurement regulation for member states prescribes as basic procedure the open one, in order to ensure the widest possible competition.
On the contrary, rules governing direct procurement of the organizations with the highest volume of procurement, such as the UN, World Food Programme, or UNICEF, prescribe the restricted procedure as the basic procedure for vendor selection, not including an open procedure among the options. Furthermore, they identify specific circumstances and thresholds that allow for direct contracting and sole source. Thus, the basic procurement procedure is not the open one but, rather, a procedure that, right from the outset, can limit the scope of the market, as well as competition within such a market. In the restricted procedure the organizations choose how many and which vendors to invite. Thus, it is always for the organizations to filter and scale the degree of competition to be applied to the market.
The rules governing procurement procedures also provide for the possibility of waivers. Under certain circumstances, specified by the procurement manuals, organizations may select vendors without opening a competitive process. The conditions under which this can take place are, however, often laid down broadly and indefinitely and organizations are left with a wide discretion in this regard. This has led, in direct procurement, to practices of recurring use and sometimes abuse of waivers. The consequence is the creation of an uncompetitive market or of a market whose scope corresponds to a few companies chosen by the organization itself.
Moreover, even when the rules do not provide for the possibility of anticompetitive choices, international organizations find ways to avoid competitive procedures tout court and, as a result, limit the breadth of the market. The practice of splitting contracts is, for example, often used by international organizations for the purpose of avoiding the implementation of competitive procedures for vendor selection. The activation of some procurement methods, such as the open or restricted procedure, is often linked to certain thresholds of contract value. It is not uncommon that large procurement volumes, usually requiring competitive procedures, are artificially broken up so that they do not meet the thresholds above which these procedures must be activated.
Also, with the primary aim of saving internal resources by avoiding cumbersome procedures, international organizations make use of the extension of long-term agreements (LTAs). LTAs are framework agreements between the organization and a company that relate to a certain time frame, within which the organization can make repeated purchases of specified goods or services at a fixed price. Competition is not completely eliminated because, in order to award an LTA, the organization must, as for other types of contracts, issue a call for tenders and undertake a competitive procedure. However, the frequency of competitive procedures undertaken by the organizations decreases: once the LTA is concluded, the same vendor can provide repeated goods or services over an agreed period of time, with no need for the administration to initiate a competitive procedure when the procurement need arises. In addition to this, the organizations can extend existing LTAs so that competition and the market is further limited. The combination of these elements has resulted in quite extensive usage of LTAs in organizations within the United Nations system and, to a lesser extent, in EU institutionsFootnote 20 and in a recurring pattern of extending existing LTAs.
In indirect procurement, although restricted and negotiated procedures are also among the tools provided to states by the procurement guidelines, the basic procedure is rather the open procedure. So, organizations generally seek to ensure that states create more open markets, with some exceptions that we will see below. This trend is understandable considering the goals that move international organizations in indirect procurement. Open procedures guarantee the widest participation, including the participation of foreign companies – thus, for instance, companies from countries funding the organization. Competition is, thus, necessary to pursue not only the organization’s interest in economy and efficiency, but also to ensure a return to the states who finance the organization.
Consistent with this, although the possibility of waivers is provided for in the guidelines governing indirect procurement, it is little used in practice. Moreover, when national administrations implement the international organizations’ projects, international organizations monitor and authorize the use of waivers by the national administration. So, the possibility of making an exception to competition is always controlled and perhaps limited by the organizations.
Similarly, in indirect procurement the practices of splitting contracts as well as the usage and extension of existing LTAs are less recurring. Since these are anti-competitive practices, international organizations tend to limit their spread either through ex ante controls over procurement needs or through ex post checks over the implementation of vendor selection procedures.
The tools discussed so far refer to the pre-bid phase. International organizations, however, can determine the scope and competitiveness of the market, even at the bid evaluation stage. The rules governing the international organizations’ indirect procurement, in fact, sometimes provide that calls for tenders may include evaluation criteria that give preference to local companies.
By favouring domestic suppliers, international organizations may aim to foster local development, job creation, and capacity building within the countries where they operate. Moreover, procuring goods and services locally may sometimes be more cost-effective and less risky in terms of logistics, transportation, and regulatory compliance. So, domestic preference may be motivated by external economic and social objectives as well as by efficiency objectives.
Domestic preference can, however, result in market-distorting effects. Indeed, domestic preference policies can distort market dynamics by artificially inflating demand for domestic goods and services, potentially leading to inefficiencies and higher costs for the procuring organization.
Also, by limiting the pool of potential suppliers to domestic ones, international organizations reduce competition in procurement processes. This can result in higher prices, lower quality and less innovation compared to what might be available from a broader, global pool of suppliers. It is, however, a trade-off between social objectives and market goals or, to put it in another way, it is the (legitimate) cost of social objectives.
A different trade-off is found when one looks at preferential evaluations in direct procurement and sometimes indirect procurement as well. The so-called tied procurementFootnote 21 is a practice often used by the organizations, but rarely provided by the rules, where contracts are awarded subject to conditions that require the works, goods or services to be purchased from a particular country, that is according to the donor country criterion. Usually, the country is one financing the organization or a certain programme or project sponsored by the organization.
Thus, the donor funding criterion is directly tied to a specific state. This also means that the same organization may apply varying levels of competition for similar procurement activities, depending on the funding source – whether from a single state or from the general budget. When funding originates from a single state, the donor funding criterion embodies formal or informal tied aid. While this criterion is explicit in certain organizations, it exists, albeit not explicitly stated or only briefly mentioned, in others.
States are, of course, highly influential in tied procurement as they can define the scope of competition, even eliminating competition from the process when a single vendor is preselected — typically a vendor from the financing state.
In such cases, administrative decisions may even exclude vendors due to political tensions between the financing state and the vendor’s home country or due to differing standards adopted by these states. Both political and technical factors can play a role in restricting competition.
Thus, the procurement process operates on a hierarchy of interests associated with different international public actors. While the principle of competition is primarily intended to secure the best value for the international organization, it takes a backseat when it clashes with the political and economic interests of the financing state.
7.4 Accountability in Shaping the Market
Through norms and practices, international organizations are able to create, regulate and influence some sectors of the market, and they have an impact, and not a negligible one – especially for economies in transition, on the economies of individual states and their companies. Given this impact, the question that, therefore, arises is to what extent are organizations accountable in exerting this influence? And, more specifically, what are the mechanisms, if any, that ensure accountability with respect to this specific function? And are these mechanisms effective?
Again, the distinction between direct institutional relationship and the indirect instrumental relationship is relevant and helps to identify the various components of accountability in the relationship between international organizations and the market.
In the direct institutional relationship, accountability is primarily inter-institutional and refers to both the rule-making and implementation phases. As mentioned earlier, states participate in rulemaking in international fora that allow for confrontation, dialogue and negotiation. In this sense, there are physiological checks that states can exert through the participation of their institutional representatives in the rule-making process of the international organization.
Moreover, in the implementation phase of market policies, there is often horizontal accountability, activated by states on other states, which is intertwined with legal accountability ensured by the organization itself. In the context of the WTO this is the case of the Appellate Body that hears appeals in disputes brought by WTO members. Although these accountability mechanisms have weaknesses and shortcomings, nevertheless the formal presence of states at the core of the accountability mechanism allows all states to have opportunities to monitor the compliance with the policies and principles set by the international agreements governing the market.
In contrast, accountability mechanisms in the indirect instrumental relationship are less developed and effective. The accountability framework within international organizations for procurement comprises three fundamental components: external controls, internal controls and mechanisms for private sector appeals against the actions and decisions of procurement entities.
These components serve multiple critical purposes. Firstly, they aim to ensure that member states, representing taxpayers and participating businesses, are well-informed about the procurement activities of the organizations. Secondly, they aim to maintain the awareness of the organization’s administrative heads regarding the actions of procurement officials and any deviations from principles and rules. Lastly, they are intended to provide private parties with opportunities to assert their rights against international organizations and states.
Of these components, accountability to states is the most extensively realized. Member states exercise oversight through various bodies such as Executive Boards, Boards of Auditors, and the Joint Inspection Unit (for the organizations of the UN family). These bodies evaluate different aspects of procurement activity and provide information to states. Additionally, legislative bodies of organizations decide whether to implement reforms in response to oversight findings.
However, internal controls in direct procurement have notable shortcomings. Increased procurement volume and decentralization have exacerbated issues in delegation of authority and responsibility. Even when lines of authority are clear, practices of evading responsibility are not uncommon. Moreover, controls by bodies independent from the procuring entity and implementation of the relative recommendations are still subject to the political will of states. As the final decision still always rests with the contracting administrations, controls by independent bodies can also indirectly weaken the legal position of companies, in particular their interest in being registered in the vendors rosters and participating in tender procedures, without giving them guarantees of due process.
In indirect procurement, a variant of internal controls is inter-institutional controls between the international organization and national administrations. Unlike what happens in direct procurement, here the oversight methods are more effective. Financial institutions, the European Commission and also some organizations that engage in indirect procurement (UNDP, UNHCR etc.), carry out general controls aimed at determining, over longer periods of time, whether project implementation and, thus, also procurement, are being handled according to the organization’s objectives, principles and rules. Moreover, financial institutions and the European Commission carry out specific controls on the acts and decisions adopted during the tender procedure, for example, the call for tenders, the bid evaluation, the award decision, but also on the activity performed in execution of the contract. In this way, as it pursues its own interest in effective management of the resources granted, the international organization also becomes the guarantor of private subjects’ rights, as defined in the guidelines.
The third component of accountability includes the mechanisms that make international organizations and national administrations accountable to private subjects during the vendor selection phase and execution of the contract. Within this component as well, there is a significant difference between direct and indirect procurement. In the former, although there have been significant developments compared to the past, the degree of accountability and its effectiveness are still decided by the international organizations. Bid protest mechanisms are scarcely proceduralized and mostly managed by the administrations and consist in hierarchical appeals or protests before the same body that adopted the decision. With the exception of ESA, EU institutions and some UN agencies, the bodies to whom a protest can be presented do not yet provide sufficient guarantees of independence and, while they have the power to annul the procedure, they lack the power to order compensation for damages.
On the contrary, in indirect procurement, the mechanisms for accountability vis-à-vis private subjects take advantage of the tripartite nature of the relationships among international organizations, national administrations and private subjects. The organization scrutinizes the handling of complaints by the national procuring entity; it may intervene by blocking an award decision or requiring to cancel and revise the bidding procedure; it may provide a further debriefing if the vendor is not satisfied with the answer provided by the national procuring entity; it may conduct investigations based on a private party’s allegations of fraud and corruption against national administrative officials or other private parties who participated in the bidding procedure. In all cases, the international organization has the power of financial retaliation against the financed state. Moreover, in the case of EU institutions it is also possible to file a complaint against the supranational administration itself, asserting failure to properly supervise.
Finally, in executing the contract, while private parties are guaranteed the opportunity of appeal to impartial bodies to protect their legal positions through recourse to arbitrators rather than judicial bodies within organizations, the effectiveness of this protection is nevertheless undermined by the inherent international public nature of the organizations, which can always invoke immunity from execution.
An overall analysis of accountability in the indirect instrumental relationship, thus, underscores two aspects. The first regards the ties between each of the three components, and more in particular the influence that external oversight has on the other two types of oversight and on the limited effectiveness of public procurement principles. The external controls described show that states have a detailed awareness of how resources are managed and procurement activity is carried out. Thus, in direct procurement, regulatory limits and application practices that deviate from the principles of competition, transparency and integrity, the shortcomings of the system of internal controls, and the only partial protection of the private parties’ legal position during contractor selection and contractual execution are not the result of the states’ lack of information, but rather their lack of will, or at any rate their tolerance, dictated by a particular dynamic of interests between international organizations and states.Footnote 22 Proof of this is that, when the balance of interests shifts, as occurs in indirect procurement, the two components of internal controls and accountability to private parties function more effectively. The dynamic of interests is, however, a ‘covert operative’. The noble justification for the lack of accountability is the exercise of the public function: ‘ubi maior, minor cessat’, where the ‘maior’ is the higher public interest ensured by the exercise of the institutional function and the ‘minor’ is whatever can hamper such interest, namely the interests and legitimate expectations of private actors. In this way, the functionalist approach has worked as a useful conceptual shield to protect the status quo.Footnote 23
The second aspect regards the contract. Although, in fact, unlike some national legal systems, there is no administrative judge who settles on contractual disputes, the neutrality of the judicial body does not guarantee that both parties to the contract are equally accountable to each other. In this sense, the privileged legal position of the international public body does not come from having a special jurisdiction, as in some domestic legal systems, because, except for a few organizations, the system does not offer this component. Rather, the privilege consists of activating immunities that allow the international organization to jeopardize the effectiveness of the accountability mechanisms even when they are entrusted to neutral and impartial bodies.
7.5 Concluding Remarks: A New Ethos for International Public Powers
This analysis on the relationship between international organizations and the market stemmed from a number of questions that are worth recalling: first, the preliminary question of whether there is a relationship between international organizations and the market; then, if the first question was answered in the affirmative, what are the mechanisms through which organizations impact the market; and finally, whether in exerting this impact on the market, international organizations are accountable.
The analysis that developed around these questions allows for some general considerations.
The answer to the first question is partially as expected: yes, there is a relationship between international organizations and the market. And yet, already this first part of the answer has revealed unexpected aspects. While the relationship stemming from the market-related mission of some organizations has been the subject matter of attention and research by specialized studies, there is another type of relationship that has not been analysed and conceptualized from the perspective of the market: the activity carried out by international organizations to procure goods, services and works. At the state level, this conceptualization is so well known that public procurement is strategically employed as a market policy. In contrast, it has never been formulated in these terms with reference to international organizations.
In this sense, the distinction that has been proposed between direct institutional relationship and indirect instrumental relationship has not only the sense of a taxonomy that systematizes reality, but the objective of bringing awareness on the meaning and implications that a certain activity of international organizations has. Meaning and implications, in fact, transcend the needs related to the functioning of the organizations, and show a broader and more significant impact on the market; and, as such, must be treated and regulated. In this respect, a transition of the procurement activity can be observed from a mere activity instrumental to the functioning of organizations to an activity that integrates functional profiles with those of market policies.
Here, I come to the second consideration. Weak forms of accountability have so far been attached to procurement of international organizations. The reasons for this are rooted in the dynamics of interests between international organizations, states and private parties. These reasons were justifiable in light of an originally modest number of partnerships between international organizations and private actors, of a scarcely significant procurement activity of the international organizations, of an exclusive functional relationship between the organizations and their procurement (i.e. procurement was primarily an activity that enabled the operation of the organization) and of an under-developed legal environment with reference to accountability mechanisms of public powers.
The conditions under which, however, international organizations operate have changed profoundly. The rise of global public–private partnershipsFootnote 24 and the increase in procurement activities lead to the reconceptualization of procurement activities as activities having a market impact. Moreover, at the state level the legal framework governing relations between public powers and individuals has profoundly changed in the direction of greater transparency, participatory or at least informed decision-making tools, penetrating accountability mechanisms. In other words, the ethos of public powers is undergoing a deep transformation.
Considering this reconceptualization and the changes of the context, preserving and tolerating a dynamic of interests that maintains the status quo, and protects the ‘function’ at the expenses of accountability, creates a temporal dissonance between international organizations and their contextFootnote 25 that can further undermine the already fragile legitimacy of the organizations. This is all the more so in a globally fragmented context in which states and national policies are regaining relevance and influence.
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