The European Union’s rules on government procurement have traditionally been admirably open and non-discriminatory, free from the “buy local” preferences found elsewhere in the world.

That could change in view of a draft regulation issued by the European Commission which will allow the EU to impose price preferences against certain bids comprising a significant element of non-EU goods and services where such bids emanate from a country that the EU determines does not apply reciprocity in terms of procurement transparency and openness. Despite denials that this is protectionist in nature, the draft regulation will provide a mechanism to allow EU public bodies to discriminate against some foreign bids in some circumstances.

Background

The market for procurement by public bodies in the EU is significant. The EU estimates that approximately €420 billion in contracts is open to public tender each year. This corresponds to approximately 19% of GDP across all 27 EU Member States. The EU estimates that 85% of these contracts are subject to harmonised EUwide public procurement rules that are designed to ensure that all public purchases are transparent, fair and non-discriminatory.

Historically, there have only been limited exceptional cases in which certain types of EU public sector procurements could be closed to bidders from outside the EU – for example, in some utility-related or defence procurements. In all other cases, the EU’s markets are fully open and no discrimination is permitted against non-EU bids.

The European Commission has been concerned for some time that the playing field is not level and that many other countries have implemented so-called “buy local” rules which close off their own domestic government procurement markets from bidders from the EU. Back in 2012, those concerns prompted the Commission to issue a first attempt at a draft regulation covering the procurement of goods and services from countries where the EU did not have any international commitments for market access. That proposal stalled but the Commission has now brought it back onto the EU’s legislative agenda.

Existing EU International Commitments

The EU has always been at pains to say that its rules are not protectionist and that, rather, its aim is to incentivise other countries to make certain that their own domestic government procurement markets are open to entities from the EU.

By law, the EU cannot override its own existing international commitments to open and non-discriminatory procurement. These include:

  • The WTO GPA. The EU is a party to the World Trade Organization (WTO) Government Procurement Agreement (GPA). The GPA was last revised in 2012 and requires the EU to ensure openness amongst other members of the GPA (which include Japan, the U.S., Korea, Canada and Israel).
  • Other Bilateral Agreements. Additionally, the EU has concluded a number of other bilateral free trade agreements which include procurement openness requirements. Such agreements are already in place with Mexico, Korea, Switzerland, Colombia, Peru and Chile and the EU is currently negotiating similar agreements with Canada, Singapore, India and Malaysia.

The Original Proposal

Under the 2012 proposal (known as the “International Procurement Instrument”), the Commission originally suggested a two-pronged decentralised and centralised approach.

  • Initially, the Commission suggested a “decentralised” approach where public bodies could reject bids that consist of more than 50% of non-EU-based goods or services (except where the bidder is from a country with which the EU has an existing international procurement arrangement (see below)). The right to exclude was not automatic: public bodies would have needed to notify the European Commission about their intent and the Commission would have had two months to assess the existence of reciprocity with the country in question and decide whether or not to approve such an exclusion. It was this limb of the proposals that proved most controversial.
  • Additionally, the Commission proposed a more centralised procedure to be used in the event of repeated and serious discrimination against EU suppliers in other countries. The Commission would have the power to conduct investigations into possible discriminatory procurement practices in countries where government markets are not open to EU entities and to start consultations with the country concerned to try to resolve those market access problems. If necessary, the Commission could take additional measures to restrict bidders from those offending countries from access to the EU’s public contracts market. Those restrictive measures could include the exclusion of tenders originating from that country in a particular sector or the imposition of a price penalty on such non-EU bids.

Despite the support of the European Parliament, the 2012 proposal didn’t get off the ground. There was no consensus among Member States on the principle of closing the EU market for goods and services originating in certain third countries, and concerns about the administrative burdens imposed by the proposal.

In 2015, the Commission announced its intent to amend the proposal to simplify procedures, shorten timelines and reduce the administrative processes.

The 2016 Draft Regulation

The Commission has now revised the 2012 proposal with a greater focus on the role of the Commission to investigate procurement barriers in third countries and engage with third countries towards their removal.

So, for example, the current draft regulation drops the decentralised limb and does not permit a contracting authority to ban non-EU bids altogether. The focus instead is on price penalties or price adjustment measures if, following a Commission investigation, it is determined that a country applies barriers to EU participation in procurement. A non-EU bidder could be subject to a price adjustment measure for evaluation purposes but could still be awarded the contract if, despite the price adjustment, the offer remains competitive in terms of price and quality.

The price adjustment measure would not apply to EU small and medium-sized enterprises and bidders. Also, the new proposal exempts bids where more than 50% of the total value of the tender is made up of goods and/or services originating from certain developing countries (to support EU trade and development policy toward these countries).

The Commission has proposed new rules setting out when it may initiate an investigation into alleged restrictive and/or discriminatory procurement practices – i.e., effectively, when the Commission considers it to be in the interests of the EU. Investigations should be concluded within eight months and the results made public.

If the Commission considers it to be in the EU’s interests, it would plan to invite a country to enter into consultations with the aim of ensuring that EU companies can participate in tendering procedures in that country on conditions no less favourable than their nationals, and to ensure application of principles of transparency and equal treatment. If consultations don’t lead to satisfactory results within 15 months, the Commission can terminate the consultations and take appropriate action, including the imposition of price adjustment measures.

Price adjustment measures could apply to contracts with an estimated value of €5 million or more, and the measures can specify a penalty of up to 20% extra on the value of a submitted tender.

Of course, the draft regulation continues to respect the EU’s international obligations and only applies in relation to restrictive and/or discriminatory procurement practices implemented by a third country outside the WTO GPA or a country with which the EU does not have a bilateral arrangement.

Conclusion

The Commission has shown tenacity in revising and re-issuing this proposal. It clearly wants it to pass the EU legislative process and feels that it has done enough to modify the 2012 proposal to succeed in its aim.

The Commission reiterates that the EU public procurement market is fundamentally open. It says that the object of this proposal is not to close down the EU’s market to foreign bidders and that any restrictive measure affecting the current openness of the EU public procurement market will only be adopted as a last stage of the procedures described either at the contracting authority level or at the EU-wide level.

This initiative will have no impact on procurements that the EU has opened up to third party countries under the framework of the WTO GPA or bilateral free-trade agreements. The Commission will stand by its international commitments. Indeed, the Commission is also currently negotiating additional market openings with some of the EU’s major trading partners which would take any such countries outside the scope of this proposal.