18 February 2016

New Proposal for a European legislative instrument on public procurement: Reciprocity and Protectionism

New Proposal for a European legislative instrument on public procurement: Reciprocity and Protectionism
On January 29th, 2016, the European Commission adopted a proposal for a revised legislative instrument on third country access to the EU’s public procurement market.  Commissioner Cecilia Malmström accompanied by Vice-President Bieńkowska stressed the importance of this proposal to give “better access” for European companies to the government/public procurement markets of “developed countries” (since the less developed ones are clearly excluded from the scope of this instrument). Back in 2012 discussions in the Council and in the EU Parliament on the first version of this instrument, gave rise to negative opinions, on the basis of arguments including protectionism, absence of  real problems, inefficiency of the proposal, high risk of retaliation as well as non-compliance with WTO law. To become law, this new proposal will now have to be adopted by the Council of the EU and the European Parliament, a process where heated debates can be expected.


To truly understand the significance of this proposal, it is important to recall the very particular nature of international public procurement markets. The way contracts are awarded and the nature of contracting entities actually explain why they are subject to specific rules. The public procurement market is not homogeneous. Indeed Adam Smith’s "invisible hand" isn’t evident here either, and, more generally, there is actually no such thing as a perfect competitive market. As its name suggests, public procurement is a contract signed by a public entity, subsidized by public money, to provide goods or services, via a tendering process. In most OECD countries and in EU members states, when contracts are awarded they have to abide by general rules that provide for publicity, transparency, non-discrimination, and good use of public money.


According to the European Commission, public procurement represents a substantial share of world trade flows but only a quarter of the world's procurement markets are open to international competition. Although the EU procurement market is one of the most open in the world, many countries are reluctant to further open their procurement markets to international competition. This has an impact on business opportunities for European companies, especially in a wide range of sectors in which European companies are highly competitive or leaders, such as construction, public transport, power generation, pharmaceuticals and medical devices. Besides, the countries that are not party to the OECD, don’t have to abide by the same rules of law and international commitments concerning the award of public contracts, such as the ones on transparency, corruption or bribery for example.


In addition to this un-level playing field, there are only a select number of agreements on public procurement, that link a small number of countries. The WTO plurilateral Government Procurement Agreement (GPA) concerns just 15 (counting the EU as a member) out of 156 WTO members. The EU has also signed a select number of comprehensive free trade agreements containing a chapter on the reciprocal opening of procurement markets on a bilateral basis: Korea, Colombia, Peru, Singapore and Canada (soon in place). Negotiations with Japan, Malaysia, and of course with the USA and India are still ongoing.


Trade in public procurement is in fact in derogation from the international principles governing the multilateral trading system: the General Agreement on Tariffs and Trade (GATT) and the General Agreement on Trade in Services (GATS) are both based on the most favoured nation (MFN) clause. According to the principle of multilateralism, the GATT and GATS benefit all members without any discrimination and without considering their respective level of commitment. As an example, the tariff concessions that were proposed by the EU through multilateral negotiations apply to all 156 members of WTO, no matter what they offered individually. On the contrary, under the GPA, neither the EU nor its 14 other members made a commitment to the remaining WTO members who did not wish, at that time, to join the GPA. So, does it also mean that EU public procurement is closed to GPA partners for non-covered sectors and to non-GPA members for all EU public procurement? The answer is no. EU international commitments (GPA and bilateral free trade agreements) say nothing about an “a priori” opening or closure of European public procurement markets. Companies from China, Brazil or India, which are not GPA members and are not linked by any free trade agreements with the EU, can access EU public procurement markets, as EU companies can access non GPA countries’ public procurement.


As a result, the EU procurement markets are open to companies from countries that do not have an agreement with the EU. But, unlike companies from countries that are signatories to the GPA, this de facto openness is simply not legally guaranteed to them.


To clarify, when developing this proposal, the European Commission had four options to choose from:


(1) close all EU procurement not covered by the GPA;
(2) open all procurement not covered by the GPA;
(3) do nothing (that is to say to maintain legal and economic uncertainties); or
(4) open or close under certain conditions.


The Commission chose the forth option: European public procurement is open, except in some situations. The opening principle of the EU is clearly stated and will now have the possibility to be enshrined into EU law.


In its previous version (2012), the Commission proposed a “decentralized” instrument, allowing public authorities to exclude in certain cases bidders from countries which were not “substantially open to EU companies”. This provision which was quite controversial in the original Instrument has now disappeared.


The adoption of the instrument will enable the Commission to gain an upper hand, in order to put pressure on partners, whose procurement markets are closed, in law or in practice, to European suppliers and to convince them, through negotiations, to join the GPA or to conclude a bilateral agreement with the EU.  Particular pressure is exercised here on Japan and the USA.
The second objective is to rebalance the openings made by the EU. According to the European Commission, EU public procurement share is estimated between 15 and 20% of EU’s GDP. Opening these markets and establishing rules of law on transparency and non-discrimination is crucial. The Commission believes that China's accession to the GPA should help to secure the opening of an additional €80 billion: this legislative instrument of reciprocity should contribute to this result.


The objectives of the Commission are very clear: clarify the legal uncertainty in implementing EU GPA commitments, guarantee the principle of openness of public procurement in the EU "except" where there is a lack of “substantial reciprocity” and use the reciprocity principle – a core principle of the GPA - as a way to ensure that European companies get similar openings as the ones their competitors enjoy in the EU market. As European companies are more than ever looking for growth outside the EU, it seems particularly crucial to ensure “legal certainty” of access in these countries. The Commission’s proposal therefore aims to increase market opportunities for business, and not to protect the EU market.


On the other side, companies from countries where the Commission could launch a procedure against “lack of reciprocity”, could end up being faced with legal uncertainties in their public procurement bids in Europe, which could range from increasing their “evaluated price” as well as difficulties in using all the available remedies.


It should be in the EU’s interests to have this instrument adopted by both the Council of the EU and the Parliament, and make sure that European companies will finally benefit from increased opportunities outside the EU as well as be provided with clearer legal certainty. 

Related contacts :

Alain Berger
Executive Strategy Director

email: alain.berger@hkstrategies.com