Public Tenders and Procurement Procedures: The International Procurement Instrument

a dynamic and innovative European economy can be globally successful in the long term and act as a role model. This requires a market-oriented, industry-friendly and technology-open environment. In addition, the EU must continue to focus on offensive measures to open third markets and promote reciprocal trade. This includes the conclusion and implementation of further free trade and investment agreements with important economic partners. In addition, the EU should pursue plurilateral paths with other interested parties in order to better protect market economies from the distorting effects of state economies. Finally, the EU Commission and the governments of the Member States should use the dialogue with third country state economies to encourage and urge economic reforms toward a more market-oriented economy.

In the following, we analyze various trade, investment and competition policy instruments of the EU and examine to what extent these instruments are already sufficient to ensure an international level playing field and where readjustments should be made. Once these instruments have been implemented, they should be applied consistently if the respective conditions are met.

Public Tenders and Procurement Procedures: The International Procurement Instrument

The awarding of public contracts is an extremely important economic factor at the national, European and international level. The total volume of public contracts, both at the national and European level, generally amounts to ten to 20 percent of the respective gross domestic product. In this respect, public contracts are also of considerable relevance for economic well-being, growth, innovation and jobs.

In this respect, access to public contracts based on transparency and equal treatment of all bidders is essential. Furthermore, effective legal remedies are required in the event of violations of the aforementioned principles respectively the provisions of procurement law created for this purpose.

Thus, it is important for companies interested in public tenders not only to have access to public contracts on their home markets, but also to markets for public procurement in other countries. This is particularly important for the heavily export-oriented German economy.

As far as essential national security interests pursuant to Article 346 of the Treaty on the Functioning of the European Union (TFEU) require a deviation from this principle, internationally or at least EUwide harmonized principles of application should be pursued wherever possible. In particular, the BDI is of the opinion that unilateral compensation respectively “offset” requirements as a secondary condition of public contracts should be avoided, or – if unavoidable – should be designed in a balanced manner in the sense of a level playing field.

Already existing imbalances in market opening in the relationship between the comparatively more open EU on the one hand and often still closed third countries on the other have intensified in recent years. This is one of the factors that could have a negative impact on Europe's desired strategic autonomy. The Commission intends to counteract the growing imbalances in terms of market opening by creating the international procurement instrument (IPI). This instrument aims at opening procurement markets of third countries which are still closed. To this end, a procedure is proposed for the EU to object to and prosecute unacceptable market closures or unfair practices by third countries, which may lead to the sanctioning of bids originating from these countries and thus increase the pressure on them to open their markets.

Status quo

Access to national and European procurement markets is ensured by national procurement law and –for the award of large public contracts above certain thresholds – by the EU Directives on public procurement, which prescribe transparency and equal treatment of bidders. In contrast, access for European companies to public tenders in third countries is still closed or at least severely impeded in many cases.

The plurilateral WTO Government Procurement Agreement (GPA), to which the EU and its Member States are parties, has led to an opening of markets for large public contracts in some but by no means all WTO members: In addition to the EU Member States, other traditional industrialized nations such as the United States, Canada, Japan and Switzerland are also members of the GPA. Most developing and emerging countries have not yet joined the GPA because they have so far rejected a binding opening of their procurement markets to foreign bidders. This also applies to economically especially important emerging third countries, such as China in particular, but also to other significant countries such as Russia, India and Turkey. China has repeatedly delayed accession to the GPA, which has been promised many years ago, by making inadequate offers of accession which are unacceptable to the members of the GPA.

Beyond market opening under the GPA, the EU has also worked in recent years to achieve further opening of procurement markets in third countries through bilateral trade agreements that go further than the GPA. In this way, quite a few improvements have been achieved vis-à-vis some important trading partners such as Canada and Japan. However, this does not change the fact that many important countries have not yet accepted any opening of their own procurement markets towards the EU.

Overall, a disparity in market opening has increasingly emerged in recent years in the relationship between the EU on the one hand and economically significant third countries with still closed markets on the other. This is true at least in factual terms. While the EU public procurement directives do not provide for a legal claim of a company from a third country to access public contracts in the EU if the company's home country has not concluded a corresponding opening agreement with the EU, bidders from such third countries may be excluded from participating in public procurement procedures in the EU. However, such exclusion is not mandatory.

A number of EU Member States, including Germany, have opened their procurement markets widely and do not generally exclude bidders from third countries. In some EU Member States, bids from China with extremely low prices, some of which may even be suspected of dumping, have repeatedly been awarded contracts to the detriment of European competitors in recent years, even though China has still not accepted any market opening vis-à-vis the EU in this regard and continues to seal off its own markets against foreign bidders in various ways. Examples of this can be found, for example, in public procurement in the areas of construction and infrastructure contracts, railroad and road construction in various Eastern European, but also in Western European Member States.

In addition, in a number of cases where bidders from isolated third countries are awarded contracts, this is made possible by means of EU funds and thus money raised by EU taxpayers, ultimately benefiting companies from third countries with dubious bids and to the detriment of companies from the EU. This is particularly true when foreign state-owned enterprises act as bidders with suspiciously low prices in the EU.

The Commission's Proposals on the IPI and the further Discussion

To overcome the imbalances that have arisen, the Commission presented an initial proposal for an international procurement instrument back in 2012. The aim is to create a regulation for the access of bids from third countries to procurement markets in the EU and at the same time to work towards opening up markets in third countries which are still closed. In simple terms, the IPI provides a procedure for reviewing and objecting to problematic procurement or trade policy behavior by third countries. In the event that the complaints do not lead to the elimination of the problems, the IPI provides for sanctions against bids that originate at least 50 percent from third countries that are classified as closing off their markets or acting unfairly.

While the IPI's stated objectives have been generally welcomed, the 2012 proposal met with widespread criticism, including from Germany and German industry, due to expected negative side effects. As a result, the Commission presented an amended proposal in 2016, which provides for partially modified sanctions (price surcharges of up to 20 %) for offers from closed-off third countries. In the Council, IPI proponents welcomed the new proposal, while other Member States rejected it, mainly due to continued fears regarding problems caused by a complicated determination of the country-oforigin and associated legal uncertainties. This again led to a stalemate in the Council.

Finally, while problems of unequal market access continued to intensify, in 2019 it became clear that the discussions on the IPI should be revitalized in the Council and the possibility of revising the amended proposal should be examined. Insofar, an important aspect, also from BDI’s point of view, was the fact that long expected changes in the behavior of states such as China did not materialize. Instead, the impression has arisen that these states are increasingly acting as "systemic competitors" which, on the one hand, are penetrating EU markets more and more, but on the other hand are not willing to open their own markets and thus there is a need for action.

Under the current Portuguese Council Presidency, new momentum has been injected into the IPI discussions in the EU Council. An agreement is now being sought in the Council by summer 2021.

Recommendations

German industry advocates that the negotiations resumed in the Council in 2019 should now be taken forward decisively. In doing so, the remaining deficits of the Commission's amended proposal from 2016 must be addressed. When revising the IPI, it must be ensured that adversarial effects, additional burdens and legal uncertainties for EU companies and contracting authorities in the EU are avoided.

5

5 On June 2, 2021, the Council agreed on a mandate for negotiations with the European Parliament on the IPI. The mandate is based on a Council compromise text for the IPI regulation prepared by the Portuguese Presidency in the first half of 2021. It has to be welcomed that the compromise text of the Council takes up quite a few proposals of BDI and BusinessEurope. This may help to overcome several weaknesses still contained in the earlier revised Commission’s proposal of 2016 and thus contribute to a better overall shaping of the IPI. Among others, BDI welcomes that the Council compromise text leads to a structural change from the initial model focussing on the often complex determination of origin of an offer to the new approach focussing on the origin of the bidder. This leads to a reduction of bureaucratic burden at least for a considerable number of stakeholders. Equally, it is important that, in contrast to earlier texts, the Council compromise text does not lead to a ban of further existing national or sectorial sanctions against bids from sealed-off third countries. Nevertheless, also with a view to the Council compromise text, attention will still have to be paid to the envisaged exemption clause regarding sanctions. It must be safeguarded that this clause will not allow for a circumvention of the necessary sanctions of the IPI.

In the revision and final development of the IPI, especially the following objectives are essential:

Ensure practicability of the IPI: Compared to the amended Commission proposal of 2016, the existing provisions on sanctions are in urgent need of revision. Above all, the complicated regulations regarding the linking of sanctions to the - possibly only partial - origin of offers from third countries must be changed in order to avoid excessive administrative burdens and legal uncertainties. As rightly sought by the Portuguese Council Presidency, it is preferable to focus on the origin of the bidders instead of the origin of the goods used for the bid. This is a significant simplification for both bidders and public procurers compared to the previous concept under the Commission's amended proposal of 2016.

The proposal for a so-called “safety net” also appears sensible in order to prevent the IPI regulations from being circumvented by the fact that a bid originates from an EU bidder but includes a predominant share of goods from closed third countries. Under the safety net, only the successful bidder will be obliged to declare contractually that less than 50 percent of the value of his bid is derived from goods or services from a third country deemed to be closed or acting unfairly according to the assessment of the Commission. Such a declaration may not be an easy task for the successful bidder in individual cases, but it appears to be much less onerous than the corresponding investigation of the origin of the bid, which has been required for every bid so far. Guidance by the Commission regarding the most practicable determination of the information for the successful bidder's declaration would appear to be helpful.

Maintain national scope for action under the EU procurement legal framework: The IPI can become a key instrument for more balanced market access in public procurement with a strong role of the Commission. In this respect, the IPI provides, to some extent, a basis for common action at EU level. However, it must not prevent Member States from adopting necessary measures that go beyond the IPI, as long as they are compatible with the EU's legal framework on public procurement. Therefore, German industry calls for:

▪ a removal of a provision previously included in the IPI that would prohibit Member States from adopting more far-reaching measures (Art. 1(5) of the Commission's 2016 amended proposal), and

▪ a deletion of a previously intended provision that would lead to the abolition of an existing provision of the EU Directive on procurement in special utilities sectors, which stipulates that contracting authorities or Member States may exclude tenders where more than 50 percent of the value originates from a closed third country (Art. 17 of the amended Commission proposal of 2016).

An ambitious and effective instrument: For the IPI to be effective, it is essential to ensure that the instrument cannot be undermined by overly broad exemption rules. A key point in this respect is above all an envisaged provision on exceptions. These must be strictly limited to narrowly defined exceptions, such as an exception in the event that there is only one bidder in a tender. On the contrary, the currently proposed, overly far-reaching exception for the case of a sharp increase in costs or prices for the contracting authority in the event of the application of the IPI must be rejected most insistently. This exception could very easily lead to the IPI being completely undermined and should therefore be removed without replacement.