Government procurement in the European Union

Government procurement in the European Union is the awarding of contracts for public works and for the purchase of goods and services by the public authorities of the European Union (EU) and its member states. Government procurement represents 13.5% of EU GDP as of 2007, and has been the subject of increasing European regulation since the 1970s because of its importance in the European single market.

Because the implementation of EU government law by national governments is far from uniform and sometimes weak – in 2002, for instance, only 16% of governmental calls to tender were published – government procurement has been called "the weakest link in the common market".

Legislative history

Primary legislation

The basis of European procurement regulation are the provisions of the Treaties of the European Union that prohibit barriers to intra-Union trade, provide the freedom to provide services and the right to establishment (three of the "Four Freedoms"), prohibit discrimination on the basis of national origin and regulate public undertakings and public monopolies. But these rules, being prohibitive in character, proved insufficient to eliminate the protection afforded by Member States to domestic enterprises by preferential procurement practices. For this, positive regulation through secondary legislation which harmonized the procurement laws of Member States appeared to be needed.

First generation of secondary legislation: Supply and Works Directives

The European Communities (EC) Council of Ministers adopted General Programmes in 1962 that envisaged the abolition of national quotas and restrictions in public procurement. Directive 66/683 prohibited rules requiring the use of national products or prohibiting the use of foreign products in public procurement, and Directive 70/32 applied the same rule to public supply contracts.

The procedures for awarding public supply contracts were co-ordinated with Directive 77/62, which introduced three fundamental principles: contracts had to be advertised community-wide, discriminatory technical specifications were prohibited and tendering and award procedures had to be based on objective criteria. However, it did not apply to public utilities, or to products originating outside the EC until its amendment by Directive 80/767 following Community approval of the 1979 General Agreement on Tariffs and Trade (GATT) Agreement on Government Procurement.

Similar principles of transparency and non-discrimination were applied to the awarding of public works contracts with Directive 71/305, which however did not replace national tendering procedures and practices with a set of common rules.

Second generation of secondary legislation: Utilities Directive

The European Commission's 1985 White Paper for the Completion of the Internal Market identified Member States' public procurement policy and practice as a significant non-tariff barrier to the free circulation of goods and provision of services in Europe because it tended to favour national providers, thereby sheltering markets from competition and distorting trade patterns. The paper and the Single European Act of 1986 which it led to are the conceptual foundation of current EU procurement law.

On this basis, Directive 88/295 amended all previous public supplies directives. Open tendering procedures were now the norm and negotiated procedures were allowed only in exceptional circumstances. Purchasing authorities now had to publish advance notices of their annual procurement programmes as well as details of each award decision. National technical standards now had to be mutually recognised, and the exempted sectors were more clearly defined.

Directive 89/440 likewise amended the previous public works directives. Their scope of application was widened, now also covering concession contracts and certain state-subsidized works, and consortial participation in contracts was allowed.

The most important change was the adoption of the first Utilities Directive, Directive 90/351. Public utilities – the energy, telecommunications, transport and water sectors – had so far escaped European procurement law harmonisation because of the strongly divergent national legal régimes governing them, and possibly also because their large purchasing volume constituted an instrument of national industrial policy that governments were reluctant to give up. The removal of market access barriers in this sector was largely enabled by the concurrent liberalisation of the European telecommunications industry and by the envisaged global liberalisation of public procurement in the Uruguay Round of GATT negotiations. The first Utilities Directive generally followed the approach of the Supply and Works directives, but provided for the exemption of several sectors such as broadcasting, or for utilities operating under competitive conditions.

Moreover, with the first Remedies Directives, 89/665 (relating to public works and supply contracts) and 92/13 (relating to public utilities), Member States were required to ensure rapid and effective judicial review of decisions by contracting authorities. The directives also introduced the "attestation procedure" as a way for contracting authorities to certify the compliance of their purchase procedures and practices with procurement law.

Third generation of secondary legislation: Services Directive and consolidation

Following the official completion of the single market project in 1992, the attention of the European institutions shifted towards the service sector, in view of its ever-increasing macroeconomic importance. The Services Directive, 92/50, attempted to contribute to the liberalisation of public sector services by introducing a régime similar to that governing the procurement of goods, works and by public utilities. It also introduced a new award procedure, the design contest. But its scope excluded several specific services, as well as service concessions, maybe due to certain national constitutional restrictions against the outsourcing of public services. It also distinguished between "priority" services, to which the whole range of procurement disciplines applied, and "non-priority" services, whose procurement was subject only to basic non-discrimination and publicity rules.

In 1993, the older Supplies, Works and Utilities directives were re-adopted in a consolidated form as Directives 93/36, 93/37 and 93/38. This was to make the legal framework more homogeneous, but the changes to the Works Directive included significant clarifications and a special, mitigated régime for the award of concession contracts.

Fourth generation of secondary legislation: further consolidation

In 2004, procurement legislation was again consolidated following the principles of simplification and modernisation. The new legal framework is based on a clear-cut dichotomy between utilities and the rest of the public sector. While the procurement of the former remains governed by a new Utilities Directive, Directive 2004/17 "coordinating the procurement procedures of entities operating in the water, energy, transport and postal services sectors", the other three directives were amalgamated into a single "Public Sector Directive", Directive 2004/18 "on the coordination of procedures for the award of public works contracts, public supply contracts and public service contracts", which now governs procurement by public authorities other than utilities. The 2004 directives, apart from simplifying and clarifying the existing law, introduce a new procurement procedures, the competitive dialogue, and allow the procurement of framework agreements. They were required to be transposed into national law by 31 January 2006.

In 2007, the Remedies Directives were also updated by Directive 2007/66 "amending Directive 89/665 and 92/13 with regard to improving the effectiveness of review procedures concerning the award of public contracts".

Fifth generation

New Directives on Public Procurement, Utilities Procurement and Concessions were adopted by the European Council on 11 February 2014. The Member States have until April 2016 to transpose the new rules into their national laws (except with regard to e-procurement, where the deadline is September 2018). In the UK, the Public Contracts Regulations 2015 implementing the 2014 Directive on Procurement came into force on 26 February 2015.

Aims and principles

The European Commission estimates that the elimination of trade barriers resulting from discriminatory and preferential procurement practices may bring about savings to the European economy of about 0.5% of EU GDP, which would be about USD 92 billion in 2008. These savings are thought to be the result of three effects: The trade effect represents the actual and potential savings as a result of lower purchase prices than can be had from a broader pool of suppliers. The competition effect represents the improvement, as a result of increased competition, in the efficiency and performance of previously sheltered national firms, and manifests as price convergence. Finally, the restructuring effect represents the long-term structural adjustment of the industries servicing the public sector in reaction to the trade and competition effects.

To effect this, the Public Procurement Directives seek to base procurement on the following principles.

Transparency

Transparency in European government procurement is achieved through the publication, in the Official Journal, of three types of notices:

• Periodic Indicative Notices (PIN) indicate the annual estimated procurement volume for every contracting authority
• Invitations to tender are the formal invitations to suppliers to tender offers that start the process of awarding a contract.
• Contract Award Notices (CAN) notify the public about the award of a contract to a successful tenderer, including the price and the reason for the selection.

Transparency increases price competition among suppliers, resulting in lower purchase prices, because publications make more suppliers aware of business opportunities, and they also know that their competitors will too have seen the publications. CANs also send important price signals to the market. But the increased competition may drive down prices down to a level where poor quality or predatory pricing become a concern. It also wastes effort on the part of the many unsuccessful tenderers and of the authority who has to evaluate many tenders.

De minimis thresholds

In part because of the above-mentioned problem, the Directives apply only to contracts whose value (VAT excluded) exceeds certain thresholds. Other contracts, whose value is considered de minimis, are not required to be awarded under the Directives' procedures (though the basic rules of the European Treaties, such as non-discrimination, still apply).

The thresholds are (as last amended by Regulation 1177/2009 of 30 November 2009):

• €125,000 for public sector supply and service contracts as well as design contests of central government authorities: (Directive 2004/18/EC article 7(a), article 67(1)(a))
• €193,000 for public sector supply and service contracts as well as design contests of other authorities (Directive 2004/18/EC article 7(b), article 67(1)(b))
• €193,000 for service contracts that are more than 50% state-subsidized: (Directive 2004/18/EC article 8(b))
• €387,000 for utility supply and service contracts, including service design contests (Directive 2004/17/EC article 16(a), article 61)
• €4,845,000 for public sector and utility works contracts, as well as for contracts that are more than 50% state-subsidized and involve civil engineering activities or hospital, sports, recreation or education facility construction (Directive 2004/17/EC article 16(b); Directive 2004/18/EC article 7(c), article 8(a))
• €4,845,000 for public works concession contracts (Directive 2004/18/EC article 56, 63(1))

The de minimis principle allows authorities to avoid an expensive and lengthy tendering and award procedure for low-value contracts where the costs of the procedure would exceed the public welfare benefits of the increased transparency and competition associated with the procedure. A 1995 Commission study shows that this "sub-dimensional" public purchasing, which remains unaffected by the procedural disciplines of the Directives, appears to be at least three times the size of "dimensional" (i.e., above-threshold) purchasing.

But the de minimis principle also provides an incentive for authorities to divide contracts into separate lots for the purpose of avoiding bothersome procedures. Although the Directives prohibit doing this, such avoidance of procurement law is difficult to detect and enforce (as of 2007 no case relating to it had ever been before the ECJ), and it is thought to be mainly responsible for the observed low percentage of all public contracts that are published in the Official Journal.

Procedures

There are several different procedures available for public authorities. These include the Open, Restricted, Negotiated and Competitive Dialogue procedures. Each of these procedures sets its own limitations on the procuring authority, which must be considered when choosing the appropriate procedure.

The procedure is intended to be fully transparent with the intention of creating a free and competitive Europe-wide market. The rules state that for projects above a certain financial threshold (about €100K) a contract notice must be published in Supplement S of the Official Journal of the European Union OJEU previously known as [OJEC S-Series]. Nowadays the information is available immediately on the web from Tenders Electronic Daily.

The buyer can advertise the contract more widely, but cannot do so before it has dispatched a notice for publication in the OJEU, and is forbidden from including information not also included in the OJEU publication.

After the prescribed date, the bids are opened and assessed, and either the "lowest cost" or "most economically advantageous tender" is chosen. The contract award must also be reported in the OJEU.

The system is under constant revision to avoid misuse. Rejected bidders are granted up to ten days to challenge a decision, and the European Commission routinely acts to police infringements.

Special forms of procurement

Framework agreements

The 2004 Public Sector Directive codified rules for the procurement of goods and services through framework agreements. These are not in themselves procurement contracts, but they set out the terms of such contract with suppliers in advance over a set time.

Public-private partnerships

Public-private partnerships are not subject to special rules in EU procurement law, but must follow the rules and principles resulting from the European Treaties, including those embodied in secondary legislation. In 2000, the European Commission published an "interpretative communication on concessions under Community law", and in 2004 it published a "Green Paper on public-private partnerships and Community law on public contracts and concessions", which takes stock of existing practices from the perspective of European law and is intended to launch a debate on whether a specific legal framework should be drawn up at the European level. Competitive dialogue was created with the aim of making the award of public-private partnerships easier, since before its creation a Contracting Authority faced the choice of the restricted procedure, which is often too inflexible for such contracts, or the negotiated procedure, which is intended to be an exceptional procedure with specific legal justifications. Its use so far in the EU, has, however, been uneven. Up to June 2009, more than 80% of the award procedures using competitive dialogue have been launched in two EU Member States i.e. France and the United Kingdom.

Innovation partnerships

The 2014 Directive provides for a new Innovation Partnership type of contract, whereby businesses are invited to submit "research and innovation projects aimed at meeting the needs identified by the contracting authority that cannot be met by existing solutions". An Innovation Partnership is a contractual relationship formed between a public body and one or more businesses which enables the public body and the business(es) to work together through a partnership agreement in order to develop new products, works or services, where these are not already available on the market.

Innovation Partnerships were first endorsed among a series of public procurement reforms introduced in the 2014 Directive, and implemented in the UK's Public Contracts Regulations 2015. The EU is expected to publish its guidance in 2016 as to how it sees Innovation Partnerships working and other EU states are expected to implement the new regulations by April 2016. Innovation Partnerships are likely to be long term in nature and may involve contracts across three phases covering research and proof of concept, an intermediate development phase and a purchase phase. The European Parliament welcomed the new option as an opportunity 'to strengthen innovative solutions in public procurement' by 'allow[ing] public authorities to call for tenders to solve a specific problem without pre-empting the solution, thus leaving room for the contracting authority and the tenderer to come up with innovative solutions together'.

Objectives

The promotion of innovation forms part of the European Union's Europe 2020 ten-year growth strategy. The EU seeks "to create an innovation-friendly environment that makes it easier for great ideas to be turned into products and services that will bring our economy growth and jobs" and the objectives of Innovation Partnerships can be seen as:

• to open up this process within the context of public procurement
• to help resolve societal challenges
• to overcome the problem which arose under previous public procurement directives whereby public bodies could partner with private businesses to develop innovative solutions but once these were developed they were required to reopen competition before awarding a contract and therefore could not commit in advance to purchasing goods and services from any company they were supporting with product development.

Process

To commence the process of establishing an Innovation Partnership, a contracting authority must publish a Contract Notice in the Official Journal of the European Union (OJEU), which will 'identify the need for an innovative product, service or works that cannot be met by purchasing products, services or works already available on the market, and indicate which elements of this description define the minimum requirements to be met by all tenders'. There is a 30-day statutory minimum period from dispatch of the Contract Notice to the OJEU office to the closing date for requests from businesses wishing to participate in the process. From the companies who have asked to participate within the application period, the contracting authority will select suitable businesses based on objective criteria, which must include "capacity in the field of research and development and of developing and implementing innovative solutions". At least three businesses must be selected provided that there are three suitably qualified businesses interested.

The selected businesses will then be invited to submit "research and innovation projects aimed at meeting the needs identified by the contracting authority that cannot be met by existing solutions". Once project proposals have been received, the contracting authority will assess them against pre-determined and published criteria and may select one or more projects to proceed. For any project that the contracting authority wishes to pursue, they will then negotiate a contract with the project proposers which is likely to cover:

• the scope of the project
• the value and terms of the contracting authority's financial investment
• provisions for intellectual property rights and confidentiality
• provisions for terminating the innovation partnership with the business concerned.

At intermediate stages, the number of businesses involved in the partnership may be reduced, for example where proof of concept stages do not produce satisfactory or economical proposals which the contracting authority would contemplate purchasing in due course. Once a product or service has been developed which meets the contracting authority's needs, each of the partners is invited to submit a final and non-negotiable tender for the manufacture and supply of the products to the contracting authority or for performance of the service, and these tenders are evaluated to identify which offers the best combination of price and quality with a view to one of them being awarded a long term supply contract.

Responses

Initial expectations are that the procedure will see limited use. Concerns have been raised by some commentators, particularly in relation to the potentially anti-competitive effect of the procedure.

Examples

Examples are limited to date. On 23 July 2015 the Christie NHS Foundation Trust based in Manchester issued a Prior Indicative Notice regarding an intention to procure "a patient information/entertainment platform delivering patient tailored content over wireless infrastructure to mobile devices within the Trust" and stated that the Trust "intends to use the Innovation Partnership procedure for any subsequent procurement process" and wishes "to enter a long-term partnership with an organisation to develop a new patient focused extensible information/entertainment platform.". Worcestershire County Council issued a Prior Indicative Notice on 16 December 2015 seeking to appoint up to five businesses interested in "developing, test[ing] and bring[ing] to the market innovative technology in care solutions".

Joint Procurement

The 2014 Directive makes provision for "occasional joint procurement", whereby two or more contracting authorities undertake an entire procurement process or aspects of it together, including occasions when contracting authorities from different EU member states undertake procurement jointly. The Directive makes provision for authorities to assume joint responsibility for compliance with regulations applicable to the procurement process.

Bibliography

• Burnett, Michael (with Oder, Martin) "Competitive Dialogue – A practical guide", European Institute of Public Administration, 2010
• Sanchez Graells, Albert "Public Procurement and the EU Competition Rules", Hart Publishing, 2011