Bidding for European Government Contracts post Brexit (Part 1)

We are delighted to publish this post from Ammar Al-Tabbaa, partner at gunnercooke  and procurement law specialist, with Part 2 appearing tomorrow.

The European Commission has for some time now been considering how best to incentivise non-EU Member States (hereafter referred to as ‘third countries’) to open up their public procurement markets. At the heart of this is what appears to be a significant imbalance. It estimates that whilst some Euro 352 billion of EU government contracts are open to bidders from third countries, the equivalent figure is only Euro 178 billion for the US, and Euro 27 billion for Japan. Further, only a fraction of the Chinese public procurement market is open to foreign bidders. China, like India and Brazil, is not a signatory to the WTO’s Government Procurement Agreement (“GPA”).

A proposal in 2012 for a new EU regulation with the effect of penalising bidders from those third countries which do not offer equivalent access to EU firms, was voted down by a number of Member States, led by the UK and Germany, as being unduly protectionist. Four years on, and the Commission is having another go with a revised proposal which has already received its first reading at the European Council and been reviewed by the European Economic and Social Committee (“EESC”). (In the second half of this article we consider the greater significance that this proposal will have following the UK's decision to leave the EU and become essentially a 'third country.')

So how would the so-called International Procurement Instrument (“IPI”) actually work?

Essentially, it provides the Commission with the power to determine (following an investigation, whether of its own initiative or as a result of a complaint from a Member State) whether a particular third country imposes restrictive or discriminatory practices against EU bidders. This centralised process means that it is not possible for an individual Member State to make such a determination unilaterally, thereby ensuring a consistent EU-wide approach (it also avoids situations where a given Member State may, for example, have diplomatic reasons not to apply the penalty to a third country bidder).

Where an offending third country has been identified, bids submitted by contractors from that country will be treated – for the purposes of evaluation only – as being up to 20% more expensive than they actually are. It should be stressed that this is purely for the purpose of scoring, and does not affect the price paid. So if such a third country bid continues to represent best overall value for money notwithstanding the penalty and is chosen as the winner, then the authority would pay the price actually bid (not the price plus a 20% premium). The Commission proposes that the IPI would apply only to the evaluation of contracts valued at over Euro 5 million, and which are awarded pursuant to the EU rules on public, utilities or concessions procurement. One of the observations made by the EESC is that this threshold is too high, since it would in effect apply the IPI to only around 7% of the public contracts awarded in the EU each year. It therefore suggests that the IPI should apply to all contracts above Euro 2.5 million.

There are some exemptions. One is that bidders from countries which fall on the EU’s list of Least Developed Countries are not subject to the penalty, in order to ensure that the IPI does not cut across other aspects of EU policy designed to help those countries where possible. A second is that authorities may disapply the penalty where there is no equivalent EU-based product which meets the requirement, or where applying the penalty would lead to a disproportionate increase in the price of the contract.

Perhaps the most important exemption, however, is that the IPI will not apply to any contract which is covered by (a) a Free Trade Agreement between the EU and a third country, or (b) the terms of the GPA (to which the EU is a signatory as a unitary bloc, rather than as individual Member States). This last exemption makes clear that the overall purpose of the IPI is to incentivise those third countries which do not already have one in place, to negotiate a Free Trade Agreement (covering procurement, as well as the various other aspects of bilateral trade) with the EU or sign up to the GPA; in each case thereby opening up their domestic government contracts market to EU bidders.

In view of the UK’s recent decision to leave the EU, this proposal now assumes a greater significance, which you can read in part 2 tomorrow.

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