Public procurement – European and international law governing public procurement

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The award of public contracts to business is of great importance for meeting public needs adequately and cost-efficiently. At the same time, it constitutes an important demand factor for national businesses bidding for these contracts and for competitors from other countries.

Overview

Great importance for state, citizens and business

The award of public contracts to business is of great importance for meeting public needs adequately and cost-efficiently. At the same time, it constitutes an important demand factor for national businesses bidding for these contracts and for competitors from other countries. The total volume of all public contracts in EU Member States is estimated to be around € 2,2 trillion a year. Measured against gross domestic product (GDP), experience shows that the award of all of a country’s public contracts including procurement at regional and municipal level accounts for a volume of around 12 to 19 percent. These figures demonstrate the extraordinary macroeconomic significance of public procurement. It extends both to investments and jobs but also to the interest of citizens and taxpayers in procurement that provides the best value for money.

Awards are the focus of conflicting interests

Against the backdrop of the enormous volumes, the award of public contracts is an area of tension between a wide spectrum of interests and influences. This means that the primary goal of covering needs as cost-efficiently as possible is often eclipsed by efforts to link awards to other, secondary goals from other policy areas. This often leads to conflicting objectives. Secondary objectives relate first and foremost to various requirements on environmental and social aspects. The latter range from requirements on working conditions, apprentice training and gender equality through to fair world trade and human rights.

Experience shows that solid results can only be achieved if careful consideration is given to relevant secondary objectives – for instance, environmental requirements specifically related to the subject matter of the contract. Conversely, across-the-board imposition of criteria remote from the contract can have a very negative effect on the coverage of needs and/or cost-efficient procurement because they can lead to inappropriate distortions of competition and discrimination.

Lastly, structural policy aspects such as taking particular account of interests of SMEs gaining access to public contracts also play an important role.

Vulnerability to unjustified preferential treatment and market compartmentalisation

Given the often attractive contract values, experience has shown that public procurement is vulnerable to unjustified preferential treatment of certain, primarily national, bidders. This trend can go as far as corruption in individual cases. Overall, public contract awards have in the past been strongly dominated by national, regional and municipal market compartmentalisation.

Market opening at national and international level successively

With the realisation that market compartmentalisation leads to reduced competition and more costly procurement, successive initiatives have been launched to dismantle obstacles to market access in the cross-border sphere. Thus, as long ago as 1960 Germany unilaterally opened up the award of public contracts also to foreign bidders. Subsequently, efforts to bring about cross-border market opening have increasingly been made also at European and international level. In the case of the EU, this has been done first and foremost through the development of directives for public procurement since the end of the 1960s. At international level, rules have also been created – mainly in the framework of the General Agreement on Tariffs and Trade (GATT) and later the World Trade Organisation (WTO). They are complemented by provisions in a number of bilateral agreements.

Market foreclosure still an issue in some parts of the world

Unfortunately, preferential treatment – sometimes systematic – for national bidders still exists in a number of states (a practice variously labelled as “buy local” or “local content”). This has a very damaging effect on cross-border trade and lead de jure or de facto to discrimination against foreign bidders. Given the negative consequences of artificial market compartmentalisation and associated legal uncertainties, such behaviour sometimes also has a negative impact on the procurement and national business fabric of the countries in question.

Extensive legislative framework at international, European and national level

In light of the importance of public procurement, an extensive set of rules on public procurement has been developed at national, European and international level. The objective is the creation of a predictable legislative framework for public procurement. This is determined above all by requirements on transparency and non-discrimination as well as necessary concrete minimum requirements on the award process. Lastly, for enforcement of the rules it is very important to ensure rapid and effective legal protection in the event of award errors.

BDI in favour of transparency and fairness in public procurement

BDI attaches great importance to transparent, fair and competitive public procurement. It therefore expressly campaigns for transparency and fairness in public procurement and against all distortions of competition and market compartmentalisation. In this regard, it is actively involved in discussions on public procurement law at national, European and international level.  

Read more about the legislative framework at international, European and national level:  

Important sources of public procurement law – at international, European and national level

International public procurement law

WTO Government Procurement Agreement

The most important public procurement agreement at international level is the WTO Government Procurement Agreement (GPA), now in a revised version adopted in 2012 and in force since 2014. GPA applies only for large contracts above specified threshold values. It is what is known as a plurilateral agreement which has been signed by a majority of states but by no means all WTO members. It sets out minimum requirements on transparent, non-discriminatory contract awards and provides for protection under procurement law.

The provisions are binding on signatory states of the agreement. GPA’s members include the most important industrialised nations including the USA, Canada, Japan and the EU with its Member States. Developing and emerging countries are often still sceptical about the agreement because they fear disadvantages arising from the market opening brought about through GPA. China has not yet acceded to GPA. A revised accession offer from China is on the table but this is not yet deemed sufficient by GPA members.

Bilateral agreements

More or less comprehensive provisions on public procurement are also to be found in a series of bilateral agreements between the EU and foreign states, above all in bilateral trade agreements.

UNCITRAL model law on public procurement

This model law drawn up by the United Nations Commission on International Trade Law (UNCITRAL) is not a valid legislative act. It has been created as an encouragement for states which want to create new public procurement rules or reform existing ones. The first version of the model law dating from 1994 was revised in 2011. Furthermore, in 2012 UNCITRAL presented an accompanying Guide to Enactment of the UNCITRAL Model Law on Public Procurement.

EU public procurement law

Detailed rules above EU threshold values

Certain EU threshold values apply for large public contracts:

  • EU directive on public procurement, 2004/18/EU; superseded by the new directive 2014/24/EU,
  • EU directive on procurement by entities operating in the water, energy, transport and postal services, 2004/17/EU; superseded by the new directive 2014/25/EU), and
  • EU directive on the award of concession contracts, 2014/23/EU.

These directives set out concrete procedural rules in the interest of transparency and non-discrimination of bidders as well as a competitive procedure. They are supplemented by the following directives designed to guarantee effective legal protection:

  • EU directive on remedies for classical procurement contracts, 89/665 EEC, as amended in directive 2007/66/EU), and
  • EU directive on remedies for sectoral awarding entities, 92/13 EEC, also as amended in directive 2007/66/EU.

The threshold values are currently as follows for:

  • Construction contracts € 5.225 million,
  • Supplies and service contracts € 209,000,
  • Supplies and service contracts from central government authorities € 135.000,
  • Supplies and service contracts from sectoral awarding entities € 418.000, and
  • Concessions € 5.225 million.

Alongside the directives itemised above, there also exists a directive for special awards in the areas of defence and security, (Dir. 2009/81/EU).

Legal situation below the EU threshold values

The described body of rules does not apply for contracts below the threshold values. Only the general provisions of EU primary legislation apply here, i.e. essentially the general European legislative requirements for transparency and non-discrimination.

National procurement law in Germany

German procurement law is rooted in a long tradition. Comparatively modern rules for construction awards were put in place back in 1926. Access to German public contracts was opened up to foreign bidders as long ago as 1960, i.e. before the creation of EEC procurement law. There is now a comprehensive body of public procurement legislation which transposes the provisions of GPA and the EU directives on public contracts.

For large contracts above the EU threshold values, the EU directives are transposed in Germany by the German Act against Restraints of Competition Part IV (GWB) and the subordinate public procurement decree (VgV). To this are added further rules for specific areas of procurement. Rapid and effective protection under procurement law is available for awards above the threshold values.

For smaller contracts below the EU threshold values are regulated by a range of national rules depending on the procurement area. These rules form part of national budget law. In addition, the general principles of EU primary law, in particular with a view to adequate transparency, have to be taken into account for public contracts which are likely to have a cross-border interests.