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Openness in public procurement – a worthy cause facing new challenges

  • United Kingdom
  • Competition, EU and Trade - Brexit
  • Procurement strategies
  • Public procurement
  • Technology, Media and Telecoms

03-08-2017

The establishment of more open public procurement systems, that is, procurement systems which offer foreign suppliers access to the award of public contracts on the basis of no less favourable terms than to domestic suppliers, constitutes an essential part of attempts to liberalise further global trade. Openness in public procurement is important in that it leads to greater and more effective competition in the award of public contracts, thereby encouraging innovation, delivering better value for money and ultimately, contributing to long-term economic development. However, like global trade liberalisation more generally, it has been facing a number of challenges recently.

Click here to read the full copy of Public Procurement, Getting the Deal Through.

The basic aims of public procurement

In most countries, government purchasing is subject to some form of procurement legislation, often involving detailed rules on when and how to advertise contract opportunities and carry out contract award procedures. A key aim of public procurement legislation is to ensure fairness in the award of public contracts by mandating the award of contracts (often subject to minimum value thresholds and other qualifications) by means of advertised competitive tender processes based on objective rules and criteria.

A fair procurement system, including provisions for effective remedies in the event of a breach of the rules, gives confidence to suppliers, encouraging them to participate in public contract award procedures, thereby leading to greater and more effective competition. In turn, as a 2011 report by the then UK competition regulator noted:

“effective competition [in public procurement] can play an important role in promoting efficiency and innovation, resulting in enduring value for money. Competition can create a dynamic market in which end users choose those suppliers which offer the best value for money, and suppliers face appropriate incentives to offer better value for money or risk losing contracts or market share. This, in turn, can generate increased economic growth and greater prosperity”.

The issue of openness in public procurement

Of course, the fairness of a public procurement system is separate from the question of its openness. It is perfectly feasible to have in place a public procurement regime based on fair and objective rules which, nonetheless, restricts participation in contract award procedures to local (or certain local) suppliers. Indeed, most domestic procurement systems entail the use of some form of domestic preferences or the reservation of certain contract awards to certain classes of local suppliers (such as SMEs).

Restricting access to government contracts in this way, may encourage local job creation and economic growth by providing support to local industries and businesses. However, inappropriate or excessive reliance on this type of restrictions are only likely to yield short-term benefits. In the longer term, the quality of the competition for public contracts is likely to be compromised, reducing incentives for local suppliers to innovate and limiting the scope for obtaining best value for money. Such outcomes can then affect adversely economic growth and the competitiveness of national economies.

It is, therefore, not surprising that opening up public procurement is increasingly becoming an integral part of attempts to liberalise international trade and promote greater economic growth. In the context of the World Trade Organisation (WTO), the principle of openness in public procurement has found expression in the Agreement on Government Procurement (GPA). The GPA is an agreement between certain WTO members, including the EU, the United States, Canada, Japan and South Korea. It seeks to achieve greater liberalisation and expansion of world trade by means of the creation of an “effective” multilateral framework for government procurement. This involves GPA parties opening up their public procurement markets, at least partly, to each other's suppliers and undertaking to ensure the conduct of transparent, impartial and fair public procurements.

Separately, many free trade agreements incorporate provisions which deal specifically with the issue of public procurement. Indeed, the European Commission considers that opening up public procurement is an important aim in trade negotiations and that lack of adequate access to public procurement markets constitutes a non-tariff barrier to trade.

And yet, as with attempts to liberalise further international trade, greater openness in public procurement has now run into difficulties.

Transatlantic disagreements and the “Buy American, Hire American” US presidential executive order

Even before the election of Donald Trump to the presidency of the United States, the EU-US trade negotiations to conclude a Transatlantic Trade and Investment Partnership (TTIP) had stalled. The question of opening up further their respective public procurement markets to each other’s suppliers proved particularly contentious. Both sides seemed to accept, in principle, that there was asymmetry in the openness of their respective procurement markets. However, they failed to agree as to the causes of such asymmetry and the measures which each side had to take to remedy this.

At the time of writing, it would seem unlikely that this issue would be resolved any time soon, not least as a result of the new US President’s “Buy American, Hire American” April 2017 order.

Among other things, this order provides for the review of US trade agreements on the basis of which the US has allowed foreign suppliers to gain access to its government procurement markets in exchange for reciprocal rights for US suppliers abroad. Such agreements, essentially involve waivers from the “Buy America”/”Buy American” legislation (including the “Berry Amendment” in the defence sector), which seeks to promote domestically manufactured goods and domestically sourced construction materials in government procurements.

The White House has made it clear that, if the review concludes that any of these agreements works against US interests, in that it fails to provide US companies with “fair and reciprocal” access to foreign government procurement markets, the US President may decide to rescind or seek to renegotiate these. At stake in this context, is US participation in the GPA.

The US Government’s current assumption is that the GPA is not working in the interests of the United States. In support of this contention, reliance has been placed on preliminary evidence according to which, at $837 billion, the value of procurements which the United States has opened up to suppliers from GPA parties, is almost twice as large as the combined value (said to be approximately $381 billion) of the next five largest GPA parties - the EU, Japan, South Korea, Norway, and Canada.

This type of claim is likely to be contentious. Certainly, the EU’s position in the context of the TTIP negotiations has been that, in general, the EU is guaranteeing greater government procurement access to US companies than the US does to EU companies.

One of the reasons put forward by the EU in support of this conclusion is the fact that under the GPA, access to the cumulatively more valuable non-federal US government procurements is limited, with only 37 of the 50 States agreeing to allow access to their procurement markets to foreign companies. In addition, no US city or county is covered by the GPA arrangements. This factor seems to be crucial, in that that the value of procurements by some American cities is said to exceed the value of procurements by some States. According to the EU, other relevant factors in this context are the restrictions placed by the Buy America/Buy American legislation which, as noted above, seeks to promote domestic goods and materials in government procurements, as well as SME set aside programmes, which limit competitions for certain government contracts to smaller US companies. There are currently no similar restrictions in relation to access to the EU government procurement markets.

Ultimately, if the US were to leave the GPA or seek its re-negotiation this would almost certainly lead to other GPA parties taking retaliatory measures which would have the effect of limiting the ability of US suppliers to compete in foreign public procurement markets.

Brexit

The likelihood of the US seeking to rescind or renegotiate the GPA and other agreements which involve waivers from US domestic preference legislation, is not the only threat to the principle of openness in public procurement. The UK’s exit from the EU might also affect the openness of the UK public procurement system and the basis on which UK procurement legislation currently offers full and equal access and protection to suppliers from other EU Member States, as well as to suppliers which are nationals of other GPA parties in relation to the smaller pool of contracts which come within the scope of the GPA arrangements.

The extent to which the openness of the UK procurement system might be affected as a result of Brexit, will ultimately depend on factors such as the provisions of a new free trade agreement between the UK and the EU but also the question of whether the UK will decide to re-join the GPA in its own right. Currently, the UK is a party to the GPA by virtue of its membership of the EU. It would seem logical to assume that the UK would wish that, to the extent possible, UK suppliers continue to have access to as wide a pool of public contract award opportunities in foreign public procurement markets as before Brexit.

The argument that GPA membership is not necessary for the UK and that UK businesses wishing to continue benefitting from uninterrupted access to the EU/GPA public procurement markets could simply set up a subsidiary in an EU jurisdiction would not seem credible. First, it needs to be considered how realistic that option would be for most UK suppliers. Secondly, even assuming that this is an option for at least some of the larger businesses, such an approach is likely to lead to additional complexities and costs, putting them at a disadvantage vis-à-vis other competitors. Potentially, there is also the question of whether, in the absence of reciprocal rights for EU suppliers in UK public contract awards, the EU might adopt measures which would in effect limit the ability of non-EU/GPA suppliers bidding for public contracts through “letterbox” companies established for that purpose in an EU jurisdiction.

On that basis, membership of the GPA would seem to be a first necessary step in ensuring that UK suppliers continue to have access to important foreign public procurement markets post-Brexit. How easy or time-consuming that would be is currently unclear, with diverse views expressed on this point.

And then there is CETA…

Despite these challenges, other recent trade developments can, in principle, contribute to greater openness in public procurement. More specifically, the Comprehensive Economic and Trade Agreement (CETA) between the EU and Canada incorporates provisions which commit both sides to opening up their respective procurement markets beyond the levels that had been agreed in the context of the GPA. It also provides for establishing in Canada for the first time, a single electronic point of access for contract award notices (similar to the online notification system in the Official Journal of the EU) which will make it easier for suppliers not only in the EU but also Canada to access more easily public contract opportunities.

It is well known, of course, that some aspects of CETA (not those relating to procurement) have faced opposition in parts of Europe, leading to the Walloon regional parliament’s initial decision, subsequently reversed, not to adopt the agreement. While the European Parliament and Canada have now ratified CETA, so that it may enter provisionally into force, full ratification by all 38 competent parliaments (including regional parliaments) in the EU is still outstanding – a process which might take years to complete and which might face yet further challenges.

As it would be obvious from the above, various international developments are creating uncertainties not only in relation to world trade liberalisation generally, but also in relation to the future direction of multilateralism in public procurement and the openness of domestic procurement systems. It is to be hoped that these challenges would prove temporary and that in due course, further steps would be taken to achieve greater openness in domestic procurement systems, encouraging more innovation, better value for money and long-term economic development.

Click here to read the full copy of Public Procurement, Getting the Deal Through.

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