Business for New Europe Blog

In Depth: A Series on the EU’s Internal Market. [2] Delivering Value for Money

By Morris Schonberg

The mood of governments across Europe, inflamed by the eurozone debt crisis, is unsurprisingly characterised by austerity.  At present, the public purse is experiencing a myriad of pressures, such as fire-fighting the debt crisis, continuing to recapitalise systemic financial institutions and managing existing spending commitments made in better times.

In this climate, it is now more essential than ever that the State is able to maximise efficiency in public purchases and deliver the best value for money.  Public markets remain among the largest and most important for many economic operators in Europe.  In the EU, the purchases of goods and services by public bodies corresponded to around 19 per cent of EU GDP in 2009, amounting to over €2,100 billion.[1]  Given the sheer size of public markets, cost-savings made in public procurement have the potential to make a real impact on the finances of EU governments and stabilise the economic outlook.

The European Commission recognised this when it finalised the Single Market Act earlier this year, including public procurement policy reform among the package of twelve priority measures to rejuvenate the EU’s internal market.  The Commission plans to present detailed proposals for public procurement reform before the end of this year.

The current EU public procurement rules are meant to ensure the application of the EU’s internal market ‘freedoms’, the free movement of goods, persons, services and capital and the optimal allocation of resources they bring, in the specific context of public markets.  In such markets, given the inherent advantages national incumbents may have in dealing with their own national public authorities and the danger of latent preference to ‘buy national’, additional effort is required to ensure a level playing field.  This is where the framework under the public procurement rules comes in.  The rules establish specific contract award procedures for public bodies to follow that ensure public purchases are made in a fully transparent and objective manner, without any discrimination on grounds of nationality.  The public procurement rules ensure greater competition between commercial operators from different Member States and maximum value for tax-payers’ money.

The current EU public procurement rules, however, have not been wholly successful in opening up the EU’s public markets.  Cross-border public procurement remains low – it is estimated that only 13 per cent of public contracts publicised in the EU’s Official Journal are awarded to operators from other Member States.[2]  Whilst this figure may not necessarily reflect the competitive pressure that national operators may have been exposed to as a result of competition from operators from other Member States and the consequent price benefits, the figure is still strikingly low.

The European Commission is currently considering significant reform of the EU public procurement regime in two respects. Firstly, ‘modernisation’ and reform of the EU public procurement regime itself and secondly, developing a new external public procurement policy.  Unfortunately, costs savings is amongst the Commission’s objectives for reform, other considerations are also animating the Commission’s proposals that may have the opposite effect.

The potential changes being mooted to the public procurement rules themselves are far-reaching.  One possible reform concerns the scope of the public procurement regime itself.  Currently the procurement regime is only applicable to certain types of public contracts with a value above certain specified financial thresholds for each type of contract.  The broad idea is that the additional safeguards during the contract award process imposed by the public procurement regime, and the consequent additional administrative burdens for public authorities should only be applicable in the case of contracts that are of a sufficient value to merit cross-border interest in the first place.

In principle, the extension of the application of the public procurement regime to more public contracts allows for the possibility of greater competition but the administrative burden to public authorities in complying with the public procurement rules must also be taken into account.  There is no sense in expanding the public procurement rules to more contracts where the cross-border interest may be too limited to justify these greater administrative burdens.

The scope of the public procurement regime must therefore be carefully considered and any change should be targeted and precise.  In this sense, the Commission should be fully open to the possibility of lesser application as well as greater application of the public procurement rules in achieving the best result for the tax payer.  The financial thresholds have not been reviewed since 2004 – when the current public procurement rules were introduced – nor has there been any effort to index the thresholds in line with inflation.  Raising them may deliver more value for money.

Another aspect of the reforms represents particular cause for concern.  In the current framework, public contracts may only be awarded on the basis of (a) the best-priced tender, or (b) the most ‘economically advantageous’ tender.  Although the latter approach allows for the introduction of award criteria that relate to a wider range of policies, such as environmental protection, an important requirement is any such non-price criteria must ‘relate to the subject matter of the contract’ itself – for example, the characteristics of the goods/services to be purchased.

This limitation ensures that the actual goods/services that are being purchased themselves remain central and public authorities obtain the best value for money.  Loosening the link may undermine this, allow for disguised discrimination against operators from other Member States, and result in the imposition of a whole variety of different societal requirements for each contract that may impede access by SMEs to public contracts.  The additional complexity will also bring further administrative burdens for public authorities conducting public procurement.  It is important that this change is fully resisted.

Some of the proposals for a new EU external public procurement policy are also of concern.  While commercial operators from the great majority of countries are able to participate in public procurement tenders in the EU, commercial operators from EU Member States may find themselves excluded from public procurement in these third countries, due to protectionism.

The Commission wants to redress this imbalance and improve the access of EU commercial operators to third-country markets.  One of the options being mooted is that public procurement in the EU will only be accessible to operators from countries with which the EU has concluded binding international agreements on access.  Access to EU public procurement will be restricted for operators from countries with which there is no agreement and from which EU operators are excluded.  According to the Commission, this may then grant the EU greater leverage in persuading these countries to open up their public procurement to EU operators.

Much will depend on the detail of any proposal, but it is clear that any initiative that may restrict economically-efficient third country operators from EU public procurement, may have a detrimental impact on competition in the EU and result in the tax-payer receiving less value for money.

Finally, while the public procurement rules and many of the reforms are directed at tackling obstacles to free movement and distortions of competition emanating from public activity, the tenderers themselves are one particular area of reform which could receive more attention in an attempt to combat anti-competitive behaviour by private parties,.

Why? Because did-rigging drives up prices for public contract at the expense of the public purse.  Public markets in particular have features which arguably facilitate bid-rigging.  Demand is inelastic and stable and the transparency during the tendering process which the public procurement rules ensure, stabilises any bid-rigging arrangements by allowing cheating on any illegal bid-rigging arrangements to be detected by the other participants and sanctioned by reprisals.

Further incentives to deter bid-rigging in the public markets may be created.  While the European Commission continues to levy ever-increasing fines on those guilty of anti-competitive conduct, a more targeted solution in the public procurement sphere would be to allow a public authority to restrict operators guilty of bid-rigging in public contracts from its future procurement.  Currently public authorities are only able to do this in respect of certain limited offences such as corruption and money laundering.  However, it is anti-competitive bid-rigging which, in particular, results in higher costs being paid by the tax-payer.  Any restrictions may be on a contract-by-contract basis or sector-specific and subject to self-cleansing, such as the implementation of a successful compliance programme.

During the current economic climate, the goal of delivering better value for money must be the paramount.  Any reform proposed by the Commission should not stray from this objective.