Government procurement in the European Union
Government procurement or public procurement is undertaken by the public authorities of the European Union (EU) and its member states in order to award contracts for public works and for the purchase of goods and services in accordance with the principles underlying the Treaties of the European Union. Public 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 to the European single market.
According to a 2011 study prepared for the European Commission by PwC, London Economics and Ecorys, the UK, France, Spain, Germany, Poland and Italy were together responsible for about 75% of all public procurement in the EU and European Economic Area, both in terms of the number of contracts awarded through EU-regulated procedures and in value. The UK awarded the most contracts in value terms and France had the highest number of contracts.
The basis of European procurement regulation lies in the provisions of the European Union treaties which 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 the 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 which 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 90/531. 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, which may have been 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: 2014 Directives
New Directives on Public Procurement, Utilities Procurement and Concessions were adopted by the European Council on 24 February 2014. The Member States were allowed until 18 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. The Irish Office of Government Procurement undertook a public consultation process between 31 October and 12 December 2014 with a view to transposing the new Directives into Irish law by 17 April 2016.
The 2014 Public Procurement Directive introduced an obligation to take into account accessibility criteria for disabled persons in any procurement of works, goods or services intended for use by the general public or by staff of the contracting authority.
On 26 May 2016 the European Commission issued letters of formal notice to 21 member states who had failed to notify the Commission of their transposition of one or more of the three new directives into their national law by the due date. The Commission's letter of formal notice was sent to Austria, Belgium, Bulgaria, Croatia, the Czech Republic, Cyprus, Estonia, Ireland, Greece, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Romania, Slovenia, Finland, Spain and Sweden.
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.
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 also 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 (excluding VAT) exceeds certain thresholds. Other contracts, whose value is considered de minimis, are not required to be awarded under the Directives' procedures, although the basic rules of the European Union Treaties, such as non-discrimination, still apply.
- €144,000 (previously €135,000) 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)); the equivalent in the UK is £118,133
- €221,000 (previously €209,000) for wider 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)); the equivalent in the UK is £181,302
- €221,000 (previously €209,000) for service contracts that are more than 50% state-subsidised: (Directive 2004/18/EC article 8(b)); the equivalent in the UK is £181,302
- €443,000 (previously €387,000) for utility supply and service contracts, including service design contests (Directive 2004/17/EC article 16(a), article 61); the equivalent in the UK is £363,424
- €80,000 (no change) for small lots within a project above the services threshold, allowing no more than 20% of the value of the project to be excluded from procurement in accordance with the directive; the equivalent in the UK is £65,630
- €750,000 (no change) for light touch regime contracts (also known as Annex XIV contracts); the equivalent in the UK is £615,278
- €5,548,000 (previously €5,225,000) for public sector and utility works contracts, as well as for contracts that are more than 50% state-subsidised 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)); the equivalent in the UK is £4,551,413
- €5,548,000 (previously €5,225,000) for public works and services concession contracts; the equivalent in the UK is £4,551,413
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.
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.
Regulation 57 provides for companies who have committed certain offences to be excluded from the supplier appraisal process and their tenders rejected. Mandatory exclusion applies in relation to offences relating to corruption, bribery, money laundering, taxation offences, people trafficking and drug trafficking.
The same regulation also allows contracting authorities to exclude businesses from the supplier appraisal process and reject their tenders where they have committed offences or undertaken activities relating to misrepresentation, undue influence on procurement procedures, grave professional misconduct, agreements to distort competition or demonstrated significant or persistent deficiencies in the performance of a public contract which led to early termination of that contract.
Regulation 57(13)-(17) recognises that businesses may have addressed the reasons why they may have previously committed excludable offences and demonstrated that they should now be considered a reliable and suitable business for performance of a public contract. The provision of evidence to this effect is known as 'self-cleaning'. To take advantage of this provision, businesses must demonstrate that they have paid fines or provided compensation for damages, "clarified the facts and circumstances in a comprehensive manner by actively collaborating with the investigating authorities" and taken appropriate steps relating to their organisation, policies, procedures and personnel to address the cause of previous failings.
Termination of contract
Regulation 73 requires public authorities to include terms in public contracts which allow the contract to be terminated if its award or subsequent variation should not have taken place for reasons directly connected with the procurement regulations. These terms should deal with the mechanism for, and consequences of, termination. In the absence of such a term, a power for the contracting authority to terminate the contract on reasonable notice will be implied.
Electronic invoicing in public procurement
Directive 2014/55/EU of the European Parliament and European Council on electronic invoicing in public procurement (16 April 2014) applies to electronic invoices issued as a result of the performance of contracts to which Directive 2009/81/EC, Directive 2014/23/EU, Directive 2014/24/EU or Directive 2014/25/EU applies. This directive aims to secure the development and implementation of a European standard on electronic invoicing.
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 ('TED').
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 and be published electronically on Tenders Electronic Daily ('TED').
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
Public contracting authorities may enter into framework agreements with one or more businesses, which prescribe the terms and conditions which would apply to any subsequent contract and make provision for selection and appointment of a contractor by reference directly to the agreed terms and conditions or by holding a competition inviting only the partners to the framework agreement to submit specific commercial proposals. These are not in themselves procurement contracts, but they set out the terms of such contract with suppliers in advance over a set time.
The 2004 Public Sector Directive codified rules for the procurement of goods and services through framework agreements, and the 2014 Directive amended these rules. Under the 2004 Directive, either one economic operator or more than three were to be party to a framework agreement, but the 2014 Directive also allowed a framework agreement to operate with just two economic operators. The term of a framework agreement may not usually exceed 4 years, "save in exceptional cases duly justified, in particular by the subject-matter of the framework agreement".
Competitive procedure with negotiation
A competitive procedure allowing for negotiation with companies before finalisation of their tenders was introduced through Article 29 of the 2014 Directive (Regulation 29 in the UK Regulations). Contracting authorities using this procedure are required to provide to the market a description of their needs, the characteristics of the goods, works or services to be procured, and the award criteria which will ultimately be used to determine which business is to be awarded the contract to supply. Companies are invited through a contract notice or prior indicative notice to express interest in being invited to tender, and selected companies are then invited to submit an initial tender. Negotiations may take place between the contracting authority and each business in order to "improve the content" of each tender, before invitations are issued to submit a final tender. Final tenders are then evaluated against the previously published award criteria and a contract awarded.
The competitive procedure with negotiation may only be used in cases where the contracting authority's needs cannot be met through use of 'readily available solutions' without their adaptation, where there is a design or innovation element to the goods, works or services to be procured, where the nature, complexity or legal and financial aspects of contractual risk demand a negotiated solution. In addition, where a procurement for goods, works or services falling outside the above criteria has been undertaken and only irregular or unacceptable tenders have been received, the contracting authority may then adopt the competitive procedure with negotiation as the next stage of the procurement process.
For example, on 3 June 2016, Bridgend County Borough Council issued an invitation to express interest in participating in a competitive procurement with negotiation for waste collection services.
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. The 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.
Articles 78 to 82 of the 2014 Directive (Regulations 78 to 82 in the UK Regulations) provide for the conduct of a design contest, which may be either a stage in a procurement process leading to the award of a services contract, or a competition for which a prize is to be awarded or payment to be made. The Directive suggests that design contests are held "mainly in the fields of town and country planning, architecture and engineering or data processing". A Design Contest Notice must be issued in the OJEU. Where a jury is used to assess the plans and projects submitted by candidate businesses, it must consider the plans anonymously and retain minutes of any clarification discussions which take place with candidates.
The Danish Herlev Hospital issued a Design Contest Notice on 13 April 2016 for the design of the Steno Diabetes Center Copenhagen, intending to award a service contract following the contest to the winner or winners of the contest.
The 2014 Directive provides for a new type of contract, the Innovation Partnership, 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'.
The European Commission issued guidance in May 2018 noting that the Innovation Partnership is just one of a number of routes a public authority may consider in order to procure an innovative product or service.
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, therefore could not commit in advance to purchasing goods and services from any company they were supporting with product development.
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 economic 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.
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 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".
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.
The light-touch regime (LTR) is a specific set of rules for certain service contracts which tend to be of lower interest to cross-border competition. Those service contracts include certain social, health and education services, defined by Common Procurement Vocabulary (CPV) codes. The list of services to which the Light-Touch Regime applies is set out in Schedule 3 of the Public Contracts Regulations 2015 (Annex A). This regime allows for significantly fewer procedural limitations and only applies to services contracts valued over €750,000 (£589,148 in the UK).
Procurement of arms, munitions, war material and related works and services acquired for defence purposes and procurement of sensitive supplies, works and services required for security purposes are subject to EU Directive 2009/81/EC on defence and sensitive security procurement, not the Directives on Public Procurement. The purpose of the directive is to balance the need for transparency and openness in defence markets within the European Single Market with the need to protect individual countries’ security interests. The European Commission has been working to improve cross-border access for small and medium-sized enterprises in defence contracts and on 20 April 2018 the Commission published a 'Recommendation on cross-border market access for sub-suppliers and SMEs in the defence sector' calling for earlier and clearer publication of information regarding member states' long-term plans and priorities in defence procurement.
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