Legal Briefing

Saving billions of euros in public procurement

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Eastern Europe | 01 February 2011

Not least due to the financial crisis, the situation surrounding the public budget in central and eastern Europe (CEE) and southeastern Europe (SEE) countries is fraught with complications. Nonetheless, governments (including the states, provinces and municipalities) in the EU will invest a barely credible €2.5trn (ie €2,500bn) in various government contracts in 2011 – purchasing goods and services ranging from engineering services to copying paper to the construction of power plants. In the CEE/SEE region alone, the value of government contracts in 2011 will amount to some hundreds of billions of euros. However, studies have shown that ensuring compliance with existing EU public procurement law would result in savings of dozens of billions of euros every year.


Hence, a legally compliant and efficient public procurement system is crucial for balancing the budget. In practice, however, the decision-makers responsible for public tenders do not only take economics into account, but often prioritise national or regional interests instead. Pursuant to the ‘public choice theory’, this can be explained by the fact that those politically responsible for procurement projects behave in a manner that maximises their own benefit: instead of establishing the ‘best value for money’, the maximisation of electoral votes is often the driving force behind decision making. This appears to be particularly true for the CEE/SEE region, where governments tend to increasingly favour national suppliers instead of contracting with foreign companies.

BEST VALUE FOR MONEY

However, the goal of every public tender procedure should – at least in theory – always be to achieve the best value for money. The public sector is thus duty-bound to procure the best performance for the best price, regardless of the geographic origin of the bidder. For precisely this reason, the EU public procurement legislation (ie the EU Public Procurement Directives together with the respective Public Procurement Remedy Directives) expressly stipulates the obligation to observe the basic freedoms under EU law and the prohibition of discrimination in tender procedures. However, to really achieve the best value for money, adequate and, ideally, cross-border competition is essential, and this in turn requires the liberalisation of the national procurement markets. If the public sector selects its potential contractual partners out of a larger pool of domestic and foreign bidders, work, services and supplies can generally be procured less expensively; accordingly, the mandatory principle of free competition is also anchored in the EU public procurement legislation.

The liberalisation of the public procurement markets in CEE/SEE and the associated entry of additional foreign bidders into these markets would thus lead to greater competition and consequently lower bid prices. Ultimately, increased competition will also prompt inefficient (local) businesses to optimise their competitiveness.

If, on the other hand, the public sector does not have access to the best companies and products due to market restrictions and/or protectionism, it usually procures performance at a premium. Moreover, many studies show that the increase in prosperity brought about by trade restrictions – often cited by protectionists – is considerably smaller than the growth in prosperity that can be achieved by liberalised markets and free trade; obviously this also applies to barriers associated with procurement markets.

COMPARTMENTALISATION PROVOKES RESPONSE

Furthermore, the compartmentalisation of public procurement markets, whether national or regional, leads to counter-measures. Public entities shut out from the public procurement market will, in return, restrict access to their own public procurement markets and refuse to contract with foreign bidders; this becomes a vicious circle.

Nevertheless, an efficient procurement system and the promotion of national or regional enterprises in the course of awarding contracts are not mutually exclusive. For instance, appropriate incentives can be given to national and regional companies by means of lot tenders or the stipulation of certain selection and award criteria (such as response time, fast availability on site and environmental friendliness of the transport). However, it is both counter-productive and downright inefficient to award a contract to a domestic company simply because it is domestic. The sole decisive criterion must be to procure public works under the best conditions on the market to save accordingly on costs and thus place as little strain as possible on the public budget.

The tool necessary for an efficient and effective public procurement system already exists in the form of EU procurement legislation. It is vital that the principles of non-discrimination established by the EU (particularly in the Public Procurement Directives) are observed in respect of all domestic and foreign bidders. In case of violations of procurement law – for instance, by tender specifications or award criteria that are tailored to certain bidders – domestic and foreign undertakings participating in the tender process already have effective means of legal protection at their disposal. Regrettably these remedies are frequently not invoked – predominantly because the companies look towards participating in future tendering procedures.

PROTECTIONISM IS COUNTER-PRODUCTIVE

The public sector in CEE/SEE spends many billions of euros every year on government contracts – supplies, services and construction works. To obtain the best value for money, it should take advantage of cross-border competition in accordance with the EU legislation on public procurement. It may be politically tempting to favour domestic bidders but, given the difficult budgetary situation, EU member states in CEE/SEE simply cannot afford to award contracts to domestic companies out of protectionist motivations if a foreign company can offer better conditions for performance. Protectionism is counter-productive in the procurement system.

In-house counsel of foreign companies participating in public tenders in the CEE/SEE region should make sure that their companies are treated in the same (ie non-discriminatory) way as national bidders. Should this not be the case, EU public procurement law provides for effective remedy procedures.