EU: Penalizing Closed Procurement Markets

On January 29th, the European Commission, the executive body of the European Union, proposed a new tool that would allow it to penalize countries that apply restrictive procurement practices that discriminate against EU businesses. With the new regulation, the EU intends to give its trading partners an incentive to stop such practices; and if they do not, their tenders could be subject to penalties. The United States and its states could be targets under the new authority.

The proposed regulation, referred to as an International Procurement Instrument, would authorize the Commission to investigate procurement practices in countries where it believes EU companies face discrimination. If it finds that the country applies barriers to EU participation in its procurement, it would offer the offending country two choices. The country could agree to remove the discriminatory practice or face price penalties on its bids.

The price penalties would add as much as 20% to the price of the targeted country’s tenders and would be applied to bidders, goods or services from that country. Such penalties would give bids offering European and non-targeted countries’ goods and services a competitive advantage. The price penalties would only apply to contracts with an estimated value equal to or above EUR 5,000,000.

The supplier with the penalized bid could still be awarded the contract if its offer remained competitive in terms of price and quality despite the price penalty. Where EU goods or services are not available or their use would provide a disproportionate increase in the price or costs of the contract, the penalties would not be imposed.

In emphasizing a pressing need for the new regulation, the Commission pointed to its ongoing negotiations of the Transatlantic Trade and Investment Partnership (TTIP) with the U.S., a free trade agreement (FTA) with Japan and China’s accession to the WTO Government Procurement Agreement (GPA). It expects these negotiations to “lead to substantive market openings, making the future use of the new tool vis-à-vis these countries superfluous”.

Under the TTIP, the EU makes gaining greater access to U.S. procurement a priority. Of particular interest to the EU is a substantial expansion of access to state procurement, namely, coverage of the 13 states outside the GPA and elimination of existing restrictions by the 37 GPA-covered states. States could be vulnerable under the EU’s proposal because it would allow the EU to target them directly – as well as other regional and municipal governments, if they maintain barriers to EU participation in their procurement. The EU believes that such targeting, in lieu of applying price penalties to a whole country, would reduce the risk of retaliation by the targeted country.

In addition to expanded access to state procurement under the TTIP, the EU is seeking removal of Buy America requirements that the federal government attaches to federal funds given to state and local governments for highway, railway and transit projects. If the U.S. does not remove these domestic content requirements, the EU could use the new tool.

The EU proposal shares the overall objective of the U.S. Trade Agreements Act of 1979 (TAA) to encourage countries to open their procurement by joining the GPA or negotiating other agreements. The TAA prohibits federal agencies from buying goods or services that are covered by the GPA from any country that has not opened its procurement to U.S. goods, services and suppliers, subject to certain exceptions. However, once a country commits to open its procurement by joining the GPA or signing an FTA, the TAA prohibition no longer applies. By contrast, the EU proposal would apply to the EU’s GPA and FTA partners with respect to procurement not subject to those agreements.

The pricing penalties tool would not be applied in certain cases, such as to suppliers from least developed counties or more vulnerable developing countries or to tenders by EU small and medium-sized businesses.

The newly introduced regulation is a revision of a 2012 proposal that would have allowed the EU to close its market completely to a trading partner that did not provide reciprocal access to its procurement. The amended proposal would shift the focus from reciprocity to restrictive and discriminatory procurement measures or practices and allow the EU to take more targeted action.

The proposed regulation will become effective after adoption by the European Parliament and the Council of the European Union. The EU has not indicated a timetable for such action.

Jean Heilman Grier

February 16, 2016

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