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European Center for Law and Economics

OPENING UP OF INTERNATIONAL GOVERNMENT PROCUREMENT Based on the research program "Europe and competitiveness“ www.cede-essec.fr CENTRE EUROPÉEN DE DROIT ET D’ECONOMIE – CEDE - EUROPEAN CENTER FOR LAW & ECONOMICS

By Dr. Viviane de Beaufort, ESSEC Business School – co-founder of the ECLE

With the participation of Edouard Devilder and Edouard Simon, ESSEC Business School, research assistants

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INTERNATIONAL GOVERNMENT PROCUREMENT

• Definition

Contract signed with a government entity or an institution (States or awarding entities) via an international tendering process

• "Major contracts"
• Large amounts which are continuing to rise
• Localization increasing to the benefit of emerging countries

(by 2015, 90% of world growth will be generated outside Europe - Trade and Investment Barriers Report 2011)

• Activities with very high value added
• Long-term follow-up (maintenance and services contracts lasting several decades)
• Sectors considered as "strategic" from an economic point of view: knock-on effect/

technology/jobs, etc.

• Large groups : Thales, Saab, EADS, AREVA, DCNS, Rheinmetall, etc.

…And political implications: a good indication of a country’s influence on the international stage!

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GPA and opening up of GOVERNMENT PROCUREMENT

The Government Procurement Agreement (GPA):

(Annex 4B of the Marrakesh Declaration establishing the World Trade Organization)

• Although it represents a major part of a country's market for foreign

suppliers, government procurement was excluded from the application of the multilateral trade rules under the GATT.

• A specific Agreement on Government Procurement (GPA )was signed and

came into force in1996.

Main aspects

• Provisions relating to national treatment and non-discrimination
• Procedural aspects designed to ensure that covered procurements are

carried out in a transparent and competitive manner

• Application of the WTO Dispute Settlement Understanding
• An open agreement (any WTO Member can accede to the GPA)

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Principle of non discrimination

Article I Scope and Coverage

1) This

Agreement applies to any law, regulation, procedure or practice regarding any procurement by entities covered by this Agreement, as specified in Appendix 1*.

2) This Agreement applies to procurement by

any contractual means. *For each Party, Appendix 1 is divided into five Annexes:

• Annex 1 contains central government entities.
• Annex 2 contains sub-central government

entities.

• Annex

3 contains all other entities that procure in accordance with the provisions of this Agreement.

• Annex 4 specifies services, whether listed

positively or negatively, covered by this Agreement.

• Annex

5 specifies covered construction services.

Article III National Treatment and Non-discrimination

…Each Party shall provide immediately and unconditionally to the products, services and suppliers of other Parties

• ffering products or services of the

Parties

treatment no less favorable than:

a)that

accorded to domestic products, services and suppliers…

b) that accorded to products, services and

suppliers of any other Party.

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APPLICATION in the EUROPEAN UNION

Opening up of European government procurement (EU & EU Members States)

To operators in the EU member States but also to operators in countries

signatory to the GPA

Equal treatment principle

Guarantees the application of equally favorable conditions to

• perators coming from countries signatory to the GPA
• Art. 5 directive 2004/18/EC
• Art.12 directive 2004/17/EC

Incorporation of the GPA into EU law

Since January 1, 1996 when the GPA came into force all covered contracting entities (meaning States, EU and so on )have to comply with the requirements of the GPA

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BUT ….! LIMITED EFFECTIVENESS OF THE GPA

Few States are party to the Agreement

Canada, EU, Korea, Hong Kong, Iceland, Israel, Japan, Liechtenstein, Norway, the Netherlands, Aruba, Singapore, Switzerland, Chinese Taipei, USA

AND Numerous exceptions to the Agreement

Parties have negotiated important limits to their market

• pening commitments in the form of minimum

thresholds or exclusion of sectors or entities (such as sub-federal). And there are even more exceptions...

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What Exceptions? 1/ THE "DEFENSE EXCEPTION"

Nothing in this Agreement shall be construed to prevent any Party from taking any action or not disclosing any information which it considers necessary for the protection of its essential security interests relating to the procurement of arms, ammunition or war materials, or to procurement indispensable for national security

• r for national defense purposes.

EXCEPTION TO THE GPA AGREEMENT (ART. XXIII §1)

1) The provisions of the Treaties shall not preclude the application of the following rules:… b) any Member State may take such measures as it considers necessary for the protection of the essential interests of its security which are connected with the production of or trade in arms, munitions and war material; such measures shall not adversely affect the conditions of competition in the internal market regarding products which are not intended for specifically military purposes.

EXCEPTION TO THE EU TREATY ( ART. 346)

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What Exceptions? 2/ THE "PUBLIC INTEREST" EXCEPTION (ART. XXIII §2)

[…]Nothing in this Agreement shall be construed to prevent any Party from imposing or enforcing measures necessary to protect public morals, order or safety, human, animal or plant life or health or intellectual property; or relating to the products or services of handicapped persons, of philanthropic institutions or of prison labour. Trade and Investment Barriers Report 2011 European Commission THE "PUBLIC INTEREST" EXCEPTION This exception ThThis exception is open to broad interpretation

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THE "PUBLIC INTEREST" EXCEPTION is open to broad interpretation

Public safety motives

Transport safety requirements in Japan are earthquake-related:

• nly 4% of Japan's total public procurement are open to foreigners

National preferences: (WTO 2009-2010 report or Trade and Investment Barriers European

Commission Report 2011)

USA, American Recovery and Reinvestment Act of 17/2/2009:

• Section 604 requires the Department of Homeland Security (DHS) to procure US-manufactured textile

and apparel goods, subject to certain exceptions

• Section 1605 requires that only US-produced iron, steel and manufactured goods be used in public

buildings and public works funded by this Act

Regional markets closed down due to a power split between federal and local agencies

Canada: national preference rules allowing a price difference of up to ten per cent to be taken into

• account. Applies in Quebec, Ontario and British Columbia.

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Exceptions regarding underdeveloped countries

They are are not required to open up their markets… The GPA authorises differential treatment for developing countries (Art. 5 GPA) But what is a "developing country“?

• Eg: China’s resistance as regards adhesion to the GPA
• *cf. December 2010 US Trade Report to Congress on China’s

compliance with WT Result: obvious discrimination among WTO States which are not party to the GPA Eg: Indigenous Innovative Procurement Scheme (China) or Sanitary and Phytosanitary (SPS) import requirements (India) Access of foreign companies to the procurement market is becoming even more difficult than before

• Eg: a recent law introduced a 25% preference margin for local goods

and services and restricted to national suppliers the procurement of goods and services considered of national strategic interest (Brazil)

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OFFSETS CONSTITUTE FURTHER BARRIERS

Offsets in government procurement are measures used to encourage local development or improve the balance-of-payments accounts by means of domestic content, licensing of technology, investment requirements, counter-trade or similar requirements.

What about offsets in the GPA?

Article XVI Offsets §1 Entities shall not, in the qualification and selection of suppliers, products

• r services, or in the evaluation of tenders and award of contracts impose,

seek or consider offsets.

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BUT …! OFFSETS ARE ALLOWED

Helping emerging countries to catch up

Art XVI §2 of the GPA Nevertheless, having regard to general policy considerations, including those relating to development, a developing country may at the time of accession negotiate conditions for the use of offsets, such as requirements for the incorporation of domestic content. Such requirements shall be used only for qualification to participate in the procurement process and not as criteria for awarding contracts. Conditions shall be objective, clearly defined and non-

• discriminatory. They shall be set forth in the country’s Appendix I and may include precise

limitations on the imposition of offsets in any contract subject to this Agreement. The existence

• f such conditions shall be notified to the Committee and included in the notice of intended

procurement and other documentation.

And the defence exception remains for developed countries

• Art. XXIII
• Art. 346 TFEU - EDA code of conduct on offsets - October 2008
• Buy American Act - 1933

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DANGER because of the lack of any clear framework!

Legal uncertainty Risks for technology transfers

Example of the rail sector in China

Problems in meeting "local content

requirements”

Example of the Broad-Based Black Economic Empowerment program in South Africa

The success of a bid is not directly related

to the quality of the bid itself

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EU rules & the supposed "level playing field"

Restricted application of the GPA by the Parties and non-application to emerging countries Opening up of EU government procurement (Art. 5.Directive 2004/18 and Art. 12- 2004/17) Non-Discrimination: Member States shall apply conditions as favorable as those which they grant to them to economic operators of third countries members of GPA.

+ =

Difficult situation for European operators up against competition within the EU and discriminated against or excluded from government procurement of third States The EU’s commitment to the liberalisation of trade depends on a level playing field between domestic and foreign entities based on genuine competitive advantages. But this level playing field is far from being a reality, therefore the Commission‘s role is to defend European interests against international trade distortions.

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IS THERE A SOLUTION?

The “preference” principle? A “reciprocity” rule?

• The “Preference” principle:

Article 58 of the Utilities Directive (2004/17) allows contracting entities to reject a tender if the proportion of non-Community products exceeds 50% of the total value of the products constituting the tender. In the case of two equivalent tenders, rejection is compulsory. BUT… The provisions of this article automatically cease to apply if an Agreement ensures comparable and effective access for Community suppliers. AND… This provision is hardly ever used.

• How can reciprocity be guaranteed in practice?

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How can reciprocity be guaranteed?

1/ Should EU Member States play on a direct effect of the GPA? No! The GPA does not seem to have a direct effect* according to the Court of Justice of the European Union Therefore EU Member States cannot take advantage

• f it

Therefore, the government procurement directives should be modified to ensure reciprocity (work of the Directorate-General for Internal Market & Services)

On January 27, 2011 the European Commission published a green paper on this topic, giving rise to debate and a very recent consultation is ongoing

*L’invocabilité de l’Accord plurilatéral sur les Marchés Publics (AMP devant le

juge communautaire by Edouard Simon and Viviane de Beaufort – Publication pending - www.cede-essec.fr

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How can reciprocity be guaranteed 2/ Multilateral negotiation – could the GPA be modified at the WTO? Maybe !

Negotiations ongoing and a new draft

proposed in 2007(Art. XXIV)

• Revision of the agreement on government procurement

WTO 11- GPA/W/297, 2007

• The EU is trying to be firmer in its recommendations to apply the

reciprocity principle and is insisting on China’s adhesion to the GPA: cf. CHINA’S REVISED GPA ACCESSION OFFER OF JULY 9, 2010

New Art. 207 of the TFEU extends the exclusive

competencies of the EU in this field

• European Parliament approval is now required for international

agreements (Art. 218.6)

• These new elements could change the situation

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How can reciprocity be guaranteed? 3/ Bilateral negotiation to better ensure reciprocity? Maybe!

*Work of Edouard Devilder - ECLE Workshop, June 2010, Paris.

To include a more systematic government procurement section in EU Free Trade Agreements* And To ensure real requirements and not only wishes e.g. FTA between EU and South Korea imposes application of the new version of the GPA with mandatory reciprocity. This is clearly a new, more efficient approach But…To what extent is the EU able to negotiate such requirements with its strategic partners (India, China)?

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Today , Europe seems more determined as regards RECIPROCITY

• First mentioned in The MONTI report (May 2010)

Europe needs to better match actions to expand the competitiveness space for its firms and efforts to level the global regulatory playing field. The common commercial policy gives the EU the power and the right tools to act effectively on the global stage. Europe should use these tools to defend and promote its interests in an active, determined way vis-à-vis its trading partners, to ensure trade access and to foster regulatory convergence…

• Further signs:
• EU 2020 Trade strategy Communication

Creation of initiatives with a view to opening the markets to the sectors of the future…

• Reply given by M. Barnier to a EP question on government procurement in the rail

transport sector between the EU and Japan – April 15, 2010 The objective of the Commission is to trigger a more general debate on the EU strategy in the field of international negotiations on procurement.

• Commission Communications referring to reciprocity:
• Towards a Single Market Act - COM(2010) 608/5
• Trade policy as a core component of the EU’s 2020 strategy – COM(2010) 612
• An integrated industrial policy for the globalization era – COM(2010) 614

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• Trade and Investment Barriers Report 2011

The renewed trade policy must take a more assertive approach

• A strong stance taken by Commissioners Barnier and De Gucht
• The Consultation on « government procurement » dated January 2011

includes a question on Access of third country suppliers to the EU Market

• The new defense sector directive (which is supposed to come in to force in

August ) creates debate on the reciprocity issue.

• Several debates are in progress in the European Parliament and between

Member States

European ORIENTATION seems MORE DETERMINED AS REGARDS RECIPROCITY (2)

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States apply rules depending on political issues (between 2009 and 2010 , 15 States did modify their “rules of the game”...).The guidelines when they exist remain unclear, the propagation to the civil sector is a strong tendency. States should agree to ... 1.Specify the conditions for using offsets on an international scale (WTO)

• 2. Include offset principles systematically in FTAs
• 3. Lay down national guidelines

HOW CAN OFFSETS BE SECURED IN GOVERNMENT PROCUREMENT?

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Community law, which prohibits offsets anywhere but in the defence sector (targeted more and more strictly), cannot go

• n ignoring their existence in third countries and should be

addressing the issue ! The time is right as both internal instruments (GP directives) and external instruments (GPA at the WTO and review of trade policy and FTAs) are being reviewed !!! Use the consultation on EU public procurement markets originating in third countries to explain that to the European Commission!

http://ec.europa.eu/internal_market/consultations/2011/access_EU_public_proc urement_en.htm

Conclusion