Public AdministrationWritten evidence submitted by Professor Christopher Bovis (PROC 31)

Public Procurement in the Single Market of the European Union and its Member States

1. Public procurement is an essential component of the single market and the European integration. Public procurement has been identified as a considerable non-tariff barrier and a hindering factor for the functioning of a genuinely competitive single market.

2. The main reason for regulating public sector and utilities procurement is to bring their respective markets in parallel to the operation of private markets. European policy makers have recognised the distinctive character of public markets and focused on establishing conditions similar to those that control the operation of private markets. The public markets reflect an economic equation where the demand side is represented by the public sector at large and the utilities, whereas the supply side covers the industry.

3. The state and its organs would enter the market place in pursuit of public interest.1 However, the activities of the state and its organs do not display the commercial characteristics of private entrepreneurship, as the aim of the public sector is not the maximisation of profits but the observance of public interest.2 This fundamental difference emerges as the ground for the creation of public markets where public interest substitutes profit maximisation.3 However, further variances distinguish private from public markets. These focus on structural elements of the market place, competitiveness, demand conditions, supply conditions, the production process, and finally pricing and risk. They also provide for an indication as to the different methods and approaches employed in their regulation.4

4. Private markets are generally structured as a result of competitive pressures originating in the interaction between buyers and supplier and their configuration can vary from monopoly or oligopoly conditions to models representing perfect competition. Demand arises from heterogeneous buyers with a variety of specific needs, is based on expectations and is multiple for each product. Supply, on the other hand, is offered through various product ranges, where products are standardised using known technology, but constantly improved through research and development processes. The production process is based on mass-production patterns and the product range represents a large choice including substitutes, whereas the critical production factor is cost level. The development cycle appears to be short to medium-term and finally, the technology of products destined for the private markets is evolutionary. Purchases are made when an acceptable balance between price and quality is achieved. Purchase orders are multitude and at limited intervals. Pricing policy in private markets is determined by competitive forces and the purchasing decision is focused on the price-quality relation, where the risk factor is highly present.

5. On the other hand, public markets tend to be structured and to function in a different way. The market structure often reveals monopsony characteristics.5 In terms of its origins, demand in public markets is institutionalised and operates mainly under budgetary considerations rather than price mechanisms. It is also based on fulfilment of tasks (pursuit of public interest) and it is single for many products. Supply also has limited origins, in terms of the establishment of close ties between the public sector and industries supplying it and there is often a limited product range. Products are rarely innovative and technologically advanced and pricing is determined through tendering and negotiations. The purchasing decision is primarily based upon the life-time cycle, reliability, price and political considerations. Purchasing patterns follow tendering and negotiations and often purchases are dictated by policy rather than price/quality considerations.

6. The regulation of public procurement has been justified on economic grounds. Justifications for its regulation are based on the assumption that by introducing competitiveness into the relevant markets of the Member States, their liberalization and integration will follow. This result, in theory, would increase import penetration of products and services destined for the public sector, would enhance the tradability of public contracts across the common market and would bring about significant savings and price convergence.

7. Significant legal reasons have emerged by positioning the regulation of public procurement as a necessary ingredient of the fundamental principles of the Treaties, such as the free movement of goods and services, the right of establishment and the prohibition of discrimination on grounds of nationality.6 Finally, policy justifications of public procurement regulation have revealed a sui generis market place often referred to as marchés publics.7(public markets), where despite of the inability of competition law to regulate it, an overwhelming need for transparency and accountability points towards the regime of public procurement as a safeguard to the above principles.8

8. Influenced by the White Paper for the Completion of the Internal Market9 and the Single European Act, the 1996 European Commission’s Green Paper10 and the 1998 European Commission’s Communication11 public procurement law and policy has been shaped by reference to the instrumental role of the European Court of Justice.12

9. The current public procurement Directives13 are based upon a clear dichotomy between the public sector and utilities procurement. Although the same fundamental principles underpin procurement liberalization in the public and utilities sectors, their separate regulation reveals the positive effects of liberalization of network industries which has stimulated commercialism and competitiveness and provided for the justification of a more relaxed regime in utilities procurement and the acceptance that utilities, in some form or another represent sui generis contracting authorities which do not need a rigorous and detailed regulation of their procurement.

10. The separation between public and utilities procurement regulation also reflects on the main emphasis of European Institutions to open up the public sector procurement markets. The fusion of the public sector rules governing supplies, works and services procurement into a single legal instrument represents a successful codification which has two important implications: legal efficiency and compliance. The main influence for the codified public sector procurement Directive can be traced in important case-law from the European Court of Justice, in particular case-law on the definition of contracting authorities,14 the use of selection and qualification criteria,15 and the possibility for contracting authorities to use environmental and social considerations16 as criteria for the award of public contracts.

11. The public procurement Directives are lex specialis, aiming at complementing duties and obligations arising from fundamental freedoms of Community law in respect to intra-community trade in public contracts. The application of primary Community law is precluded in the presence of exhaustive provisions of secondary law,17 and by definition, the public procurement Directives as lex specialis legal instruments contain exhaustive harmonisation legislative measures which prevent the general application of Community law.

12. The Public Sector Directive and the Utilities Directive provide for mutual exclusivity of their provisions18 as well as their non applicability in cases of public contracts awarded pursuant to international rules,19 or secret contracts and contracts requiring special security measures or contracts related with the protection of Member States’ essential interests.20

13. The Public Sector Directive also does not cover public contracts of which their object is to provide or exploit public telecommunications networks,21 contracts for the acquisition or rental or land; contracts related to broadcasting services; contracts related with financial securities, capital raising activities and central bank services; employment contracts; and research and development contracts which do not benefit the relevant contacting authority22. The Directive does not also apply to service concessions23 or service contracts awarded on the basis of an exclusive right awarded by a contracting authority to another contracting authority or to an association of contracting authorities on the basis of an exclusive right which they enjoy pursuant to a published law, regulation or administrative provision which is compatible with the Treaty.24

14. The Utilities Directive does not apply to contracts awarded to contracting authorities on the basis of an exclusive right which they enjoy pursuant to a published law, regulation or administrative provision which is compatible with the Treaty,25 contracts awarded for purposes of resale or lease to third parties,26 contracts awarded in a third country,27 contracts awarded to affiliated undertakings,28 contracts awarded by contracting entities engaged in the provision or operation of fixed networks for the purchase of water and for the supply of energy or of fuels for the production of energy,29 contracts subject to special arrangements for the exploitation and exploration ing geographical areas for the purpose of exploring for or extracting oil, gas, coal or other solid fuels by virtue of European law,30 contracts and framework agreements awarded by central purchasing bodies,31 contracts of which their object activity is directly exposed to competition on markets to which access is not restricted32 and contracts related to works and service concessions33 which are awarded by contracting entities carrying out one or more of the activities covered by the Utilities Directive and in particular activities including gas, heat and electricity, water, transport services, postal services, exploration for oil, gas or other solid fuels, extraction of oil, gas or other solid fuels and provision of ports and airports where those concessions are awarded for carrying out those activities.

15. Public procurement and Industrial policy

16. The intellectual support of public procurement regulation in the European Union draws inferences from economic theories. Although the regulation of public procurement aims primarily at the purchasing patterns of the demand side, it is envisaged that the integration of public markets through enhanced competition, could bring about beneficial effects for the supply side. These effects focus on the optimal allocation of resources within European industries, the rationalisation of production and supply, the promotion of mergers and acquisitions and the creation of globally competitive industries. Public procurement has cyclical dynamics. It purports to change both behavioural and structural perceptions and applies its effects to both the demand and supply sides.

17. The integration of the public markets of the European Union is achieved solely by reference to the regulation of the purchasing behaviour of the demand side (the contracting authorities). The behaviour of the supply side is not the subject of public procurement legislation, although its regulation would arguably be of equal importance to the integration of public markets in the European Union. The supply side in the public procurement equation is subject to the competition law and policy of the European Union, although there is not any integral mechanism in the public procurement legislation which is capable of introducing the anti-trust rules to the supply side. Stricto sensu, anti-competitive behaviour of undertakings or collusive tendering do not appear as reasons for disqualification from the selection and award procedures of public contracts.

18. European Institutions have assumed that by encouraging the public and the utilities sectors in the European Union to adopt a purchasing behaviour which is homogenous and is based on the principles of openness, transparency and non-discrimination will achieve efficiency gains and public sector savings and stimulate industrial restructuring in the supply side.

19. The European Commission has claimed that the regulation of public procurement throughout the European Union and the resulting elimination of non-tariff barriers arising from discriminatory and preferential purchasing patterns of Member Sates could bring about substantial savings. Combating discrimination on grounds of nationality in the award of public procurement contracts and eliminating domestic preferential purchasing schemes could result in efficiency gains at European and national levels through the emergence of three major effects which would primarily influence the supply side. These include a trade effect, a competition effect and a restructuring effect.

20. The trade effect represents the actual and potential savings that the public sector will be able to achieve through lower cost purchasing. The trade effect is a result of the principle of transparency in public markets (compulsory advertisement of public contracts above certain thresholds). However, the principle of transparency and the associated trade effect in public markets do not in themselves guarantee the establishment of competitive conditions in the relevant markets, as market access—a structural element in the process of integration of public markets in Europe—could be subsequently hindered by the discriminatory behaviour of contracting authorities in the selection stages and the award stages of public procurement. The trade effect has a static dimension, since it emerges as a consequence of enhanced market access in the relevant sector or industry.

21. The competition effect relates to the changes of industrial performance as a result of changes in the price behaviour of national firms which had previously been protected from competition by means of preferential and discriminatory procurement practices. The competition effect derives also from the principle of transparency and appears to possess rather static characteristics. Transparency in public procurement breaks down information and awareness barriers in public markets, and as mentioned above, it brings a trade effect in the relevant sectors or industries by means of price competitiveness. The competition effect comes as a natural sequence to price competitiveness and inserts an element of long-term competitiveness in the relevant industries in aspects other than price (eg research and development, innovation, customer care). The competition effect will materialise in the form of price convergence of goods, works and services destined for the public sector. Price convergence could take place both nationally and Community-wide, in as much as competition in the relevant markets would equalise the prices of similar products.

22. Finally, the restructuring effect reveals the restructuring dimension and the re-organisational dynamics in the supply side, as a result of increased competition in the relevant markets. The restructuring effect is a dynamic one and refers to the long-term industrial and sectoral adjustment within industries that supply the public sector. The restructuring effect will encapsulate the reaction of the relevant sector or industry to the competitive regime imposed upon the demand and supply sides, as a result of openness and transparency and the sequential trade and competition effects. The response of the relevant sector or industry and the restructuring effect itself would depend on the efficiency of the industry to merge, diversify, convert or abort the relevant competitive markets and would also reflect upon contemporary national industrial policies.34

23. If scale economies were important in defining the most desirable purchasing pattern for the public sector and if competition were to increase amongst industries which supply the latter, an efficient European industrial structure would support less firms operating at full capacity.35 Strategic mergers and cross-border investments would reshape the industries and reorganise the operation of firms. Within this reorganisation process, the structural adjustment would constantly change in order to adapt to the new market environment introduced by the legal regime on public procurement. In the process of developing new industrial strategies, two factors appear essential: the need for integration of industrial activities36 and the need to meet local demands.

24. During the past many of the advantages offered to national champions and locally operating firms in public procurement markets had discouraged the tradability of public contracts37 amongst European industries.38 Persistently low import penetration in protected public procurement sectors dictated a corporate strategy to the relevant industries. Before the opening-up of the public procurement in Europe, the typical strategic choice was low on integration and high on responsiveness, including the replication of all major corporate functions (production, research and development, marketing) in each member state. The on-going realisation of the common market and the regulation of public procurement in the European Union have been forcing undertakings to revise their strategies and to build-up network organisations, which combine local responsiveness with a high degree of centralisation and co-ordination of major supporting activities. The new strategy has the characteristics of a multi-focal strategy.

25. The adoption of multi-focal strategies or global integration strategies involves a major shift in location patterns of key functions within firms.39 The old decentralised multinational organisations which duplicated major functions in each country which they operated need to transform into an integrated system of which the key elements show a different degree of regional concentration.40 As a consequence of the new organisational structure, different types of international transactions are expected to occur.41 Specialisation and concentration of activities in certain regions will lead to more trade between certain Member States. In addition, as a result of the corporate network system, trade will increasingly develop into-intra-firm trade and intra-industry trade with greater exchange of intermediary products.42 The organisational rationalisation following the development of network organisations may result in a problem of ownership and location of the corporate headquarters. Some Member States may fear losing strategic control in the restructuring process43 and therefore may resist the rationalisation process that the industry has been undergoing, by imposing various restrictions in terms of ownership or control structures of locally operating firms.

26. Import penetration in the public sector remains significantly lower than in the private sector. In 2005 public sector import penetration stood at 7.5%, compared to private sector import penetration of 19.1%. The low level of public sector import penetration can be attributed to the nature of the goods and services that the public sector consumes. Public administration, education, health and social services make up more than 60% of public sector expenditure (25.3%, 14.3% and 21.2% respectively in 2005). These sectors have import penetration close to zero (0.1%). In markets for public contracts which are the specific focus of EU public procurement legislation, only a small proportion of contracts are awarded for firms from another Member State. Direct cross-border procurement accounts for 1.6% of awards or approximately 3.5% of the total value of contract awards. In addition to direct cross-border procurement however, there is a considerable volume of indirect cross-border procurement, where undertakings can bid for contracts through their foreign affiliates or subsidiaries.44

27. The implementation of industrial policies through public purchasing focuses on either the sustainability of strategic national industries, or the development of infant industries. In both cases, preferential purchasing patterns can provide the economic and financial framework for the development of such industries, at the expense of competition and free trade. Although the utilisation of public procurement as a means of industrial policy in Member States may breach directly or indirectly primary Treaty provisions on free movement of goods and the right of establishment and the freedom to provide services, it is far from clear whether the European Commission and the European Court of Justice could accept public procurement as legitimate state aid.

28. The industrial policy dimension of public procurement is also reflected in the form of strategic purchasing by public utilities. Public utilities in the European Union, which in their majority are monopolies, are accountable for a substantial magnitude of procurement, in terms of volume and in terms of price. Responsible for this are the expensive infrastructure and high technology products that are necessary to procure in order to deliver their services to the public. Given the fact that most of the suppliers to public utilities depend almost entirely on their procurement and that, even when some degree of privatisation has been achieved, the actual control of the utilities is still vested in the state, the first constraint in liberalising public procurement in the European Union is apparent. Utilities, in the form of public monopolies or semi-private enterprises appear prone to perpetuate long standing over-dependency purchasing patterns with certain domestic suppliers. Reflecting the above observations, it is worth bearing in mind that until 1991 utilities were not covered by European legislation on procurement. The delay of their regulation can be attributed to the resistance from Member States in privatising their monopolies and the uncertainty of the legal regime that will follow their privatisation.

29. Nevertheless, the public procurement legal framework is positively in favour of strategic subcontracting.45 Sub-contracting plays a major role in the opening up of public markets as it is the most effective way of small and medium sized enterprises’ participation in public procurement. All Directives on Public Procurement, influenced by Commission’s Communications on sub-contracting and small and medium enterprises encourage the use of sub-contracting in the award of public contracts. For example, in public supplies contracts, the contracting entity in the invitation to tender may ask the tenderers on their intention to sub-contract to third parties part of the contract. In public works contracts, contracting authorities awarding the principal contract to a concessionaire may require the subcontracting to third parties of at least 30% of the total work provided for by the principal contract. A public works concession is defined by the Works Directive46 as a written contract between a contractor and a contracting authority concerning either the execution or both the execution and design of a work and for which remunerative considerations consist, at least partly, in the right of the concessionaire to exploit exclusively the finished construction works for a period of time. The regulation of concession contracts was introduced to the aquis communautaire by virtue of Directive 89/440 which amended Directive 71/305. In fact, it incorporated the Voluntary Code of Practice, which was adopted by the Representatives of Member States meeting within the Council in 1971.47 The Code was a non- binding instrument and contained rules on the advertising of contracts and the principle that contracting authorities awarding the principal contract to a concessionaire were to require him to subcontract to third parties at least 30% of the total work provided for by the principal contract.48

30. The industrial policy dimension of public procurement evolves around public monopolies in the Member States which predominately operate in the utilities sectors (energy, transport, water and telecommunications) and have been assigned with the exclusive exploitation of the relevant services in their respective Member States. The legal status of these entities varies from legal monopolies, where they are constitutionally guaranteed, to delegated monopolies, where the state confers certain rights on them. During the last decade they have been the target of a sweeping process of transformation from underperforming public corporations to competitive enterprises. Public monopolies very often possess a monopsony position. As they are state controlled enterprises, they tend to perform under different management patterns than private firms. Their decision making responds not only to market forces but mainly to political pressure. Understandably, their purchasing behaviour follows, to a large extent, parameters reflecting current trends of domestic industrial policies. Public monopolies in the utilities sector have sustained national industries in Member States through exclusive or preferential procurement. The sustainability of “national champions”, or in other terms, strategically perceived enterprises, could only be achieved through discriminatory purchasing patterns. The privatisation of public monopolies, which absorb, to a large extent, the output of such industries will most probably discontinue such patterns. It will also result in industrial policy imbalances as it would be difficult for the “national champions” to secure new markets to replace the traditional long dependency on public monopolies. Finally, it would take time and effort to diversify their activities or to convert to alternative industrial sectors.

31. Around one-fifth of the procurement advertised at EU level originates from utility operators. Utility operators were brought under the public procurement regime on the grounds that, because they enjoy monopoly or special and exclusive rights, they could not be presumed to have the incentives to procure efficiently. Consequently, they run the risk of engaging in preferential procurement and failing to offer foreign suppliers the opportunity to compete for their custom. As the rationale for Utilities procurement Directive stems from the absence of competition-induced discipline to procure efficiently and competitively, the evaluation examined whether the utilities sectors are now more exposed to competition than they were. On the occasion of the 2004 legislative modification, EU authorities concluded that the liberalisation of the telecommunication sector and introduction of competition in that sector were sufficient to warrant its exclusion from the scope of the Utilities Directive 2004/17/EC.

32. A number of factors are relevant. First, is the degree of liberalisation and privatisation, and the extent of competition and the effectiveness of regulation. Secondly, competition in a sector is assessed in very broad terms, taking into account the number of competitors, the degree of concentration and barriers to entry in the markets concerned, and the degree of switching amongst operators. The introduction of significant EU legislation has been directed with the aim to liberalise market access in four sectors covered by the Utilities Directive: electricity, gas, postal services and exploration for oil and gas. There has been less EU legislative activity to liberalise access in the rail, bus transport or port sectors and little or no direct action in the area of water, heat industry or airports. The liberalisation of air transport and ground-handling services has intensified competitive pressure on undertaking of some airport operations. In certain sectors competition is based on public tendering under specific EU transport legislation.

33. Progress on the legal or regulatory front has not translated into sustained or effective competitive pressure on incumbent operators in markets where access is unrestricted. In many utility sectors, high levels of market concentration or anaemic competition continue to be observed. Conditions have not evolved to the extent that competition can be deemed to be sufficiently strong on a sector wide basis to permit the exclusion of sectors from the scope of the Utilities procurement Directive. One possible exception is the market for oil exploration where markets are global.

34. Moreover, there is such wide variation in the degree of liberalisation and effective competition across Member States as to preclude any EU wide conclusions. The rationale for the Directive would seem to continue to apply in general, while specific exemptions from the application of the Directive may be justified on the basis of an in-depth, case by case analysis of each sector, broken down by relevant activities/product markets and relevant geographical markets.

35. Article 30 of the Utilities Directive provides a way of exempting market sectors from the EU public procurement rules where there has been both a regulatory liberalisation and the emergence of meaningful competition. Currently, in excess of fifteen applications have been received for ten Member States concerning either the postal or energy sectors and seventeen Decisions have been adopted (ten positive, three negative and four mixed).

36. The protected and preferential purchasing frameworks between monopolies and national champions and the output dependency patterns and secured markets of the latter have attracted considerable foreign direct investment, to the extent that European Union institutions face the dilemma of threatening to discontinue the investment flow when liberalising public procurement in the common market. However, it could be argued that the industrial restructuring following the opening-up of the procurement practices of public monopolies would possibly attract similar levels of foreign direct investment, which would be directed towards supporting the new structure. The liberalisation of public procurement in the European Union has as one of its main aims the restructuring of industries suffering from overcapacity and sub-optimal performance. However, the industries supplying public monopolies and utilities are themselves, quite often, public corporations. In such cases, procurement dependency patterns between state outfits, when disrupted can result in massive unemployment attributed to the supply side’s inadequacy to secure new customers. The monopsony position when abolished could often bring about the collapse of the relevant sector.

37. Industrial policies through public procurement can also be implemented with reference to defence industries, particularly for procurement of military equipment. The Procurement Directives cover equipment of dual-use purchased by the armed forces, but explicitly exclude from their ambit the procurement of military equipment. It should be also mentioned here that every Member State in the European Union pursues its own military procurement policy by virtue of Article 223 of the Treaty of Rome. In the light of the Maastricht Treaty on European Union, the creation of a framework within which a common European Defence Policy should be established, defence contracts and procurement of military equipment by member states should be harmonised, to the extent that a centralised mechanism regulating them should take over independent national military procurement practices.

38. Attempts have been made to liberalise, to a limited extent, the procurement of military equipment at European level under the auspices of European Defence Equipment Market (EDEM). This initiative is a programme of gradual liberalisation of defence industries in the relevant countries and has arisen through the operation of the Independent European Programme Group, which has been a forum of industrial co-operation in defence industry matters amongst European NATO members. The programme has envisaged, apart from collaborative research and development in defence technology, the introduction of a competitive regime in defence procurement and a modest degree of transparency, subject to the draconian primary Treaty provisions of Article 223. Award of defence procurement contracts, under the EDEM should follow a similar rationale with civilian procurement, particularly in the introduction of award criteria based on economic and financial considerations and a minimum degree of publicity for contracts in excess of EURO 1 m.

39. The new Defence and Security Directive attempts to regulate the procurement of armaments and other security supplies, services, and works, worth about €30 billion annually, which so far have been often treated as falling outside the field of application of the EC Treaty, the Public Sector Procurement Directive, and the Public Sector Remedies Directive. The importance of this defence market to the European economy is considerable.

40. While the acquisition of supplies, services, and works is subject to the internal market, the ‘generous’ use of a number of derogations, most notably Article 296 EC Treaty, has taken most armaments and related services outside the Community’s trade, competition, and procurement rules. This resulted in 27 separate defence markets characterised by protectionism, inefficiencies, and corruption, resulting in reduced levels of innovation and competitiveness, high prices, and a lack of transparency. The “costs of non-Europe in defence” are significant. Many initiatives of the Commission, the Council, and groups of Member States aimed at addressing the problem, without many tangible results.

41. The EU Defence and Security Procurement are areas of law and policy which rest at the borderline between core EU competence and core Member State sovereignty. This was due to the perceived lack of clarity of a number of defence and security exemptions in the EC Treaty, most notably the armaments exemption in Article 296 EC. The new Directive which was published in the Official Journal in August 2009 and must be implemented into Member States national laws by 21 August 2011 represents the most significant contribution of the Community (1st Pillar) legislator to the development of a European Defence and Security Policy, outside the Common Foreign and Security Policy. The new Directive is also a major step towards the completion of the set of legislative instruments regulating public and utilities procurement in the EU, alongside the Public Sector Procurement Directive 2004/18/EC and the Utilities Procurement Directive 2004/17/EC.

42. The scope and coverage of the Defence and Security Procurement Directive implies that the new instrument applies to Ministries of Defence and the procurement of armaments, its scope is wider than that since other procuring entities in the security sectors, such as the police, border control, and homeland security are also covered. Moreover the Directive applies to services and even works and construction projects.

43. There is considerable alignment between defence and security procurement frameworks under the premises of the EU Common Foreign and Security Policy. The European Defence Agency (EDA) was established in 2005, legally as part of the Common Foreign and Security Policy (CFSP) or second pillar of the EU and therefore institutionally as part of the Council. Within the context of this second pillar, the sui generis characteristics of Community law, such as supremacy, direct effect, and State liability and its democratic legislative process and judicial review do not apply. In 2006 the EDA introduced a non-binding Code of Conduct for Armaments Procurement with its own contract portal for its participating Member States (now all EU Member States except Denmark). Moreover, EDA introduced non-binding codes of conduct for supply management and offsets. It is argued that these instruments represent a competing legal framework for both the old Public Sector Procurement Directive with regards to armaments and for the new Defence and Security Directive. The emergence of such a competing framework can be explained by the unclear interpretation of Article 296 (1) (b) EC and the alleged inappropriateness of the Public Sector Procurement Directive for defence and security purposes. However, political and economic interests also play a major role. Crucial is the division between Member States with and those without a significant defence industrial base. Furthermore, a number of Member States with the most developed defence industrial bases established the Organisation for Joint Armaments Procurement (OCCAR) and the Letter of Intent (LoI) forums. These were partly founded due to frustration with the EU decision making processes. Both forums have their own procurement rules. An understanding of defence procurement frameworks outside the Community pillar is necessary to understand the legal and political context of the Defence and Security Procurement Directive to be discussed in the following themes.

44. The establishment of a Common European Defence Policy could possibly bring about the integration of defence industries in the European Union and this will inevitably require a change in governments’ policies and practices. Competitiveness, public savings considerations, value for money, transparency and non-discrimination should be the principles of the centralised mechanism regulating defence procurement in Europe. The establishment of a centralised defence agency with specific tasks of contractorisation, facilities management and market testing represent examples of new procurement policies which would give an opportunity to the defence industry to adopt its practices in the light of the challenges, risks, policy priorities and directions of the modern era. In particular, risk management and contracting arrangements measuring reliability of deliveries and cost compliance, without penalising the supply side are themes which could revolutionise defence procurement and play a significant role in linking such strategic industries with national and European-wide industrial policies.

45. The industrial policy dimension of public procurement as a discipline expands from a simple internal market topic, to a multi-faceted tool of European regulation and governance covering policy choices and revealing an interesting interface between centralised and national governance systems.

March 2013

1 See Valadou, La notion de pouvoir adjudicateur en matière de marchés de travaux, Semaine Juridique, 1991, Ed. E, No.3; Bovis, La notion et les attributions d’organisme de droit public comme pouvoirs adjudicateurs dans le régime des marchés publics, Contrats Publics, Septembre 2003.

2 Flamme et Flamme, Enfin l’ Europe des Marchés Publics, Actualité Juridique - Droit Administratif, 1989.

3 On the issue of public interest and its relation with profit, see cases C-223/99, Agora Srl v Ente Autonomo Fiera Internazionale di Milano and C-260/99 Excelsior Snc di Pedrotti Runa & C v. Ente Autonomo Fiera Internazionale di Milano, [2001] ECR 3605; C-360/96, Gemeente Arnhem Gemeente Rheden v. BFI Holding BV, [1998] ECR 6821; C-44/96, Mannesmann Anlangenbau Austria AG et al. v. Strohal Rotationsdurck GesmbH, [1998] ECR 73.

4 See Bovis, The Liberalisation of Public Procurement in the European Union and its Effects on the Common Market, Ashgate, 1998, Chapter 1.

5 Monopsony is the reverse of monopoly power. The state and its organs often appear as the sole outlet for an industry’s output.

6 See Drijber and Stergiou, Public Procurement Law and Internal Market Law, 46 CMLRev, 2009, 805-846; Bovis, Recent case law relating to public procurement: A beacon for the integration of public markets, 39 CMLRev, 2002, pp. 1025-1056.

7 See cases C-223/99, Agora Srl v Ente Autonomo Fiera Internazionale di Milano and C-260/99 Excelsior Snc di Pedrotti Runa & C v. Ente Autonomo Fiera Internazionale di Milano, [2001] ECR 3605; C-360/96, Gemeente Arnhem Gemeente Rheden v. BFI Holding BV, [1998] ECR 6821; C-44/96, Mannesmann Anlangenbau Austria AG et al. v. Strohal Rotationsdurck GesmbH, [1998] ECR 73.

8 See European Commission, Report to the Laeken European Council: Services of General Interest, COM (2001) 598; European Commission, Communication from the Commission to the Council, the European Parliament, the Economic and Social Committee and the Committee of the regions on the Status of Work on the Examination of a Proposal for a Framework Directive on Services of General Interest, COM(2002) 689; European Commission, Green Paper on Services of General Interest, COM (2003) 270; European Commission, Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions: White Paper on services of general interest, COM (2004) 374. See also Bovis, The State, Competition and Public Services, Chapter 11 in The European Union Legal Order after Lisbon, Birkinshaw and Varney (Eds), Kluwer, 2010.

9 See European Commission, White Paper for the Completion of the Internal Market, (COM) 85 310 fin., 1985.

10 See the Green Paper on Public Procurement in the European Union: Exploring the way forward, European Commission 1996.

11 See European Commission, Communication on Public Procurement in the European Union, COM(98) 143.

12 See Bovis, Developing Public Procurement Regulation: jurisprudence and its influence on law making, 43 CMLRev 2006, p.p. 461-495.

13 See Directive 2004/18, OJ L 134, 30.4.2004 on the coordination of procedures for the award of public works contracts, public supply contracts and public service contracts and Directive 2004/17, OJ L 134, 30.4.2004 coordinating the procurement procedures of entities operating in the water, energy, transport and postal services sectors.

14 See cases C-237/99 Commission v France [2001] ECR I-939; C-470/99 Universale-Bau and Others [2002] ECR I-11617; C-373/00 Adolf Truley [2003] ECR-193; C-84/03, Commission v Spain, not yet reported; C-44/96 Mannesmann Anlagenbau Austria, [1998] ECR I-73; C-31/87 Beentjes [1988] ECR 4635; C-360/96 BFI Holding [1998] ECR I-6821; C-18/01, Arkkitehtuuritoimisto Riitta Korhonen Oy, Arkkitehtitoimisto Pentti Toivanen Oy, Rakennuttajatoimisto Vilho Tervomaa andVarkauden Taitotalo Oy,; C-223/99, Agora Srl v Ente Autonomo Fiera Internazionale di Milano, and C-260/99 Excelsior Snc di Pedrotti runa & C v. Ente Autonomo Fiera Internazionale di Milano, [2001] ECR 3605; C-360/96, Gemeente Arnhem Gemeente Rheden v. BFI Holding BV, [1998] ECR 6821; C-343/95 Diego Cali et Figli [1997] ECR 1-1547; C-380/98 University of Cambridge [2000] ECR I-8035; C-237/99 Commission v France [2001] ECR I-939; C-26/03, Stadt Halle, RPL Recyclingpark Lochau GmbH v Arbeitsgemeinschaft Thermische Restabfall- und Energieverwertungsanlage TREA Leuna; C107/98 Teckal [1999] ECR I8121; C-18/01 Korhonen and Others [2003] ECR I-5321; C-237/99 Commission v France (OPAC), [2001] ECR I-939.

15 See cases C-315/01, (GAT) and Österreichische Autobahnen und Schnellstraßen AG (ÖSAG), ECR [2003] I-6351; C-21/03 and C-34/03, Fabricom SA v État Belge, judgment of 3 March 2005; C285/99 and C286/99 Lombardini and Mantovani [2001] ECR I9233; C324/98 Telaustria and Telefonadress, [2000] ECR I10745; C-126/03, Commission v Germany, [2004] ECR I-11197; C-176/98 Holst Italia [1999] ECR I-8607, paragraph 29; C-399/98 Ordine degli Architetti and Others [2001] ECR I-5409, paragraph 92; C-314/01 Siemens and ARGE Telekom & Partner [2004] ECR I-2549, paragraph 44; C57/01 Makedoniko Metro and Mikhaniki [2003] ECR I1091.

16 See cases C-31/87, Gebroeders Beentjes B.V. v. State of Netherlands [1988] ECR 4635; C-225/98, Nord-Pas-de-Calais Commission v. French Republic, [2000] ECR 7445; Case C-513/99, Concordia Bus Filandia Oy Ab v. Helsingin Kaupunki et HKL-Bussiliikenne, [2002] ECR 7213.

17 Case C37/92 Vanacker and Lesage [1993] ECR I4947, paragraph 9; Case C324/99 DaimlerChrysler [2001] ECR I9897, paragraph 32; and Case C322/01 Deutscher Apothekerverband [2003] ECR I14887, paragraph 64.

18 See the Utilities Directive 2004/17, OJ 2004, L 134/1.

19 See Article 15 of the Public Sector Directive and Article 22(a) of the Utilities Directive.

20 See Article 14 of the Public Sector Directive and Article 21 of the Utilities Directive.

21 See Article 13 of the Public Sector Directive.

22 See Article 16 of the Public Sector Directive.

23 See Article 17 of the Public Sector Directive.

24 See Article 18 of the Public Sector Directive.

25 See Article 25 of the Utilities Directive.

26 See Article 19(1) of the Utilities Directive.

27 See Article 20(1) of the Utilities Directive.

28 See Article 23(2)(a) of the Utilities Directive.

29 See Article 26(a) of the Utilities Directive.

30 See Article 27 of the Utilities Directive.

31 See Article 29(2) of the Utilities Directive.

32 See Article 30(1) of the Utilities Directive.

33 See Article 30(6) third indent of the Utilities Directive.

34 See European Commission, The Opening-up of Public Procurement to Foreign Direct Investment in the European Community, CC 93/79, 1995.

35 See Dunning, Explaining Changing Patterns of International Production: in Defence of the Eclectic Theory, Oxford Bulletin of Economics and Statistics, (1979), Vol. 41, No. 4, pp. 269-295.

36 See Dunning, The Globalisation of Business, The Challenge of the 1990s, (1993), Routledge, London and New York.

37 The term tradability of public contracts denotes the effectiveness of the supply side to engage in transactions with public authorities in Member States other than the State of its residence or nationality.

38 See McLachlan, Discriminatory Public Procurement, Economic Integration and the Role of Bureaucracy, Journal of Common Market Studies, (1985), Vol. 23, No. 4, pp. 357-372.

39 Porter, The Competitive Advantage of Nations, (1990), MacMillan, London.

40 Prahalad and Doz, The Multinational Mission, Balancing Local Demands and Global Vision, (1987), The Free Press.

41 Dunning,, Multinational Enterprises in the 1970's, in: K. Hopt, European Merger Contract, de Fruyter, (1982) Berlin.

42 Vandermerwe, A Framework for constructing Euro-networks, European Management Journal, (1989) Vol. 11, No. 1, pp. 55-61.

43 Tirole, The theory of Industrial Organization, The MIT Press, (1988), Cambridge.

44 This public procurement accounted for 11.4% of awards published in TED and 13.4% by value during 2006-9.

45 See European Commission, SME TASK FORCE: SMEs and Public Procurement, Brussels 1988; European Commission, Pan European Forum on Sub-Contracting in the Community, Brussels 1993. Also, Mardas, Sub-contracting, Small and Medium Sized Enterprises (SMEs) and Public Procurement in the European Community, Public Procurement Law Review, 1994, Vol. 3, CS 19.

46 See Article 1(d) of Directive 93/37.

47 See O.J.1971, C 82/13.

48 Between 2006 and 2008, small and medium enterprises among companies won around 60% of contracts covered by the Directives. The total value of public contracts awarded to SME was for around 34% of the total over these three years. These figures only take into account the contracts directly awarded to SME and do not include the value of subcontracts which could be considerable. Available data suggest that subcontracting is involved in around 8% of published contracts.

Prepared 18th July 2013