The European Commission (EC) has adopted its proposal for a reformed EU public procurement framework (the Regulation). This is a significant development for EU Member State state-owned or -controlled businesses, and those that routinely participate in public tenders across the bloc. 

The Regulation would directly apply in Member States’ national laws, replacing the directive-based regime. Stated aims include the simplification of rules, additional flexibility for public buyers in the streamlined tender procedures permitted, and a harmonisation of divergent national approaches since 2014. To this end, a single legal instrument will now consolidate the three existing directives (including on concessions) and procurement-related provisions across sectoral instruments (although defence and security contracts remain out of scope). And the EC clearly intends to fashion an integrated digital procurement marketplace, with enhanced interoperability between national systems and an electronic eligibility service built on digital business credentials.¹

A strategic investment tool

While such changes are significant, the EC’s legislative text primarily reflects the overarching realisation in Brussels that public procurement is now a “strategic investment tool” – a vehicle for strengthening the Union’s policy objectives. Public procurement accounts for c. 15 percent of the EU’s GDP. The EC prefaces that in “a geopolitical context marked by intensifying competition, supply-chain vulnerabilities and the exploitation of economic dependencies, the way public buyers spend money has become a matter of strategic relevance.”² Both the Draghi and Letta reports – underpinning the EU’s competitiveness agenda – made the same point.

This informs the most consequential shift identifiable in the draft Regulation: European preferencing in procurement markets, based on supplier (or goods/services) origin. If adopted, we see the Regulation – in practice – giving effect to this in both direct and indirect ways. 

First, public buyers are given an explicit legal basis to restrict tender participation only to EU bidders, and other “covered” economic operators. The latter are those where:

1. their state of origin is party to the WTO Government Procurement Agreement (GPA), or a bilateral/multilateral trade or customs union agreement with the EU; and
2. the procurement in question falls within scope of those EU international agreements. 

The EC commits to adapting its Access2Markets online portal for public buyers to navigate this. But for procurement managers and in-house counsel, familiarity with supplier- and goods-origin determination rules, under both the EU’s International Procurement Instrument (Reg 2022/1031) and Union Customs Code (Reg 952/2013), will now rise in salience. Notably, “covered” economic operators would not encompass those from the People’s Republic of China.

To some extent, this breaks new ground – Brussels now contemplates tightening what has traditionally been an open procurement market. As part of these preference requirements, public buyers can favour bids by EU or “covered” suppliers, require goods/services to originate in the EU or from “covered” jurisdictions, and/or reject outright tenders where the value of EU or “covered” goods/services/works in the tender falls below 50 percent of total estimated value of that tender. 

Yet, on the flip side, the Regulation is explicit that it respects and complies with the EU’s international trade obligations in this space. That includes largely reciprocal procurement market access in the UK-EU post-Brexit Trade and Cooperation Agreement, and arrangements with major WTO GPA signatory economies like the US, Canada, Japan and South Korea. Further, there are important exceptions permitting public buyers not to apply European preference requirements, including where there is no reasonably alternate to non-EU/”covered” suppliers or this would generate disproportionate costs.

Irrespective, the Regulation’s wider provisions also create a procurement architecture that is likely to favour EU suppliers on a case-by-case in practice, at least materially more so than at present. 

Chiefly, there is now a clearer legal basis to evaluate bids based on non-price criteria driving at environmental and climate-related considerations, resource or energy efficiency, or with a view to achieving positive social outcomes or prevent adverse social impacts. That latter involves objectives concerning, for example, social inclusion, high-quality jobs, disability access or promotion of the social economy. This is also backed up by moving to a default evaluative method based on best price-quality ratio, supported by more frequent minimum quality requirements (since the EC views price-only based awards as too prevalent).³ The Regulation would impose a minimum 30 percent quality weighting in award criteria (rising to 50 percent for labour-intensive contracts). Ultimately, the EC seeks to establish a “coherent architecture for integrating strategic policy objectives into procurement design, award and contract performance”.⁴

For EU-established bidders already subject to various EU law obligations, it is likely to be easier to score more highly on non-price-based criteria in tenders. This is especially so where criteria are developed in the context of the same local or regional business environment, where those bidders focus their operations. 

Enhancing resilience

There are also numerous provisions aiming at enhancing European resilience through procurement – for instance, public buyers will be under an obligation to take measures to protect the EU’s and its members’ security and public safety interests, where risks to these arise in relevant public contracts. The Regulation categorises such risks as arising from either a public contract’s subject matter or the characteristics of bidders (including, among other things, their ownership structure, exposure to third-country legislation or relevant track record). The Regulation sets out that “appropriate measures” can now be taken, including by adopting certain contract specifications, award criteria and performance conditions aimed at safeguarding public safety and against undue dependencies. In practice, bidders from EU states are likely to be advantaged in this context, and those from third countries – particularly where there are potentially geopolitical sensitivities – are not.

Given this structure, it is tempting to see the Regulation as a product of the EU’s enhanced trade defence activities, advanced now through both standard instruments and newer vehicles like the Foreign Subsidies Regulation. Politically, countering economic dependencies on, and risks of intensified competition from, China within European markets is of course a clear driving force in the Brussels regulatory agenda. The EC also states that the Regulation will now give it the power to restrict procurement market access dynamically, through two distinct mechanisms. First, the EC may strip “covered” status from operators of third countries, including (amongst other circumstances) where those countries fail to provide fair treatment to EU operators or where exclusion is needed to avoid dependencies threatening security of supply. Second, the EC may require public buyers to apply European preference requirements against non-covered operators and goods, when in the EU interest. This signals the EC’s intention to take a more muscular role in this element of international trade.

Lastly, the Regulation is intended to establish the default, baseline approach to governing European preference rules in procurement going forward and “a basis for future Union legislative acts establishing preference mechanisms based on origin”.⁵ That will create read-across with currently pending legislative initiatives, notably the proposed Industrial Accelerator Act and the Cloud and AI Development Act. The interplay and consistency between these proposals, and the Regulation, will need to be carefully monitored as all progress through the EU legislative process. 

Other objectives

Procurement managers and in-house counsel should also note several other, wider policy objectives, shaping key changes proposed in the Regulation. For instance: 

1. The ‘innovation procedure’: This will allow public buyers to seek, e.g., solutions to social challenges by assessing different kinds of proposals or approaches first, before then procuring solutions. We see avenues of opportunities here for innovation-heavy, scaling businesses to drive growth through exposure to the public market, as well as social enterprises who can score highly in bolstered quality criteria. This sits alongside the proposed European Innovation Act, which would establish a specific regime for procuring R&D service contracts (themselves excluded from this Regulation).
2. Exemptions for utility activities: The Regulation reflects that, in recent years, market liberalisation has been a feature of numerous national utility markets (e.g. water, electricity, and transport services). The Regulation now designs a process by which utility contracts can be exempted from procurement rules going forward, where the relevant activity “is directly exposed to competition on markets to which access is not restricted in that geographical area”.⁶ A new procedure for seeking EC approval of such an exemption is proposed. This will potentially give public buyers in liberalised markets significantly added flexibility, although submissions to the EC will be required in advance.
3. Enhanced governance and integrity provisions: The Regulation modernises and adds provisions relating to combatting fraud, collusion, corruption, favouritism and conflicts of interest, backed by mandatory use of data-based risk analysis tools. National co-ordinating authorities across the bloc are required, intended to enhance professionalisation.

What to do now

In the immediate terms, businesses should watch the development of these proposals in different ways: 

1. State-controlled enterprises should review their public contract portfolio and consider how reliant both their procurement pipeline and operations are on non-EU or “covered” suppliers from third countries. This is particularly important for undertakings active in critical infrastructure or more sensitive sectors, the focus of much of the legislative innovation. The direction of travel is now clearly “Buy European”.
2. For EU-based undertakings, the Regulation likely creates new opportunities to drive business growth from increased involvement in public markets – non-price quality criteria, alongside resilience and security requirements, should generate a more favourable environment. The EC clearly seeks innovative (or creatively disruptive) solutions to fare better in contract awards. This – and other provisions – indicate an attempt to lower barriers to entry in procurement markets for EU players, particularly the bloc’s SMEs, scaling businesses and social enterprises.⁷
3. For non-EU companies from jurisdictions “not covered” by the EU’s international commitments, the Regulation will likely lead to a more difficult tendering environment. Supplier and goods-origin rules are complex, with anti-circumvention mechanisms. Strategies need to be put in place to maintain procurement market access as far as possible, as well as mitigate adverse detriment to key public buyer relationships within the bloc.
4. Lastly, for utilities operating in more liberalised local or national markets, a robust assessment of competitive dynamics should now be undertaken, so as to position effectively for potential exemptions from strict EU procurement rules in the future.

Footnotes