Amid turmoil over the European Parliament’s failure to agree on some of the EU’s largest climate reforms (ETS and CBAM for acronym-savvy EU insiders), it was easy to miss that last week’s plenary approved the International procurement instrument (IPI), now much less controversial but no less relevant and which will soon enter into force after over a decade of debates. If your business has something to do with public procurement, here is what you need to know about the EU’s latest utensil in its trade defence toolbox, which has an enormous impact on economic operators.
What it is: A crowbar for reciprocity in procurement markets.
Last Thursday the Parliament approved the IPI regulation with a large majority (554 in favour, 7 against and 14 abstentions), signalling the broad political supports behind its aim: ensuring reciprocity to EU companies applying to public procurements in third countries by introducing measures to redress imbalances and level the much debated playing field.
This IPI regulates the access of third-country bidders to the EU procurement market and has the goal to favour the access of EU bidders to the procurement markets of third countries. It will allow the European Commission to penalise foreign companies participating in procurement in the EU, if its home country does not guarantee equal access to EU businesses.
The regulation will cover more than 70% of the value of the EU procurement market, covering 17% of public tenders. Public procurement constitutes 14% of the EU GDP and 15-20% of global GDP, representing €1.3 in business opportunities worldwide. Procurement is also crucial in the national plans that are being implemented with the Next Generation funds for the post-pandemic recovery, particularly in infrastructure. These new rules thus impact a wide range of sectors providing goods or services to public authorities, such highways, trains, railways or public IT systems.
How it works: Penalties, exclusions, exceptions.
The Commission can launch an investigation to assess if a third country allows access to its tenders on fair terms, compared to EU ones. If that is not the case, the Commission will start consultations with the country concerned. If that does not wield results, the Commission can decide to:
a) apply a price adjustment to that third country’s bidders, raising the price offered by the foreign bidder to make it less appealing;
b) apply a score adjustment, reducing the score on a bidder;
c) exclude the bidder from EU tenders.
Companies from countries which do not ensure reciprocity to EU enterprises (or are considered not to) should start evaluating the impact of this legislation. The rules would apply to public authorities with at least 50,000 citizens, as well as to tenders of at least €15 million for works and concessions and of at least €5 million for goods and services. There is an important exemption. The 20 countries that are parties of the General Procurement Agreement (GPA), a deal in the WTO framework aimed to open the international procurement market, will in principle be exempted for several sectors. Important EU partners have signed the GPA, such as the US, Canada, Japan and the UK.
What it means: Trade defence momentum.
First introduced by the Commission in 2012, the legislation was stalled for years, due to the opposition of countries more exposed to international markets such as Germany and the Nordic members. After a second Commission proposal the file gained traction in 2019 amid concerns about the competitiveness of the EU industry and trade tensions with the US and above all China. According to sponsors of the regulation, while the EU’s public procurement market is relatively opened to foreign companies, third countries are often deemed to restrict their markets in favour of domestic companies. This is why access to the EU’s procurement market has always been a critical point in the negotiations of trade agreements.
For the proponents, the IPI is thus part of the EU effort to prop up its “trade defences”, as well as its strive towards “strategic autonomy” – enough to make it one of the priorities of the French Presidency of the Council of the EU, with the goal to complete it before the Presidency passed to the Czech Republic and Sweden, which are among the pro trade member states. The legislation was designed to target markets like Brazil, Turkey, India and above all China. Conversely, after intense negotiations, bidders from least developed countries will be exempted. The US was a “person of interest” in the matter, but recent improvements in transatlantic relations make economic tensions between Brussels and Washington less likely. For now. “Buy American” rules in the US – privileging domestic companies for public tenders – are raising eyebrows among EU policymakers, and might lead to tit-for-tat in the longer term.
The IPI should thus benefit EU companies, favouring a level playing field in domestic and foreign markets. According to European Commission estimates, the EU would be able to double its procurement exports by greater access to foreign procurement markets. However, should it fuel further trade tensions or discourage investments in key sectors (especially in combination with the foreign subsidies instrument) it might result into risks for operators and decreased competitiveness and thus quality in public procurement tenders across Europe.
Whether and how the IPI will succeed in opening procurement markets in countries that are not easily swayed by soft policy manoeuvres remains to be seen. Its combined impact with other trade defences, notably the foreign subsidies instrument, is also unclear, and might have unforeseen effects for investment into the EU.
One thing is sure: businesses will certainly have to factor the IPI into their strategies.