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EU public procurement - the wood report

A year long review commissioned by the Chancellor of the Exchequer, Gordon Brown, has found that British firms are losing out in the battle for the €1,500 billion European public procurement market (around 16 per cent of the EU’s annual economic activity) because other EU governments and publicly funded bodies are unfairly discriminating against them and getting around the rules to help their own companies.

Alan Wood, the Chief Executive of Siemens UK, led the review and wrote the final report, which criticises failings in the EU public procurement process. Mr. Wood was appointed to investigate procurement practice last year following complaints from British business that they were missing out because of unfair procurement practices. The Report concludes that complex rules, unfair national preferences and a less committed attitude to competition in other EU Member States are preventing the establishment of a truly competitive market for contracts awarded by EU governments and publicly funded bodies in EU Member States, such as the construction of schools, hospitals and local authorities. The Report was based on a confidential poll of about one hundred British companies and trade organisations. It found that British business felt that it was disadvantaged by a variety of practices in other countries that appeared to be designed to ensure that local companies - not foreign outsiders - win the best contracts.

The Report details instances of unfair practices. These include the award of contracts to national suppliers even where foreign bidders are believed to offer better quality or price; the drawing up of contracts to suit a national supplier; putting pressure on suppliers to use locally-based sub-contractors; and inviting foreign bids simply to squeeze local suppliers on price, not because they have a chance of winning the contract.

One of the “tricks” used to abuse procurement rules is the splitting of large contracts into several smaller ones. In this way, the contract value can be kept below the EU thresholds above which it must be opened up to pan-European competition. One government cited in the study split a contract for road surfacing into two parts - one for surfacing the top half of the road and one for surfacing the bottom half. This the study stated was an “artificial split which produced no benefit other than the avoidance of competition”. There are Aggregation Rules which are aimed at preventing purchasers deliberately avoiding the application of the rules by splitting contracts and they also reduce the possibility of the rules being rendered inapplicable by inefficient purchasing through lots of small contracts. Indeed, the Aggregation Rules are applied to contracts awarded at the same time, as well as to those awarded at different times. These rules are important (and should be enforced by the European Commission) since contract splitting, whether deliberate or unintentional, is unlawful and is a source of regular abuse of the rules.

The number of EU contracts advertised (106,000 in 2002) is so high it is impossible for the European Commission to monitor them to ensure fairness and so aggrieved companies have to rely on grievance procedures in the different EU Member States. The Wood Report concludes that there is a lack of any meaningful complaints process in many EU Member States for firms who have unfairly lost out on a contract. Indeed, in any event, most businesses are unwilling to take legal action against EU governments and public bodies as they fear that they would lose out on lucrative future contracts if they were to complain.

The Report makes it clear that competition for public contracts is vital so that the EU as a whole benefits from work being carried out in the most efficient way. Research by the European Commission found that correct application of the public procurement rules reduces costs by 30 per cent. The Report calls for action by other EU Member States to open up markets and to eliminate bad practices. Alan Wood thinks that British firms should not have to put up with barriers and difficulties in order to compete for lucrative public contracts in other EU Member States.

Finally, the Report identifies high volumes of state subsidies (often illegal state aids) in some countries as giving foreign companies an unfair competitive advantage against British companies trying to compete for public procurement deals. The UK was found to distribute less state aid than any of the other 15 older EU Member States.

The Chancellor intends to use the Report at upcoming meetings of European finance ministers to insist on a level playing field, to demand better enforcement of procurement rules across the EU and clearer benchmarks from the European Commission in relation to the way in which the rules should operate.

key expertise

Geraldine Tickle
Partner
geraldine.tickle@martjohn.com

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