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GERMANY: An Introduction to Public Law: Public Procurement/PPP

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Germany – Public Law: Public Procurement/PPP 

A whole set of topics with a far-reaching impact on public procurement law are currently being discussed in Germany. For example, the so-called Supply Chain Law (Lieferkettengesetz), which is expected to be enacted in 2021, could have a significant impact on companies participating in public procurement procedures (I.). Another focus is on defence procurement, as there is a political will in Germany to award more defence contracts directly to German companies (II). Finally, there is a lively discussion as how to deal with threats to fair competition inside and outside of the EU Single Market caused by third countries, ie which are neither members of the EU nor the GPA or other international agreements (III).

I. Supply Chain Law 

After numerous discussions, the so-called Supply Chain Law is to be passed in the current legislative period. The main purpose of the Supply Chain Law is to prevent human rights violations that occur along global supply chains in the production of a product. To this end, the law places an obligation on companies based in Germany with a size of more than 1,000 employees and requires them to ensure that no human rights violations are committed in their supply chains.

Although the Supply Chain Law will only come into force in stages from 1st January 2023, it already has an impact on companies participating in public procurement procedures that should not be underestimated. A violation of the regulations of the Supply Chain Law does not only result in a high fine but can also lead to an entry in the newly established Competition Register (Wettbewerbsregister). Such registration can completely exclude the company concerned from public procurement for up to three years.

In order to prevent this worst-case scenario, the compliance departments of affected companies are already required and encouraged to take preventive measures to avoid future violations. It is important to identify potential risks in the own supply chains and to have appropriate remedial measures in place if there are indications of human rights violations. Depending on the size of the company and the number of its suppliers, this may be a very elaborate and extremely extensive undertaking.

Besides Germany, also other countries such as France and the Netherlands are holding companies accountable in this area. In addition, the EU has also announced its intention to act in this regard and to present already in June 2021 an even stricter and more far-reaching proposal than the German one. It remains to be seen which further effects this will have on public procurement law.

II. Defence procurement 

In defence procurement, being another familiar topic of public procurement law in Germany, there have been some interesting recent developments. While defence contracts generally have to be awarded on the basis of EU wide public procurement procedures, there is a political will in Germany to restrict the competition to only German companies. However, as a matter of law it is only possible to award defence contracts without conducting a procurement procedure in very exceptional cases.

The most far-reaching exemption provision is provided by Article 346 of the Treaty on the Functioning of the European Union. According to this article, a public procurement procedure is not necessary if this procedure would adversely affect essential national security interests. After the European Court of Justice interpreted the conditions for the application of this provision narrowly in a series of rulings and after the defence directive was implemented in Germany, the provision was used less and less frequently in Germany. This has changed more recently. In 2020, a new law was enacted by the German Government that defines certain so-called key defence technologies. When a contract involving such a key defence technology is awarded, Germany's essential security interests are said to be affected. In this case, Article 346 of the Treaty on the Functioning of the European Union is applied by the German Ministry of Defence and no EU wide award procedure involving foreign companies is carried out. So far, this new approach has not been finally reviewed by courts.

III. Threats to fair competition inside and outside of the EU Single Market

Another topic being discussed at both German and EU level is how to deal with the (perceived) increasing unilateralism und protectionism in the government contracts market. There are two major issues to resolve. First, while the EU has opened up its public procurement markets to companies from third countries to a large degree, many of these countries do not grant EU companies comparable access. Second, unregulated state subsidies from third countries can contribute to unfair competition in the EU Single Market.

In response to the discrimination against EU companies in third countries’ markets, the European Commission proposed the International Procurement Instrument (IPI) in 2012, which was revised in 2016. The IPI enables the European Commission to impose penalties on third countries that discriminate against EU companies.

The IPI builds on already existing provisions in EU and German public procurement law providing for tools to react to discrimination by third countries which fail to open up their public procurement markets. Article 85 of the Directive 2014/25/EU (Utilities Directive – which concerns procurement by entities operating in the water, energy, transport and postal services sectors) allows a contracting authority to exclude a bidder from a public procurement procedure if the bidder is from a third country with a non-open market, or if the offer relies on products coming from such a country. More specifically, according to Article 85 (2) of the Utilities Directive, any tender submitted for the award of a supply contract may be rejected where the proportion of the products originating in third countries exceeds 50% of the total value of the products constituting the tender. Products are regarded as third country goods if they originate from countries that do not belong to the EEA and with which there are no agreements on mutual market access. The provision does not contain any further material requirements for the exclusion.

In Germany, this provision and its implementation in national law became relevant in a recent court decision. The Higher Regional Court of the Federal State of Brandenburg confirmed the legality of the rejection of a bid submitted by a Chinese company for the supply of tram vehicles on the basis of the German provision implementing Article 85 (2) of the Utilities Directive. The company had offered tram vehicles with 70% of the components originating from third countries.

However, this case law of the Higher Regional Court is limited to cases that fall within the scope of application of the Utilities Directive. It cannot be transposed to other sectors and industries. In particular, Article 25 of Directive 2014/24/EU does not specifically provide for an authorisation to exclude non-EU bidders. This was recently confirmed by the German Federal Procurement Review Chamber in a case involving the procurement of pharmaceuticals. The public contracting authority had declared to purchase pharmaceutical products only from suppliers who could prove a "closed EU supply chain". The Federal Procurement Review Chamber found that Article 85 (2) of the Utilities Directive does not apply and that there is no legal basis in the remaining EU procurement law for the exclusion of companies based solely on the ground that the bidder offers products originating in third countries. In conclusion, current EU public procurement law does not entail an efficient legal instrument such as the IPI. The discussions over the content of the IPI led to a severe delay in the IPI’s adoption. Recently, the EU institutions have been calling to accelerate the work on the IPI.

In addition to the IPI, to address unregulated state subsidies from third countries leading to market distortions, the European Commission published a White Paper on foreign subsidies in June 2020. The White Paper is designed to deal with the advantage obtained through state subsidies from third countries, that enables companies to outbid their competitors in the European Single Market by submitting more cost-effective bids in public procurement procedures. To prevent such distortions of competition, the Commission has proposed that companies participating in a procurement procedure should disclose in future whether they have received or will receive subsidies from third countries. Companies with a competitive advantage because of third state subsidies could then be excluded from the procurement procedure.

The idea to exclude bidders relying on distortive foreign subsidies is not totally new to the EU and German public procurement law. Article 69 of the Directive 2014/24/EU and article 84 of the Utilities Directive allow contracting authorities to exclude offers from subsidised bidders if those are “abnormally low”. Nevertheless, as it neither addresses distortive foreign subsidies nor contains an obligation to exclude subsidised bidders, there still is a regulatory gap.

The proposals of the IPI and the White Paper show that there are many calls for better protection of EU companies against unfair competition inside and outside of the EU market. However, the EU Member States have not yet been able to agree on binding, stricter rules. There have been ongoing discussions on the content of the proposed legal instruments, and some have criticised them as too protectionist. However, in the long-term, both the IPI and the White Paper are supposed to make third countries agree to open their public procurement markets. The topic will continue to be a subject of discussion in the future.