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

The Draft International Procurement Instrument and Regulation on Foreign Subsidies

At EU level, two new instruments are currently being discussed with potentially significant effects on public procurement procedures. On the one hand, the debate on the International Procurement Instrument (IPI), first proposed by the Commission a decade ago, has gained strong momentum. A delegation from the European Parliament is currently negotiating a revised draft instrument with the Council and it is likely that consensus will be reached in 2022. The instrument, set out to fortify the EU’s economic standing in the world, will strengthen the EU’s negotiating power vis-à-vis third countries that have not yet opened their procurement markets to EU companies. On the other hand, a proposed Regulation on foreign subsidies distorting the internal market (Draft Foreign Subsidies Regulation) is set out to close a legal gap and counter the impact of third-state subsidies on concentrations and public procurement within the EU. The two planned instruments will possibly have significant impacts on both EU and non-EU businesses.

With the IPI, the EU aims to protect European companies against discriminatory or restrictive practices by some of its trading partners, namely those that are covered by neither the Agreement on Government Procurement (GPA) nor a free trade agreement. The IPI would allow the Commission to adopt tangible sanctions against bidders from countries which do not themselves offer reciprocal access to EU companies. Despite its broader range of application, the Instrument seems to be particularly directed against China. The risk of sanctions should not be underestimated: The IPI is intended to have a particularly broad scope, covering all public contracting authorities and all tenders for works and concessions worth at least EUR10 million and for goods and services worth at least EUR5 million. Exceptions are limited to narrowly defined cases and take into account the interests of least developed and vulnerable developing countries. If the Commission identifies inequalities in access to government procurement markets, it may open an investigation into the matter and initiate consultations with the third country concerned. In addition to diplomatic measures, the draft IPI provides for strong immediate responses: according to the current draft, the Commission may not only require EU contracting authorities to adjust the score of tenders from the third country concerned, which can lead to a reduction of up to 100% of the evaluation points; the Commission may also require contracting authorities to exclude a bidder from the EU market altogether.

The planned IPI runs in parallel with a proposal in 2021 to introduce a Foreign Subsidies Regulation. This regulation aims to address subsidies granted by third countries that benefit companies operating in the EU. Current EU rules, including those on public procurement, do not sufficiently allow to consider subsidies from third countries. This is in stark contrast to the rigorous regime applicable to subsidies from EU Member States. The Commission considers this to be problematic, as foreign subsidies may distort the internal market as well. To address this issue, the draft regulation introduces a notification-based review process that precedes procurement procedures or concentrations (i.e. mergers, acquisitions, and joint ventures). It also allows the Commission to investigate foreign subsidies on its own initiative and on an ex post basis. The notification requirement applies to all foreign subsidies in public procurement procedures if the value of the tender is at least EUR250 million. If the Commission finds a distortive effect on competition, it may impose commitments on the bidder to remedy this effect or even exclude it from the procedure.

Both the current draft of the IPI as well as the Draft Foreign Subsidies Regulation signal a vigorous EU initiative to establish a level playing field in public procurement. Non-EU companies risk becoming targets of sanctions if their home country unfairly restricts EU bidders’ access to their markets or grants subsidies that have distorting effects on the internal market. For EU companies, on the other hand, the IPI could lead to the opening of new markets and protect them from unfair restrictions, whilst the Draft Foreign Subsidies Regulation could lead to fairer conditions in procurement procedures. At the same time, both instruments could also mean further bureaucratic obstacles and delays in procurement procedures. What is more, it is uncertain how third countries will respond once restrictions are imposed on their companies. Instead of a level playing field, the result could thus also be a spiral of further restrictions. Ultimately, the success of the two initiatives will depend on the Commission's and the Member States' practical implementation of the envisaged tools.

Restrictive tendency at national level: Rebate contracts for pharmaceuticals

The tendency towards restricting access to the EU public procurement market for bidders from non-EU states that do not grant an equivalent access to EU bidders (third states) can also be observed at national level. A current example concerns the German pharmaceuticals market. In recent years, the production of pharmaceuticals, in particular off-patent medicines, has shifted to China and India, neither of which is part of the multilateral Government Procurement Agreement (GPA) or an EU free trade agreement. There is concern that a disruption in the supply chains, as recently caused, for example, by the pandemic or accidents such as in the Suez Canal, could acutely endanger the provision of health care with these drugs in Germany and the EU.

The health insurance funds award off-patent medicines as public contracting authorities according to the rules of public procurement law. They have recently tried to use means of public procurement law to exclude suppliers from third states. Specifically, one health insurance fund has planned to grant bonus points to bidders with a closed supply chain in the EU, in GPA signatory states or in an EU free trade area when assessing the economic viability of the bid. The Higher Regional Court in Düsseldorf has now put a stop to this practice. However, the court mainly argued that German public procurement law does not provide for an explicit authorisation of the health insurance funds to disadvantage bids from third states. This reasoning is based on the German public procurement principle that an unequal treatment of bidders is only permissible if there is an explicit legal authorisation. It remains to be seen whether, in view of the current Brussels tendencies, the German legislator will also take action and implement such legal basis. This could substantively extend the restrictive tendencies at national level.

ESG and its implications to public procurement 

Given the growing impact of the climate crisis on the political agenda both in the EU and in Germany, it is highly likely that bidders will see an increase in ESG and sustainability criteria in public procurement procedures. The private sector is facing a great deal of restrictions and obligations with, for example, the proposal for a Deforestation-Free European Regulation and the German Act on Corporate Due Diligence Obligations for the Prevention of Human Rights Violations in Supply Chains. This trend to use trade mechanisms to enforce ESG goals will influence how contracting authorities will structure their public procurement procedures.

In particular, the “Fit for 55” legislative package presented by the European Commission in July 2021 may have an impact on public procurements with its proposal to change the Energy Efficiency Directive to impose to the public sector the obligation to renew 3% of its buildings each year, creating an important market for sustainable construction. Another important change is the acceleration of the transition to a zero-emission mobility system, requiring average emissions from new cars to come down to 55% by 2030 and to 100% by 2035.

In Germany, the Authority for Sustainable Procurement (Kompetenzstelle für nachhaltige Beschaffung) issued in September 2021 the Sustainability Action Plan that will guide the government’s efforts for the next two years in the area and defines that public procurement must be increasingly geared to the principles of sustainability. Furthermore, the Federal Ministry of the Interior and Community (BMI) and the Federal Ministry for Economic Affairs and Climate Action (BMWK) are to set up a committee for sustainable public procurement in 2022 which, among other things, will work on the definition of sustainability criteria.

One of the main legal constraints is that any ESG criteria need to be linked to the subject matter of the contract. In this regard, ESG criteria may for example be included in the description of the deliverables itself as technical specifications (especially when considering environmental requirements), including requiring specific eco-certifications of products. In addition, ESG criteria may also be used as suitability criteria, e.g. by requiring a specific ESG management standard. Furthermore, it is possible to set them as award criteria or as conditions for the execution of the contract.