By: Marta Andhov[1] & Michał Kania[2]
Introduction
This blog examines the ever-growing catalogue of restrictions on who can participate in the EU public procurement market and, consequently, with whom the public buyer (the contracting authority) cannot contract. We start by showcasing how freedom of contracting – one of the fundamental principles of contract law – is limited in the context of public procurement (section 1). Next, we look outside of EU Public Procurement Directives to sources of additional restrictions. These represent a clear reaction to contemporary challenges and include Sanctions Against Russia (section 2), Foreign Subsidies Regulation and International Procurement Instrument (section 3), Deforestation-Free Products Regulation and the Proposal for an Anti-Greenwashing Directive (section 4). Finally, we provide some conclusions.
Limiting Freedom of Contracting
Public contracts represent a juxtaposition of public procurement law’s public and private character. One of the areas of the interaction between public (EU law, administrative law) and private (contract) law elements in public contracts is the issue of restricting freedom of contracting and, more precisely, restricting the choice of the party the contracting authority wishes to conclude a contract with. [3]
Typical for private contract law, the freedom to choose the contracting party resulting from the parties’ autonomy is limited under the public procurement regime due to the public law nature of procurement law. This can be seen based on the imposition of a high number of often complex obligations when it comes to the formation of public contracts in the EU public procurement rules. The latter also makes it possible to exclude potential contractual partners on several mandatory and non-mandatory grounds.[4] Even outside the provisions on exclusion grounds, it might be necessary to exclude certain participants from the procurement process to ensure compliance with fundamental principles of equal treatment and non-discrimination in case if such tender has an unfair competitive advantage.[5]
The principle of freedom of contract can be seen in conjunction with the principle prohibiting artificially narrowing competition.[6] The mutual relationship between the two creates circumstances in which the following questions arise: Which competition is relevant in the context of public procurement contracts? Is the competition to be as open as possible, meaning unlimited competition based on the unrestricted application of the contractor’s freedom of choice? Or are we discussing competition between companies meeting certain standards representing the contracting authority’s values?
From a legal point of view, as mentioned above, the restrictions on the potential range of contractors relate to the exclusion grounds, selection criteria, and expected standards of how the subject matter of the contract is described. These legal concepts are then filled with substantive content depending on desirable public buyers’ objectives. The catalogue of circumstances and standards weaved into these rules is dynamic and open. It develops according to the values adopted by a given community and is continuously adjusted by the legislator to respond to current socio-economic developments and expectations.
Over the last few years, several significant new developments have emerged, affecting the EU’s public procurement market. These include but are not limited to the growing protectionist tendencies of the EU’s critical economic partners such as the United States[7] and China[8], COVID-19, Russian aggression against Ukraine, but also growing expectations of the EU to combat climate change. These developments limit the potential range of contractors for EU public contracts, at least in three contexts. Firstly, the access to the public procurement market for specifically Russian companies, and secondly, for the third countries’ companies.[9] Thirdly, by raising environmental standards of the goods, works, and services that are to be allowed at the EU’s public procurement market, the EU legislator also limits with whom the public buyer may engage in a public tender.
Sanction Against Russia in the EU Public Procurement
Recent years have changed the European geopolitical landscape significantly primary due to the outbreak of war in Ukraine on February 24, 2022. This event has dominated international relations, deprioritizing the long struggle with COVID-19 and its consequences to the second tier. Russian aggression led to the adoption of several restrictions on conducting business with Russian and Belarussian companies. Public procurement is explicitly considered in Art. 5k Regulation 2022/576 which prohibits an award and performance of public contracts and concessions to the detriment of persons, entities, and organizations connected with Russia.[10] It prohibits a contract with any person, regardless of their place of establishment or nationality, which implements or intends to implement a contract using Russian or Russian-owned subcontractors, suppliers, or capacity providers whose participation is above 10% of the contract value. The sanctions are applicable from April. 9, 2022. New contracts falling under the prohibition should not be signed from this day. Where the prohibition applies, a public buyer must reject or terminate the tender. Moreover, when a Russian contractor or subcontractor may be involved, public buyers are now obliged to request the tenderer to replace the Russian subcontractor in its supply chain and offer them an opportunity to submit a revised tender. The ban on awarding contracts or concessions to Russian nationals and companies is not absolute. The competent national authority can authorise the award or continued execution of a limited range of contracts, such as contracts on intergovernmental cooperation in space programs, the import or transport of natural gas and oil, and the import or transport of coal. Finally, the ban on awarding contracts to Russian nationals and companies is addressed to public buyers. Therefore, they can be subject to prosecution and penalties if they fail to comply with the ban.
Foreign Subsidies Regulation and International Procurement Instrument
New barriers for the third countries’ companies in access to the EU public procurement market came in 2022 with two pieces of legislation. The first one is Regulation 2022/2560 on Foreign Subsidies Distorting the Internal Market (FSR).[11] The second is Regulation 2022/1031 on International Procurement Instrument (IPI).[12] The primary objective of FSR is to protect EU companies from unfair competition. This protection should further lead to the rapid development of EU industries, including SMEs, providing services, works, and goods which meet the public interest expectations. FSR is believed to fill a gap in solutions aimed at eliminating distortions of competition due to illegal state aid on the Internal Market. Until now, the conceptualisation of illegal state aid in the context of public procurement referred to companies within the EU. At the same time, the provision on abnormally low price was supposed to counteract the possible distortion of competition caused by the actions of subsidised third countries companies.[13] In times of the unstable global situation and growing, dynamic economic expansion of subsidised third countries’ companies, the indicated solution was deemed insufficient. The adoption of the FSR was preceded by a consultation based on the White Paper on foreign subsidies in the Single Market.[14]
FSR provides the EU Commission with strong supervisory power to prohibit the contract award to a foreign subsidized company, which distorts competition. The supervisory power applies to all public procurement procedures above the EU thresholds, including procurement in the defence sector. [15] The FSR imposes notification obligations on contractors in procedures, which value exceeds 250 million euros. The notification should include, among others, information about the received financial contribution, explanations of the positive effects of the subsidy, and justification that the tender is not unduly advantageous. Notification obligations apply to the contractor, main subcontractors, and suppliers.
The influence of FSR also stems from the unprecedented plan to rebuild the EU economy after COVID-19. The Recovery and Resilience Facility (RRF), established on August 16, 2020, provides the legal basis for the historic post-pandemic reconstruction. The RRF is a crucial instrument at the heart of the Next Generation EU Plan for emerging stronger from COVID-19, making 750 billion € available for companies competing in the EU market. It aims to mitigate the economic and social impact of COVID-19 and make European economies and societies more sustainable, resilient, and better prepared for the challenges and opportunities of the two significant Green and Green Digital Transitions. There is a presumption that competitive advantages built on resources from RRF cannot be lost on the public procurement market because of unfair competition with third-country operators benefiting from the foreign subsidies.
The IPI, in turn, intends to level the playing field of the EU companies’ position outside the EU regarding fair competition and access to foreign public procurement markets.[16] Currently, EU companies face restrictive procurement practices in many of the trading partners of the EU. Those restrictive public procurement practices result in the loss of substantial trading opportunities and the use of competitive advantages of EU companies. The IPI enables the EU Commission to impose measures limiting the third countries’ companies’ access to the EU public procurement market if these third countries’ governments do not offer reciprocal access to their public procurement market for the EU companies.
Deforestation-Free Products and Anti-Greenwashing Laws
Further restrictions on the potential circle of the EU public sector contractors relate to adopting the regulations aiming at combating climate change. The EU policy set out in the EU Green Deal creates the phenomenon of the Twin Transition. [17] The first transition – digitalisation – can be characterised as the fourth technological revolution, based on advanced automation, the developing Internet of Things, and the prioritisation of software over hardware. [18] The second transition is the climate crisis, forcing the (advanced capitalist) world into rethinking many economic processes from the ground up to reduce its carbon intensity: from carbon-neutral transport and energy systems to the reduction of wasteful products and ‘cheap’ consumption in general.[19] Thus, the Green Transition includes developing EU industries based on respect for the natural environment and responsibility for future generations.
The latest legislation introduces limits to the freedom of contracting in public procurement contracts based on environmental considerations within the EU Deforestation-Free Products Regulation.[20] The newly adopted regulation imposes restrictions on access to the EU market for companies wishing to import products containing cattle, cocoa, coffee, palm oil, rubber, soya, wood, leather, chocolate, charcoal, and printed paper. These companies are required to issue a due diligence statement, which should confirm that cattle, cocoa, coffee, palm oil, rubber, soya, wood, and products such as leather, chocolate, charcoal, and printed paper, which have been made using these commodities, do not come from deforested land, or have led to forest degradation.
The EU is the second largest market, after China, for consumption of the targeted products. The UN Food and Agriculture Organization estimates that 420 million hectares of forest, which is an area larger than the EU, were converted from forests to agricultural use between 1990 and 2020. The EU consumption represents around 10% of this global deforestation. Palm oil and soya account for more than two-thirds of this.[21]
The new law requires verifying that products comply with the relevant legislation of the country of production. It also includes the rights of indigenous people living in the specific area. The companies’ due diligence statement, which should cover the period starting from 31 December 2020, will have to include information such as the quantity and the geolocation of all plots of land where the commodities were produced. If a company is found to be non-compliant, it will be denied access to the EU public procurement market.[22]
Article 23 on penalties of the original proposal for the regulation predicts that the Member States shall lay down rules on penalties applicable to infringements of the Regulation by operators and traders and shall take all measures necessary to ensure that they are implemented. These penalties shall be effective, proportionate, and dissuasive and include, as a minimum: “(d) temporary exclusion from public procurement processes.” What is unclear for now is whether the temporary exclusion is of a mandatory or non-mandatory character and whether the rules on self-cleaning are to be applicable here, which would be expected.
Further similar steps are to be expected in terms of raising environmental standards on the EU market. The next measure to raise these standards includes the Proposal for the Green Claims Directive, which the EU Commission adopted on 22 March 2023.[23] It aims to ensure that consumers in the EU market receive reliable, comparable, and verifiable environmental information on products and consequently help to combat “greenwashing”. It is believed that providing reliable information will increase the influence of consumers to choose environmentally friendly products.
In the context of public procurement, Article 17(3) of the Proposal predicts that “Member States shall provide that penalties and measures for infringements of this [Green Claims] Directive shall include […] c) temporary exclusion for a maximum period of 12 months from public procurement processes and from access to public funding, including tendering procedures, grants and concessions.” Consequently, it introduces yet another potential exclusion ground to the public procurement area. The time scope is more precise here than under the Deforestation Regulation; however, the same questions of mandatory or non-mandatory character as well as application of self-cleaning remain unanswered.
Conclusions
In recent years new barriers to access to the EU public procurement market have been adopted. They increase the limitation of the discretion of contracting authorities in deciding with whom to contract. While some of these new restrictions relate to multi-threaded and multifaceted geopolitical changes, others are clear reactions to the climate crisis that we are currently experiencing.
Cumulatively these restrictions tend to address the general question of ethics. From whom is it ethical or unethical to buy? How cheap is too cheap, and at which stage will we stop the race to the bottom? At what cost does our lowest acquisition price come?
If that is in the context of geopolitical situations, as with sanctions against Russian companies, or if that is in the context of reacting to the uneven position of EU companies on the internal as well as foreign markets. It continues to be reconfirmed that not any competition but fair competition and equal treatment must be ensured by deploying these new restrictions, which aim to ensure a level playing field in the public procurement markets.
At the same time, by adopting the EU Deforestation-Free Products Regulation and Proposal for Green Claims Directive, the EU reconfirms its sustainable ethics. These are the cardinal values of high-quality environmental and social standards that must be respected when wanting to participate as a commercial player in the EU internal market.
As a result, the contractual freedom regarding the choice of the contractual partner, typical for contract law, is increasingly restricted under the EU public procurement rules. The latter is based on the assumption that not every competition is good/appropriate/essential for the EU public procurement market. The internal market is to be based on fair competition between economic operators who meet high-quality environmental and social standards in compliance with the EU’s fundamental values.
[1] Associate Professor at CEPRI, Faculty of Law, University of Copenhagen, Denmark. Principal Investigator in Purchase Power – Sustainable Public Procurement through private Law Enforcement PurpLE
[2] Senior Researcher in Purchase Power – Sustainable Public Procurement through private Law Enforcement PurpLE CEPRI, Faculty of Law, University of Copenhagen, Denmark
[3] See, J. Basedow, Freedom of Contract in the European Union, (2008), 16, European Review of Private Law, Issue 6, pp. 901-923
[4] Article 57 on Exclusion Grounds Directive 2014/24/EU.
[5] Article 18(1) Principles of procurement law Directive 2014/24/EU
[6] Ibid.
[7] American focus on strong protectionist support of US companies. In this context, see: Executive Order 14005, “Ensuring the Future is Made in All of America by All of America’s Workers,” launching a whole-of-government initiative to strengthen the use of federal procurement to support American manufacturing; The Infrastructure Investment and Jobs Act (2021) and the Inflation Reduction Act (2022).
[8] The Chinese enterprise development model, mainly based on the Belt and Road Initiative assumptions. It raises many questions regarding, among others, the independence of Chinese companies from the centers of state power. See, e.g., Jonathan. E. Hillman, Emperor’s New Road: China and the Project of the Century, Yale University Press, 2020, CSIS Report: Can Chinese Firms Be Truly Private? – Big Data China (csis.org)
[9] The EU public procurement market is worth around 2 trillion € annually, from which, according to Cernat and Kutlina-Dimitrova, around 50 billion € goes to companies from third countries. See, L. Cernat, Z. Kutlina-Dimitrova, Public Procurement: How open is the European Union to US firms and beyond? “Policy Insight” 2020/4, p. 4
[10] Council Regulation (E.U.) 2022/576 of April 8, 2022, amending Regulation (E.U.) No 833/2014 concerning restrictive measures, given Russia’s actions destabilizing the situation in Ukraine.
[11] EUR-Lex – 32022R2560 – EN – EUR-Lex (europa.eu)
[12] EUR-Lex – 32022R1031 – EN – EUR-Lex (europa.eu)
[13] This solution is envisaged in Article 69 of Directive 2014/24/EU. See more, G. S. Ølykke, Ch. Clausen, Commentary on Article 69 in R. Caranta, A. Sanchez-Graells (Eds.), European Public Procurement: Commentary on Directive 2014/24/EU, 2021
[14] Foreign_subsidies_white_paper.pdf (Europa.eu)
[16] Andhov, M. “EU and public procurement: making better use of the existing tool box – The response to competition from third country bidders” in M. Wiberg: EU Industrial Policy in a Globalised World – Effects on the Single Market (SIEPS Project 2020) pp 73-88
[17] See, European Commission, Communication from the Commission to the European Parliament, the European Council, the European Economic and social committee and the Committee of Regions, The European Green Deal, Brussels, (December 11, 2019) COM(2019) 640 final, European-green-deal-communication_en.pdf (Europa.eu)
[18] See, European Commission, European Commission, Communication from the Commission to the European Parliament, the European Council, the European economic and social committee and the committee of regions, A New Industrial Strategy for Europe, Brussels, (March 10, 2020) COM(2020) 102 final
[19] Andhov, M., Biondi, A., & Rubini, L. (2023). Regulating for a sustainable and resilient single market: Challenges and reforms in the areas of state aid, competition, and public procurement. European Trade Union Institute. https://www.etui.org/publications/regulating-sustainable-and-resilient-single-market
[20] The European Parliament approved the text of the EU Deforestation-Free Products Regulation at its plenary session on 19 April, 2023. The text will pass to the EU Council for formal approval and then will be published in the Official Journal of the European Union The EU Deforestation-Free Products Regulation will enter into force 20 days after it is published in the OJEU. The obligations set out in the Regulation will be enforceable 18 months later. See also: Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on the making available on the Union market as well as export from the Union of certain commodities and products associated with deforestation and forest degradation and repealing Regulation (EU) No 995/2010 COM/2021/706 final.
[21] See, Parliament adopts new law to fight global deforestation | News | European Parliament (europa.eu)
[22] Art. 23(2)(d) of EU Deforestation-Free Products Regulation.
[23] Proposal for a Directive of the European Parliament and of the Council on substantiation and communication of explicit environmental claims (Green Claims Directive) COM/2023/166 final.
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