The following blog post has been authored by the SAPIENS Network Coordinator and lead researcher Prof. Roberto Caranta (University of Turin)

The parties to the WTO Government Procurement Agreement (GPA), recognise in the Preamble both “the need for an effective multilateral framework for government procurement, with a view to achieving greater liberalization and expansion of, and improving the framework for, the conduct of international trade” that “measures regarding government procurement should not be prepared, adopted or applied so as to afford protection to domestic suppliers, goods or services, or to discriminate among foreign suppliers, goods or services” and that “the integrity and predictability of government procurement systems are integral to the efficient and effective management of public resources, the performance of the Parties’ economies and the functioning of the multilateral trading system” (revised WTO-GPA 2012).

The EU almost always approached public procurement from the perspective of the Internal Market. Discrimination against firms – economic operators in EU procurement parlance – from other Member States is forbidden. Since 1971, the then EEC had enacted directives aimed at laying down procedural rules to guide contracting authorities in the Member States in their choice of contractual partners thus limiting the risk of indirect or covert discrimination. Together with rules requiring transparent and non-discriminatory award procedures, focusing on price – an eminently objective criterion – was seen as meeting EU internal market objectives. ‘Mechanical procurement’ was considered good practice concerning public purchasing at both international and European levels.

Such strict adherence to international trade orthodoxy led the Commission to resist attempts by the Member States and their contracting authorities to achieve social and environmental goals in their procurement practices.  Yet, those attempts have been generally upheld by the Court of Justice. Under given conditions, the Court has greenlighted contract clauses requiring the hiring of long-term unemployed workers (C-31/87, Beentjes), award criteria considering environmental aspects (C-513/99, Concordia Bus) and technical specifications requiring fair production processes (C-368/10, Max Havelaar).

The consequence is that strategic procurement ultimately includes both sustainability (social and environmental) and innovation considerations. With very limited exceptions, the 2014 directives simply empower contracting authorities to include social and environmental conditions in their buying procedures. The decision about ‘what to buy’ generally rests with each contracting authority. And non-discrimination and equal treatment remain the pillars of EU law (Article 18(1) of Directive 2014/24/EU).

Article 18(2) of Directive 2014/24/EU and the corresponding provisions in the concessions and utilities directives asks the Member States to “take appropriate measures to ensure that in the performance of public contracts economic operators comply with applicable obligations in the fields of environmental, social and labour law established by Union law, national law, collective agreements or by the international environmental, social and labour law provisions listed in Annex X”. The Court of Justice in TIM held that with this provision “the Union legislature sought to establish that requirement as a principle, like the other principles referred to in paragraph 1” so that “such a requirement constitutes, in the general scheme of that directive, a cardinal value with which the Member States must ensure compliance pursuant to the wording of Article 18(2) of that directive” (Case C‑395/18 TIM, paragraph 38). Still there is some uncertainty as to the binding force of this provision on contracting authorities as it refers to the Member States (M. Andhov 2021).

3. Mandatory Strategic Procurement

Recently, this hands off approach has been departed from in a growing number of proposals from the Commission following the European Green Deal (COM(2019) 640 final), the Circular Economy Action Plan (COM(2020) 98 final) and the Sustainable Products Initiative (COM(2022) 140 final). A rather dramatic shift towards mandatory SPP criteria has been born out of the realisation that instruments such as the EU GPP criteria (mentioned above) ‘have reduced impact due to the limitations of voluntary approaches’ (COM(2020) 98 final, paragraph 2.1). Most proposals are now in more or less of an advanced stage in the legislative process so that details might yet change, but the momentum clearly favours SPP, more specifically mandatory SPP (R. Caranta 2023; W. Janssen and R. Caranta 2023). This momentum has further increased due to the very nature of these Commission proposals, some proposals will partake in regulations rather than directives.

The reasons behind the promotion of mandatory SPP are clear, however, it remains the case that mandatory SPP represents a quantum leap in EU public procurement law. EU law is experiencing a paradigm shift from an almost exclusive focus on procedures (‘how to buy’) to also regulating what goods and services are purchased (‘what to buy’), limiting the choices of contracting authorities and entities in the 27 Member States. A small number of EU provisions mandating different forms of mandatory SPP were already in existence, but this paradigm shift represents a new, higher standard for SPP.

It stresses that EU’S “partners and competitors have grasped this opportunity and are deploying ambitious measures to secure significant parts of this new market”, a development perhaps equally driven by ‘security of supply considerations’ (at p. 2). The “net-zero energy technologies are at the centre of strong geostrategic interests and at the core of the global technological race” (ibid.; see Recital 6 in the Proposal). According to the Commission, “these technologies […] play a key role in the Union’s open strategic autonomy, ensuring that citizens have access to clean, affordable, secure energy” (at p. 3).

Global trade revealed its limitations during the COVID pandemics, with many countries hoarding PPEs first and vaccines thereafter. This era of hoarding pulled back the curtain on the tyranny of the lowest price endemic practice of overexploitation of natural resources and people alike (M. Andhov and F. Muscaritoli 2023).  Simply put, ‘mechanical procurement’ has served us poorly. The new sense of insecurity created by long, winding  supply chains extending well beyond the capacity of control of the EU has been dramatically compounded by the aftermath of the Russian invasion of Ukraine (see the proposed Recital 5).

There is an obvious link between net-zero, security of supplies, and sustainability as “the uptake in clean energy technologies is a powerful enabler for the sustainability transition”. Reciprocally, “[s]upply disruptions and dependencies on other regions for the provision of clean energy technologies can slow down the sustainability transition of the EU and affect all sectors of the economy” (at p. 4). The stakes could hardly be higher. As Recital 20 to the Proposal indicates, “A secure supply of clean energy is a prerequisite for economic development, as well as for public order and security”. There is no skirting around the matter, the security of supplies is instrumental to public order and security at large, i.e. nothing less than the core aim of any political organisation.

5. Mandatory SPP cuts its teeth in Europe

To protect and foster the EU’s vital interests, the Net Zero Industry Act relies on seven pillars: “facilitating investments for net-zero technologies (pillar 1), reducing CO2 emissions (pillar 2), facilitating access to markets (pillar 3), enhancing skills for quality job creation in net-zero technologies (pillar 4), supporting innovation (pillar 5) and creating a specific structure for implementing these objectives both in terms of governance and of monitoring (pillars 6 and 7)” (p. 6).

SPP is linked to the third pillar. Facilitating access to markets requires “specific measures related to public demand through public procurement procedures and auctions, as well as through schemes to support private demand by consumers” (p. 4). Specifically, encouraging public demand for sustainable products requires public buyers to “consistently apply criteria to ensure a high level of sustainability and resilience of the net-zero products they procure” (p. 7). The SPP measures in the proposal are “designed to help public authorities create and maintain a stable public demand for net-zero technologies that will make it economically attractive for business to scale-up the production of tailor-made products for the European market designed with high sustainability and resilience criteria in mind”. Under the proposed rules “public authorities must take into account criteria related to sustainability and resilience when awarding the contracts or ranking the bids” (p. 14).

Recital 25 to the Proposal, avowing that the 2014 procurement and concessions directives already allow for the consideration of ‘social, environmental, and innovative characteristics, places the proposed rules squarely within the field of mandatory SPP. “When awarding contracts for net-zero technology through public procurement, contracting authorities and contracting entities should duly assess the tenders’ contribution to sustainability and resilience in relation to a series of criteria relating to the tender’s environmental sustainability, innovation, system integration and to resilience”. Recital 26 sharpens the bite of Article 18(2) of Directive 2014/24/EU by referring directly to contracting authorities, clarifying that they “should contribute to social sustainability by taking the appropriate measures to ensure that in the performance of public contracts economic operators comply with applicable obligations in the fields of social and labour law”.

Article 19 is the first provision in Chapter IV, Access to markets, of the Proposal. It is dedicated to Sustainability and resilience contribution in public procurement procedures. While complying with the WTO-GPA and other Union’s international commitments and with the general public procurement framework (Recital 31), when awarding contract for the eight net zero technologies covered under the proposed Regulation, both contracting authorities and contracting entities must have recourse to “the most economically advantageous tender, which shall include the best price-quality ratio, comprising at least the sustainability and resilience contribution of the tender” (Article 19(1)). 

The tender’s sustainability and resilience contribution must be based on four objective, transparent and non-discriminatory criteria, namely “(a) environmental sustainability going beyond the minimum requirements in applicable legislation; (b) where an innovative solution needs to be developed, the impact and the quality of the implementation plan, including risk management measures; (c) where applicable, the tender’s contribution to the energy system integration, and (d) the tender’s contribution to resilience, taking into account the proportion of the products originating from a single source of supply […] from which more than 65% of the supply for that specific net-zero technology within the Union originates in the last year for which data is available for when the tender takes place” (Article 19(2)). While the criteria are indicated as cumulative, those under (b) and (c) will not be applicable to all and every public procurement or concession. Criteria (a) and (c) focus on environmental sustainability, (b) on innovation and (d) is specific to security of supplies.

Recital 27 to the Proposal expands on environmental sustainability, expressly adding several considerations to those already non-exhaustively listed in Article 67(2) of Directive 2014/24/EU. This is the case concerning the durability and reliability of the solution; the ease and quality of recycling; the use of substances; the consumption of energy, water and other resources in one or more life cycle stages of the product; the environmental footprint of the product and its life cycle environmental impacts; the carbon footprint of the product; the microplastic release; emissions to air, water or soil released in one or more life cycle stages of the product; the amounts of waste generated.

The ‘single source of supply’ under (d) is determined in accordance with Regulation (EU) No 952/2013, laying down the Union Customs Code and refers to countries and territories from outside the custom territory of the EU as defined under Article 4 thereof. To help contracting authorities and entities, Recital 29 entrusts the Commission with publishing an annual of relevant products/countries and territories.

Under the proposed Article 19(3), “Contracting authorities and contracting entities shall give the tender’s sustainability and resilience contribution a weight between 15% and 30% of the award criteria”; they can give an even higher weighting to the criteria referred under points (a) and (b) (also Recital 32). The next paragraph gives budget strained contracting authorities and entities some leeway. They are not obliged “to apply the considerations relating to the sustainability and resilience contribution of net-zero technologies where their application would oblige [them] to acquire equipment having disproportionate costs, or technical characteristics different from those of existing equipment, resulting in incompatibility, technical difficulties in operation and maintenance”. To this end, cost differences above 10% may be presumed as disproportionate. Still, abnormally low tenders can still be excluded – and must be so in case of breach of obligations relevant under Article 18(2) of Directive 2014/24/EU and the corresponding provisions in other directives (proposed Article 19(4)).

Under Recital 33 to the Proposal, the applicability of the proposed Article 19 is delayed for two years for contracting authorities and entities which are not central purchasing bodies and for contract under EUR 25 million. Under Article 38 of the Proposal, however, the deferral does not apply to the insertion of considerations pertaining to trade security (Article 19(2)(d)). Recital 34 recalls the obligations following from Regulation (EU) 2017/1369 on energy labelling, presently under revision. Finally, Recital 37 requires contracting authorities and entities “to inform the market in advance of their estimated procurement needs for net-zero technology products” to enable the industry to gear up production.

Public procurement is less directly called into play by the coeval Proposal for a Regulation establishing a framework for ensuring a secure and sustainable supply of critical raw materials (the European Critical Raw Materials Act) (COM(2023) 160 final). This is only natural as raw materials – with a possible exception for foodstuff – are upstream in the supply chain of public purchasing. Still, contracting authorities and entities may be called to contribute to the new vision for the strategic autonomy of the EU (at p. 2; see also point 7 of the 2022 European Council’s Versailles Declaration). Under the proposed Article 25, National measures on circularity, the Member States shall by adopt and implement national programmes containing measures designed to inter alia to “increase the use of secondary critical raw materials in manufacturing, including, where appropriate, by taking recycled content into account in award criteria related to public procurement”. This provision is noticeably weak and deserves better coordination with the strong mandatory character of the proposed Article 19 of the Net Zero Industry Act during the legislative process. In turn, Recital 27 of the latter Act might be clarified, specifying the possible award criterion recalling to ‘the use of substances’ adding an explicit reference to the recycled contents, including of critical materials.

6. A new understanding of public procurement?

Long ago, but longer than mechanical procurement’s coming into fashion, Colin Turpin wrote: “The volume of government procurement is such that the government’s decisions on how, when and what to buy must be inevitably have effects on the structure and health of industry, upon employment, and upon the economy as a whole. It would be remarkable is any government were to carry out its procurements wholly without regard to these incidental effects; in this as in other fields the decisions of government can be expected to be political decisions, which take account of the ulterior social and economic consequences of alternative courses of action” (1972). Clearly, the pendulum has swung back. Today, we can add public order and security to the list of considerations acted upon by public procurement rules and practices.

The recent provisions in the Net Zero Industry Act go well beyond a cyclical change in the priorities underpinning public procurement law. They must be read in a wider context of measures aimed at reinforcing the EU suppliers’ base. First came the Foreign Subsidies Regulation. The Regulation aims at fighting blatant market distortion practice from foreign (i.e. non-EU suppliers) by re-establishing the level playing field. At a very high level of approximation, the Foreign Subsidies Regulation is akin to anti-dumping duties. Next came the Carbon Border Adjustment Mechanism, aka CBAM. The CBAM goes a step further, targeting a specific form of regulatory dumping unfairly harming EU-based companies. Even the International Procurement Instrument can be seen as an instrument to, rather muscularly, nudge trading partners to recognise equal access for EU economic operators.

Restoring the level playing field was pursued by EU law until very recently. The Net Zero Industry Act substantially escalates those efforts (see Recital 23 and the reference to “critical raw materials club, working with like-minded partners“) and – dramatically -redirects the aim pursued by EU law. Social and environmental sustainability are still an important part of the picture, but they have become married with a new concern: security of supplies. Unlike with the Foreign Subsidies Regulation or the CBAM, the Net Zero Industry Act does not content itself with re-establishing the level playing field for EU companies. Security of supplies requires reshoring some production to mainland Europe. The criterion to select strategic net-zero technologies related to the ‘security of supplies’ points to the necessity to ensure “the technological and industrial resilience of the Union’s energy system by increasing the manufacturing capacity of a component or part in the net-zero technology value chain for which the Union heavily or growingly depends on imports, particularly those coming from a single third country” (COM/2023/161 final, p. 16). Security of supplies requires strengthening local (EU) manufacturing capacity and reshoring production. Not without some inconsistency, Recitals 16 and 17 to the Proposal let the tension of the Proposal with global trade mantras transpire. Recital 16 somewhat hollowly insists that “The Union has helped build a global economic system based on open and rules-based trade, pushed for respecting and advancing social and environmental sustainability standards, and is fully committed to those values”. However, immediately thereafter, Recital 17 makes it clear that “To address security of supply issues and contribute to supporting the resilience of Union’s energy system and decarbonisation and modernisation efforts, the net-zero technology manufacturing capacity in the Union needs to expand”.

What is pertinent for public procurement generally, and for us in https://sapiensnetwork.eu/ in particular, is that public procurement is one of the instruments of choice for this policy shift. ‘Mechanical procurement’ discounted social and environmental considerations, dubbed as ‘secondary’. With the 2011 Green Paper, the EU recognised their strategic value. The Net Zero Industry Act Proposal reinforces the idea of sustainable procurement as strategic. Security of supplies demands a geo-strategic oriented procurement resting on sustainability and innovation but frankly goes beyond them.

Food is next. A core passage in Recital 20 of the Net Zero Industry Act Proposal indicates that “Net-zero technology products will also yield benefits to other strategically important economic sectors, such as farming and food production by securing access to clean energy and machinery at competitive prices, thus contributing sustainably to EU food security and to providing an increasing outlet for bio-based alternatives through circular economy”. Under Article 2(1) of the proposed European Critical Raw Materials Act food (and feed) are excluded from the notion of ‘raw material’ (see also point 1 of the Explanatory Memorandum and Recital 1). The need for action in this area has been highlighted in the Commission Communication Safeguarding food security and reinforcing the resilience of food systems (COM/2022/133 final): “the invasion of Ukraine and a global commodity price boom are driving up prices in agricultural and seafood product markets and exposing the vulnerabilities of our food system: our dependence on imports of e.g. energy, fertiliser and animal feed” (at p. 1, bold in the text). The Communication does not expressly refer to public procurement, but the public purchasing power is to be deployed to tackle all and every geo-strategic concern the EU has. And the EU as it stands today, has many.

References:

1. Andhov, ‘Comment to Article 18(2)’ in R. Caranta – A. Sanchez Graells (eds), European Public Procurement (Edward Elgar, 2021) 199 ff
2. Andhov and F. Muscaritoli, ‘Climate Change and Public Procurement: Are We Shifting the Legal Discourse?’ in W. Janssen and R. Caranta (eds.), Mandatory Sustainability Requirements in EU Public Procurement Law Oxford, Hart, 2023 forthcoming
3. Caranta, ‘Sustainability takes centre stage in public procurement’ Ruch Prawniczy, Ekonomiczny i Socjologiczny 85(1) (2023) 41, available at https://pressto.amu.edu.pl/index.php/rpeis/article/view/37127/32439
4. Janssen and R. Caranta (eds.), Mandatory Sustainability Requirements in EU Public Procurement Law Oxford, Hart, 2023 forthcoming
5. Schooner – M. Speidel, ‘Warming Up’ to Sustainable Procurement’ 60 (2020) Contract Management, Issue 10, 36
6. Turpin, Government contracts. London, Penguin 1972, 244