EU’s International Procurement Instrument to Enter into Force at the End of August

On 29 August 2022, the European Union’s (“EU”) International Procurement Instrument (“IPI”)¹ will enter into force. The IPI was adopted on 23 June 2022 after more than a decade of legislative preparations and discussions. It provides for a new trade policy tool which is designed to address the perceived lack of a level playing field in global procurement markets.

The IPI will enable the European Commission (“Commission”) to impose measures limiting non-EU companies’ access to the EU public procurement market if these companies’ governments do not offer similar access to EU businesses. Specifically, the IPI envisages two types of measures that can be applied: i) a “score adjustment” penalty on tenders submitted by suppliers from the targeted third country; or ii) the exclusion of such tenders from the procurement process. Such IPI measures would be applied following an investigation by the Commission, and after consultations with the country concerned.

The adoption of the IPI has been in the works for many years, with the first proposal by the Commission dating back to 2012. After failing to gain the necessary support from the Member States, the Commission presented a revised proposal in 2016, which served as the basis for the recent negotiations. The EU has been pursuing this measure in light of concerns that the openness of its public procurement market is not reciprocated. In this context, the Commission’s “EU-China – A strategic outlook” 2019 Communication contrasted the EU’s “open procurement market, which is the largest in the world” with how “EU companies often encounter difficulties to gain access to procurement opportunities in the Chinese as well as other foreign markets, in particular in sectors where EU companies are highly competitive”. In that Communication, the Commission referred to the adoption of the IPI as a way to “promote reciprocity and open up procurement opportunities” in foreign markets.

The following sections outline some key elements of the new instrument that will enter into force at the end of August.

Impacted Procurement

The IPI has the potential to impact a significant number of procurement procedures. Reportedly, the IPI will cover at least 70% of the total public procurement value in the EU, corresponding to approximately 17% of all procurement contracts.

The IPI applies to procurement procedures within the EU if these procedures (i) are covered by the EU’s public procurement directives; (ii) relate to “non-covered procurement”, i.e., public procurement procedures with respect to which the EU has not undertaken market access commitments in an international agreement in the field of public procurement or concessions; and (iii) have an estimated value above a certain threshold. These three elements are addressed below.

First, the IPI is not applicable to all procurement procedures within the EU, but only those that are also covered by the EU’s public procurement directives, namely:

• Directive 2014/23/EU of the European Parliament and of the Council of 26 February 2014 on the award of concession contracts;

• Directive 2014/24/EU of the European Parliament and of the Council of 26 February 2014 on public procurement;

• Directive 2014/25/EU of the European Parliament and of the Council of 26 February 2014 on procurement by entities operating in the water, energy, transport, and postal services sectors.

Second, IPI measures apply only to “non-covered procurement”, i.e., public procurement procedures with respect to which the EU has not undertaken market access commitments in an international agreement in the field of public procurement or concessions. Existing international EU commitments – including under the WTO Government Procurement Agreement (“GPA”) and bilateral trade agreements – are thus not impacted by the IPI. For public procurement covered by such market access commitments undertaken by a third country towards the EU, the Commission should follow the consultation mechanisms or dispute settlement procedures set out in the relevant agreements, in line with the EU’s Trade Enforcement Regulation.²

Third, IPI measures will only apply to public procurement procedures with an estimated value exceeding a threshold to be determined by the Commission (see also below), which should be equal to or above EUR 15,000,000 net of VAT for works and concessions, and equal to or above EUR 5,000,000 net of VAT for goods and services.

As a final comment, in principle, no investigations can be initiated with respect to least developed countries. The Commission has also committed to assess the need to exempt other developing countries when it will conduct a review of IPI.

Investigations and Consultations

The IPI gives the Commission powers to launch investigations into alleged third-country measures or practices which are deemed to restrict access of EU suppliers to foreign procurement markets. The Commission can proceed with such an investigation either on its own initiative or upon a substantiated complaint by an EU interested party or a Member State.

The procedure to be followed has similarities with the procedures followed by the Commission when carrying out traditional trade remedy investigations, like anti-dumping or anti-subsidy investigations. Whenever the Commission decides to initiate an investigation, it will publish a relevant notice in the EU’s Official Journal. Upon publication of the notice, the Commission is also required to seek consultations with the third country in question with a view to eliminate or remedy the alleged third-country measure or practice.

The investigation and consultations have to be concluded within a period of 9 months after the date of their initiation, but that time period can be extended by five months in justified cases. The investigation (and consultations) can in some cases be suspended if the third country concerned takes corrective actions or undertakes commitments toward the EU to eliminate, phase out, or remedy the measure in question. However, the Commission can decide to resume the investigation and the consultations at any time if it considers that the reasons for the suspension are no longer valid.

Upon conclusion of the investigation and the consultations, the Commission will issue a publicly available report setting out the main findings of the investigation and a proposed course of action. If the conditions are met (see below), the Commission will adopt an IPI measure by means of an implementing act. If, by contrast, the Commission considers the conditions to impose an IPI measure are not met, the Commission’s investigation will be terminated.

In principle, an IPI measure shall have a duration of 5 years from its entry into force. However, if the third country eliminates or undertakes commitments to end the measure or practice in question, the Commission may decide to withdraw the IPI measure or suspend its application.

No later than 9 months before the date of expiry of the IPI measure, the Commission may initiate a review of the IPI measure and decide to extend its duration, adjust it appropriately, or replace it with a different IPI measure by means of an implementing act.

Conditions to Impose IPI Measures

The notion of “third-country measure or practice” that can be investigated by the Commission is defined broadly. It covers “any legislative, regulatory or administrative measure, procedure or practice, or combination thereof, adopted or maintained by public authorities or individual contracting authorities or contracting entities in a third country, at any level, that results in a serious and recurrent impairment of access of Union economic operators, goods or services to the public procurement or concession markets of that third country”.

An IPI measure can be imposed by the Commission if the following cumulative conditions are met:

• Confirmation of existence of a “third-country measure or practice:” the investigation confirms the existence of a “third-country measure or practice” as defined above, and thus finds that there is:
  • a legislative, regulatory or administrative measure, procedure or practice, or combination thereof;
  • which is adopted or maintained by public authorities or individual contracting authorities or contracting entities in a third country, at any level; and
  • which results in a serious and recurrent impairment of access of EU economic operators, goods, or services to the public procurement or concession markets of that third country.
• No solution through consultations: the third country concerned declines to enter into consultations, or the consultations with the third country concerned do not lead to satisfactory corrective actions that remedy the serious and recurrent impairment of access for EU economic operators, goods, and services within a reasonable timeframe; and

• Union interest: the Commission considers such adoption to be in the interest of the EU. The determination as to whether it is in the Union’s interest to adopt an IPI measure needs to be based on an appreciation of all the various interests taken as a whole, including the interests of the EU’s economic operators.

Nature and scope of IPI measures

The IPI measures that can be adopted by the Commission are twofold:

• “Score adjustment:” such a score adjustment will impact the evaluation and ranking of the tenders, but it will not affect the price to be paid under the contract to be concluded with the successful tenderer. It operates as follows:
  • For procurements where more than cost or price are considered in the evaluation of the tender, a score adjustment measure would entail the relative diminution by a certain percentage of the score of a tender. In particular, the score resulting from the tender evaluation could be reduced by as much as 50%.
  • For procurements where price or cost is the only contract award criterion, a score adjustment measure would entail the relative increase by a certain percentage of the price offered by a tenderer. This percentage could be up to 100% of the price offered by the tenderer.
• Exclusion of tenders submitted by economic operators originating in the third country in question.

The Commission should decide which of these two options to pursue, depending on what would be proportionate and most effectively remedy the level of impairment of access for EU economic operators, goods, or services to third-country public procurement or concession market. The IPI measure will also be determined while keeping in mind the availability of alternative sources of supply for the goods and services concerned, in order to avoid or minimize a significant negative impact on contracting authorities and contracting entities.

Whenever an IPI measure is adopted by the Commission, the Commission shall also determine the scope of application of that specific IPI measure, inter alia in terms of the categories of goods, services, and concessions and the categories of economic operators to whom the measure shall apply.

The target of IPI measures (namely, who and/or which kind of goods or services) will also depend in large part on the country of origin of the economic operator, goods, or services at stake. The origin of a good is determined in accordance with Article 60 of the Union Customs Code³, while the origin of a service will be determined by reference to the origin of the economic operator providing it. As regards such economic operators, the IPI distinguishes between natural persons and legal persons. For natural persons, the country of origin is that in which the person is a national or has a right of permanent residence. For legal persons, the country of origin is determined in a more complex way, which aims at avoiding a possible circumvention of IPI measures. The country of origin of legal persons is deemed to be:

• that which under the laws the legal person is constituted or otherwise organized and in the territory of which the legal person is engaged in substantive business operations; or

• if the legal person is not engaged in substantive business operations in the territory of the country in which it is constituted or otherwise organized, the IPI provides that the origin may also need to be determined by taking into account other elements, such as the origin of the owners or other persons exercising a dominant influence over that legal person. The Regulation sets out specific circumstances in which the existence of such “dominant influence” can be presumed:
  • majority ownership;
  • control of the majority of the votes attaching to shares of the legal person;
  • power to appoint more than half of the legal person’s administrative, management or supervisory body.

When it adopts an IPI measure, the Commission will also set out the threshold values of public procurement procedures above which the IPI measure should apply. As addressed above, that estimated value should in any event be:

• for works and concessions: equal to or above EUR 15 million (excl. VAT);

• for goods and services: equal to or above EUR 5 million (excl. VAT).

IPI measures will be enforced by Member States’ contracting authorities. However, contracting authorities may in exceptional situations decide to not apply an IPI measure. Specifically, this possibility is limited to: i) a situation where only tenders from economic operators originating in the targeted third country meet the tender requirements; or ii) where the decision not to apply the IPI measure is justified for overriding public interest, such as public health or protection of the environment.

Moreover, the Commission may, on receipt of justified requests by Member States and subject to specific conditions, adopt a list of local contracting authorities (within administrative units with population below 50,000 inhabitants) that are exempted from the application of the IPI.

To avoid a possible circumvention of an IPI measure, successful tenderers in public procurement procedures which are subject to an IPI measure will be subject to specific obligations.

Looking Ahead

As mentioned above, the IPI will enter into force on 29 August 2022 and will thereafter apply to public procurement procedures covered within its scope and launched after its entry into force. Within 6 months after the entry into force, the Commission will issue guidelines to facilitate the application of the IPI by contracting authorities and economic operators. Those guidelines are expected to clarify certain key concepts in the Regulation, such as the notion of “origin” of economic operators, goods and services from a targeted third country.

Once the IPI enters into force, companies outside the EU should be alert to the prospect of an investigation initiated by the Commission into measures or practices by the government of their country of origin. In the Commission’s proposal for the IPI, China, the US, and Japan were singled out as being “reluctant to open their procurement markets to international competition or to open those markets further than what they have already done”. Bidders from those countries⁴ might be among those with the highest risk of being impacted. More generally, countries that are not members to the GPA or any other trade agreement with the EU covering public procurement should also be especially wary of such possibility.

Endnotes

¹ Regulation (EU) 2022/1031 of the European Parliament and of the Council of 23 June 2022 on the access of third-country economic operators, goods, and services to the Union’s public procurement and concession markets and procedures supporting negotiations on access of Union economic operators, goods, and services to the public procurement and concession markets of third countries (International Procurement Instrument – IPI).

² Regulation (EU) No 654/2014 of the European Parliament and of the Council of 15 May 2014 concerning the exercise of the Union’s rights for the application and enforcement of international trade rules and amending Council Regulation (EC) No 3286/94 laying down Community procedures in the field of the common commercial policy in order to ensure the exercise of the Community’s rights under international trade rules, in particular those established under the auspices of the World Trade Organization.

³ Regulation (EU) No 952/2013 of the European Parliament and of the Council of 9 October 2013 laying down the Union Customs Code.

⁴ Of course, US and Japan are both parties to the GPA, and, thus, IPI measures could apply against such countries only with respect to goods, services, or concessions that are not covered by the GPA.