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Amid the protracted economic crisis of the Eurozone and the continuation of austerity policies, it appears very difficult for Member States governments to re-launch national economies and challenge unemployment. Government procurement (GP) is traditionally an instrument of economic policy and, in the present context it has the potential to support the expansion and development of new and innovative sectors as a way to build a sustainable way out of the crisis.

However, the EU clearly lacks a strategic approach to industrial policy and, in spite of the several reforms and initiatives related to GP[1] featuring now on the legislative agenda, there is no political debate on its role as a policy tool. Moreover, recent developments in the World Trade Organisation (WTO) have been further challenging the role of GP as a public policy tool and even such controversial developments have generated no debate in the EU. This article aims to outline the approach of the EU to GP so far and the conflicting trends at the EU and international levels on the one hand and at national levels on the other. Two clearly distinct policy choices have been emerging: it is therefore high time for the EU to decide which way to go, for the benefit of its economic recovery and future industrial development.

A useful public policy tool

Government procurement (GP) has been, throughout history, a key instrument to steer industrial development and innovation, as well as an economic policy tool to foster demand in times of economic crisis. According to past experience in industrialised countries, GP has long been part of the toolbox of industrialisation strategies; the idea of creating first domestic markets for infant industries via tariffs, regulation, licensing and other measures dominated the post-WW2 development consensus[2].

More recently however, the neo-liberal conception of GP has gained ground, based on the assumption that any kind of steered industrial development leads to the sub-optimal allocation of resources and to the development of inefficient industrial sectors. Moreover, as GP policy is public spending, the rhetoric of giving the utmost value to taxpayers’ money has contributed to de-legitimising the public-policy function of GP. Therefore, the main policy approach today is to think of GP like of any other economic sector where efficiency is maximised by opening up to international competition. Consequently, GP is treated like any other area under international trade rules[3], where such principles as national treatment – whereby all business from outside the country must be treated in the same way as a business from inside the country – and non-discrimination apply. The EU seems to have fully endorsed this policy choice: in its legislative proposal for a reciprocity instrument for procurement to regulate access of third countries goods and services[4], for instance, the EU has adopted the principle of GP being open to third countries by default, whereas in other major industrialised countries, such as the US or Japan, closure is the rule and openness the exception. There are therefore two contradicting realities; on the one hand, governments’ ability to regulate GP is being tightened by the international rules of the General Agreement on Tariffs and Trade (GATT) or the Government Procurement Agreement (GPA); at the same time however, GP continues to absorb a major proportion of GDP, averaging 20% in most industrialised countries, thus one of the few significant economic policy instruments remaining for national governments in the present context of budgetary constraints[5].

The liberal revolution hits procurement

When the GATT was negotiated at the end of the 1940s, the parties decided to not include GP[6] as, at the time, this was still part of that post-WW2 consensus putting procurement right at the centre of re-industrialisation policies. There was no will to apply principles such as national treatment and non-discrimination to GP, and national governments were therefore free to apply local content requirements in their procurement policies in order to discriminate in favour of domestic goods and services. In the 1970s however, GATT members agreed to negotiate a new GPA, which would extend the scope of national treatment to GP. This coincided with the shift towards a neo-liberal approach to procurement; the GPA however, did not apply national treatment across the board, but only to those sectors the parties had agreed to commit under the agreement. The EU for instance agreed to commit 85% of its procurement, the broadest commitment among GPA partners, the US committed only 32% and Japan only 25%. Moreover, signatories to the GPA that have a federal structure of the state have generally carved local governmental levels out of the coverage; the US and Canada have for instance excluded States and Provinces from the scope of the GPA. It is important to notice that GPA membership remains limited mainly to industrialised countries. Although China is in the process of negotiating its accession and India has an observer status, so far the GPA has not been able to attract major emerging economies, which generally remain reluctant to open up their national GP to international competition. Brazil for instance has not approached the issue of GPA membership so far and it is not a coincidence that, in emerging economies, GP is still being used as an important instrument for national industrialisation[7].

Undermining green energy

Notwithstanding the limited scope of the application of national treatment obligations under GPA, this is being broadened through the attempt to reduce the definition of GP, thereby broadening the scope of the application of the GATT, where national treatment applies across the board. The recent WTO dispute settlement case concerning the CanadianProvince of Ontario has created a very important precedent in this respect.

The Ontarioprovince of Canada had put in place a feed-in tariff (FIT) system to incentivise the production of renewable energy, based on a local content requirement for equipment used to produce electricity from renewable sources. The measure got challenged by the EU and Japan for alleged incompatibility with GATT, TRIMs[8] and ASCM[9] provisions. This turned out to be a key case because for the first time a WTO Panel was due to interpret Article III:8(a) GATT providing for the exemption from GATT Article III’s national treatment rules for measures falling within GP[10]. It then appears that the interpretation of the Panel – but, even more so, of the Appellate Body – have set the precedent for the definition of GP’s policy scope under international trade rules.

According to the Canadian authorities, the FIT programme – together with its local content requirements – was pursuing a public policy purpose, since the Ontario Province Agency’s purchase of renewable electricity furthered the local government’s aim to secure the supply of adequate and reliable electricity from clean sources; and local content would be a necessary requirement in order to reach adequate and reliable supply of clean energy. Moreover, Ontario’s authorities were also aiming at creating local jobs through long-term investment in renewable energy-generation facilities with local resources, which local content requirements give a particular incentive to generate. All in all, the local content policy of Ontario was pursuing a clear purpose of economic reconversion and job creation in an innovative sector[11], while also responding – it goes without saying – to the global challenge of climate change.

Recent developments in the World Trade Organisation (WTO) have been further challenging the role of GP as a public policy tool and even such controversial developments have generated no debate in the EU.

Whereas the WTO Panel did uphold that Ontario’s local content requirements were falling within the scope of Article III.8’s exemptions, as being necessary requirements for procurement to take place, the Appellate Body (AB) reversed this interpretation by substantially narrowing down the scope of such exemptions. The AB indeed ruled that Article III.8(a) could not be applied to the case in question, since the product of foreign origin being discriminated against – generation equipment – was not in direct competition with the product purchased by the government, which was in that case electricity, hence the incompatibility of local content requirements with Article III GATT. The AB did not consider local content as “requirements governing the procurement by governmental agencies of products purchases for governmental purposes” as provided for by Article III.8(a); however, according to Ontario’s legislation, as well as to the Panel, local content had been interpreted as clearly the requirement for procurement to take place under the FIT programme. It is at least puzzling how the AB completely reversed the interpretation of the Panel.

The AB also provided a very restrictive interpretation of the ‘governmental purpose’ concept, by ruling that, in the specific case of GATT article III.8, purpose means ‘need’, meaning that goods and services purchased by governmental authorities must only be consumed directly by them in the framework of their ordinary governmental functions. This definition of governmental purpose provides a clear indication of what GP should be used for by public authorities: while Canada had argued that a governmental purpose could also be a public policy purpose, the AB ruled that a governmental purpose is merely an execution of governmental functions related to functional needs of governmental authorities, without there being a clear linkage to specific public purposes to be pursued. This conclusion fully denies a public policy function for GP.

In spite of the EU’s high level of commitment under the GPA and in spite of its pro-activism in initiating the Ontario Case, some EU Member States have recently introduced local content requirements in their legislation to promote renewable energy, with a view to incentivising the transition to clean energy and making progress in meeting EU targets, while at the same time pursuing clear industrial policy purposes. France recently adopted legislation[12] aiming at doubling the yearly volume of electricity produced from solar energy; the plan clearly pursues an industrial policy objective, to relaunch the French photovoltaic sector. It provides for measures to be taken via government procurement and a 5% to 10% higher feed-in tariff is to be applied only to electricity produced from photovoltaic installations that are made in the EU. The main argument of governmental authorities is that without a local content requirement, a huge amount of public money would be spent without benefitting the local economic development. Also Italy recently adopted implementing measures on incentives for the production of electricity from photovoltaic installations[13] also containing local content requirements. The decree precisely lays down which production steps have to be executed in the EU or in the European Economic Area (EEA) in order for photovoltaic components to be considered of EU and EEA origin and for premiums on the feed in tariffs to be granted.

The EU is faced with clearly contradicting policy preferences internally. While, the EU level pursues the choice of full liberalisation of GP and commits to the fundamental principle of national treatment in international instances, Member States often have a clear preference for keeping GP as a tool of industrial policy. Moreover, the fact that the EU continues to support the development of international rules broadening the application of national treatment to GP through jurisprudence, hence in an undemocratic way, cannot remain unnoticed. The EU is giving up the opportunity to repossess GP to pursue its industrial development in a time when this is very much needed and this cannot be ignored by the public debate any longer.

 

References


[1] EU Classical and Utilities Directives are being revised; moreover, the EU has proposed an instrument to regulate access to EU GP for third countries’ goods and services (COM(2012) 124 final); also the Government Procurement Agreement (GPA) has been recenlty revised and is now undergoing the ratification process.
[2] R. Kattel and V. Lamber, Public Procurement As An Industrial Policy Tool: An Option for Developing Countries?, Journal of Public Procurement, Vo. 10, No. 3, pp. 368-404, p. 371.
[3] There is also an underlying economic interest to treat trade like any other economic sector in trade policy, this being the fact that in industrialised countries many sectors supply products that are procurable, whereas this is not the case for developing countries where agriculture remains the big chunk of their economy. As a consequence, in industrialised countries there is not enough domestic demand coming from government procurement matching with the potential supply, hence the interest of exporting products onto third countries’ procurement markets.
[4] COM(2012) 124 final
[5] L. Weiss and E. Thurbon, The business of buying American: public procurement as a trade strategy in the USA, Review of International Political Economy, December 2006, pp. 701-724, p. 703.
[6] GATT Article III.8 explicitely excludes GP from the scope of application of the national treatment principle of the GATT.
[7]Brazil adopted a new national industrialisation plan in 2011 (“Plano Brasil Maior”) a package of measures aimed at fostering industrial production. As part of the package, the Government announced that the 25% price preference for domestic products would apply to public purchases in the area of health, defence, communications and high-tech equipment. This preference margin of 25% is amongst the highest ever adopted in the country. This was soon after followed by a Plano Brasil Maior II, which included measures for stimulating the national industry through government procurement and on which bases the government will be investing BRL 3.5 billion on medications, pharmaceuticals and biopharmaceuticals in the following 5 years. China adopted in 2012 lists for official government automotive fleet purchases that only featured local Chinese car brands. That catalogue listed 412 domestically produced automotive models exclusively built under local Chinese brands. The government automotive purchases in China were estimated at around 10 % of the auto market (14 million passenger vehicles sold in 2011).
[8] WTO Agreement on Trade-related Investment Measures.
[9] WTO Agreement on Subsidies and Countervailing Measures.
[10] Article III:8(a) GATT reads: “The provisions of [Article III GATT, i.e. national treatment, hence prohibition of discrimination on the basis of local content requirements] shall not apply to laws, regulations or requirements governing the procurement by governmental agencies of products purchased for governmental purposes and not with a view to commercial resale […]”.
[11] The broader context is also the economic crisis that particularly affected the automotive sectors, which was of particularly relevant size in the province of Ontario.
[12] Arrêté du 7 janvier 2013 portant majoration des tarifs de l’électricité produite par certaines installations utilisant l’énergie radiative du soleil telles que visées au 3o de l’article 2 du décret no 2000-1196 du 6 décembre 2000.
[13] Decreto 5 Luglio 2012, Attuazione dell’art. 25 del decreto legislativo 3 marzo 2011, n. 28, recante incentivazione della produzione di energia elettrica da impianti solari fotovoltaici (c.d. Quinto Conto Energia).

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