Public Procurement Reform in the European Union - Implications for IT Solution Vendors

Public Procurement Reform in the

European Union:

Implications for IT Solution Vendors

PerspectiveVMPS-WW-DP-9901

Dataquest

Public Procurement Reform in the European Union:Implications for IT Solution Vendors

VMPS-WW-DP-9901 1 Company Confidential

© G2R, 1999


Abstract: European Union (EU) rules on public purchasing are in dire need of retooling toensure best value for money and an open, competitive, single European market. As a result,the European Commission has made reform of government acquisition processes a realpriority. A transformed market access regime, the new single currency, processbenchmarking and electronic procurement pilot projects are together driving importantchanges in the public procurement markets of the Union’s fifteen Member States. Althoughpolitical roadblocks have traditionally hampered substantive change, G2R anticipates anacceleration in the reform process over the medium term in this market space. This forward-looking Perspective illuminates future directions in information technology (IT) acquisitionsacross this vast market by detailing the European Commission’s activities of late in thegovernment procurement realm and further, assesses the ramifications of these reforms forU.S. vendors.By James Macaulay, Analyst, Global Public Sector

Background: The European Public Sector MarketIn 1996, the United States Department of Commerce estimated EU publicprocurement markets at some 12 percent of total EU gross domesticproduct, or US$778 billion annually – a figure larger than the combinedeconomies of Spain and Sweden. The EU institutions (the EuropeanCommission, Council of Ministers, European Parliament, Court of Justice,etc.) accounted for another US$97.9 billion. For 1999, G2R has forecastaggregate government procurement of information technology atUS$52.4 billion for the fifteen Member States.

Figure 1

Total European Union Public Sector IT Spending

52.456.6

61.266.2

0

10

20

30

40

50

60

70

1999 2000 2001 2002

AAGR: 8.11%

In U

S$

bill

ion

s

Forecasts comprise aggregate hardware, software, internal and externalservices expenditures for all EU Member States, except Luxembourg.

Source: G2R, 1999



© G2R, 1999

The EU’s 370+ million citizens have placed enormous pressure on local,provincial, national and supra-national governments to improve servicedelivery while reining in fiscal outlays, particularly in view of the EU’s“Maastricht criteria” for macro-economic management in the leadup toJanuary 1999’s introduction of the single European currency, the euro. Inthis context, the European Commission, the administrative arm of theUnion, has embarked on an ambitious program of reform of procurementpolicies in its Member States as an important component of the EU’sdrive for a single market for all goods and services. That said, a singlemarket for government purchasing has emerged only in name as theCommission’s annual “Single Market Scoreboard” benchmarkingexercise routinely makes clear: public procurement scores perpetuallyworst as the functional area in which the EU Member States have takenconcrete steps towards increased competition, with only 55% oflegislation implemented correctly (although Union level laws supersedenational rules, EU directives must be “transposed” into Member Statelegislation to take actual effect).

Public procurement has been a political flashpoint in the Member Statesas deep-seated traditions of political patronage have been major driversof acquisition decisions. In fact, the Commission itself concedes that amere ten percent of all government procurements are sourced fromoutside the Member State issuing the bid (other estimates are evenlower). For U.S. bids, market access questions have reinforced the imageof a “Fortress Europe,” largely precluding penetration of extra-EUsuppliers. For its part, the Commission maintains, nonetheless, that a“Firewall Europe” has not actually emerged (that is, on a sectoral level)as IT contracts tend to be those most frequently awarded to foreignvendors. For U.S. information technology firms, however, newCommission rules on transparency and increased competition are clearlywelcome developments.



© G2R, 1999

The European Union MarketThe European Union now comprises some fifteen Member States, butwill expand into Eastern Europe over the next five to ten years. TheEuropean Free Trade Area states (Norway, Iceland, Liechtenstein andSwitzerland) also abide by many single market and Community rulesunder 1992’s Agreement on a European Economic Area.

Table 1

Current Members, Applicant Countries

Current Member Status Applicant Countries

Austria

Belgium

Denmark

Finland

France

Germany

Greece

Ireland

Italy

Luxembourg

Netherlands

Portugal

Spain

Sweden

United Kingdom

Phase 1 – “Fast Track” Accessions

(likely by 2003)

Cyprus

Czech Republic

Hungary

Poland

Slovenia

Phase 2 – After 2003

Bulgaria

Estonia

Latvia

Lithuania

Romania

Slovakia

TurkeySource: G2R, 1999

Overview of EU Procurement PolicyThe body of laws pertaining to European public procurement andinformation technology usage is both expansive and at times, opaque. Abrief overview of relevant policies, however, may prove instructive. EUprocurement policy is driven by three principal legislative instruments:

■ Commission procurement directives

■ the World Trade Organization’s Government ProcurementAgreement

■ technical standards



© G2R, 1999

The Procurement DirectivesThe Union’s public procurement rules have their antecedents in the 1957Treaty of Rome, which established the European Economic Community(EEC). The Treaty contains provisions mandating, inter alia, the freemovement of goods, services and capital, and includes prohibitions ondiscrimination in business practices within the EEC on the grounds ofnationality (national treatment, transparency, mutual recognition, etc.).

The European Commission, in its role of “guardian of the treaties” and asthe exclusive initiator of Community legislation, has subsequentlyintroduced a substantial body of secondary legislation implementing theprinciples set out in the treaty. Six operative Community directivesunderpin the legal framework for public procurement within the EU:supplies, works, public services, utilities, public remedies and remediesfor utilities, the latter two detailing supplier redress rights.

Member State contracting entities have three options open to them indeveloping invitations to tender (ITTs): open, restricted, and negotiatedprocedures. Open (any firm may tender) and restricted (firms invited totender) are the preferred methods, with strict rules governing applicationof the negotiated procedure (where purchasers sit down with suppliers todetermine price, scope of the contract, etc.). In fact, the Commission hasalready made plain its intention to phase out the negotiated system.

The World Trade Organization (WTO)The World Trade Organization’s Government Procurement Agreement(GPA), entered into force January 1, 1996, and effectively governs thescope of the Commission’s legislative maneuvers in this field, as well asmarket access issues for international suppliers. American (and other)vendors now have the right under the WTO dispute settlementprocedure to seek redress if they encounter discrimination in the biddingprocess.



© G2R, 1999

Government contracts above established GPA thresholds must be open tocompetitive tender and published in the Official Journal of the EuropeanCommunities’ “Supplement Series.” These thresholds are as follows:

Table 2

GPA Thresholds

Government Authority Goods Services

EU and centralgovernment entities

130,000 SDRs* 130,000 SDRs

Sub-central governmententities

200,000 SDRs 200,000 SDRs

*1 IMF Special Drawing Right (SDR)= US$1.393 (January 1999)

Source: G2R, 1999

Although they account for more than half of all European procurementnotices, sub-national government authorities have been relatively slow tocomply with Commission rules on public ITTs. In April of 1994,however, the Commission and the U.S. government concluded anagreement on sub-central market access, extending to U.S. firms GPA-comparable levels of national treatment in provincial and localgovernment bids (conditional upon U.S. reciprocity).

Third country tenderers also enjoy GPA dictated access to EU levelfinanced contracts. EU funding sources include the European Bank forReconstruction and Development (EBRD), the European Investment Bank(EIB), the “Structural and Cohesion” funds for regional development,Trans-European Networks (also for regional and remote areainfrastructure), the Poland and Hungary Restructuring of the Economy(PHARE) program, and the Technical Assistance to the Commonwealthof Independent States (TACIS) fund, as well as the EU institutionsthemselves.

The WTO’s Information Technology Agreement (ITA) is also now law.Trade disputes over EU customs classifications of networking equipmentwill largely disappear under the ITA as will most EU tariffs on ITproducts (tariffs go to zero by January 2001). WTO members also havebegun work on expanding coverage to include satellites and other ITrelated products previously excluded (ITA2). As a result, US solutionsproviders can expect vastly improved access to European governmentmarkets, which together account for one third of worldwide public sectorIT expenditures.



© G2R, 1999

Technical StandardsStandards and technical specifications also play a critical role inCommission efforts to open up public procurement markets as the use ofprovincial standards can significantly restrict access to contracts fornon-national suppliers. Procurement directives therefore provide thatcontracting authorities must define technical specifications with referenceto European standards where possible. To this end, the Europeanstandardization bodies – the European Committee on Standardization(CEN) and the European Telecommunications Standards Institute (ETSI)– have developed many European level technical norms which have beensubsequently implemented into national standards. More recentCommission policies have incorporated international (ITU, ISO, etc.) andde facto industry standard specifications into this process.

Key Developments in EU Procurement ReformFigure 2

EU Procurement Reform in Perspective

YesterdayToday

Tomorrow

• Commission provides guidelines,Member States undertakepoliciesto implement

• WTO Gov’t ProcurementAgreement determines thresholdsfor competitive bids

• ITTs on the web, electronicforms, pilot projects

• Commission signals politicalcommitment to openness,transparency, IT take-up

• Economic and Monetary Union

• Convergence in policy-making• Single government IT market• Rapid deployment of electronic

procurement infrastructure• International and pan-European

IT standards• Improved market access and

greater competition• EU policies encompass new

Member States (Eastern Europe)

• Non-tariff barriers,protectionism

• Low penetration of externalsuppliers

• Provincial, incompatiblestandards

• Paper-based informationflowsand laborious, bureaucraticacquisition channels

• 15 different currencies

Source: G2R, 1999



© G2R, 1999

Throughout the last three years, the Commission has taken the results ofits Single Market Scoreboard benchmarking exercise to heart, delivering“reasoned opinions” (an interim step towards involving the EuropeanCourt of Justice in the EU’s infringement process) to most of the fifteencountries for missteps in the public procurement field. TheCommission’s 1998 communication on policy priorities (see below) hasmade clear its plans to change the European acquisition processdramatically and for the better. While progress to date has been sporadicin terms of implementation of the directives, public ITTs at the EU levelhave in fact increased significantly over the last decade (roughlyfourfold), a development which bodes well for the direction of change.

The Green PaperIn November of 1996, the Commission launched a pan-Europeanconsultation process on public procurement reform with its Green Paper“Public Procurement in the European Union: Exploring the WayForward.” Two years of discussions with procurement stakeholdersaddressed general directions in reform, application of Communitydirectives in national law, facilitation of market access, enhancement ofinformation dissemination, implementation of electronic procurementpilot projects, special provisions for small and medium-sized enterprises(SMEs), standardization, and the role of EU-level funds.

In March of 1998, the Commission released a communication setting outthe results of the Green Paper consultations. The communicationacknowledges the need for streamlining and reform in procurementprocesses and makes the following recommendations of interest to U.S.IT vendors:

■ Stakeholders should make increased use of information technology inprocurement processes, particularly in the context of the SIMAP andTED projects (see below). The Commission wants Europeangovernments to conduct a very achievable 25% of all publicprocurement transactions electronically by 2003. Officials have alsopledged to keep this objective in sight when developing electronicbusiness and standardization policies on digital signatures,cryptography, electronic contract law, etc.

■ Law makers must work towards a clarification of existing rules,including the consolidation of the main procurement directives into asingle directive in the hopes of mitigating incremental legislative“clarifications” which tend actually to obfuscate policy and/orimpede market access.



© G2R, 1999

■ The Commission should replace the negotiated tendering procedurewith a “competitive dialogue” approach and flexible long termcontracts, specifically in the information technology sector. Thisdialogue would facilitate interaction with potential suppliers in orderto identify precise business needs and a “best fit” for technologies.This sort of interaction is effectively proscribed under the currentrules base. Moreover, as factor costs can vary widely over the courseof long term implementations, contracting entities ought to enjoy thefreedom to manage contracts over the long term (frameworkpurchasing), rather than establishing a hard and fast agreementunresponsive to market conditions. Contracting entities may opt touse price as the sole selection criterion, or alternatively, may utilize amore flexible “most economically advantageous” metric. This levelcan be determined by a host of factors including price, delivery date,technical merit, and after-sale service and support.

■ The Commission and the Member States should provide forimproved mutual recognition of supplier qualification schemes.Officials should also work towards World Trade Organizationcommitments on government procurement and tackle theshortcomings in Member State practices in terms of transposition ofthe major directives, including accelerated infringement proceedingsagainst delinquent parties.

The EuroEuropean Economic and Monetary Union (EMU) has made numerousimportant advances in recent months. The introduction of the euro onJanuary 1, 1999, and the appointment of Wim Duisenberg as head of thenew European Central Bank are clearly watersheds in the EU’sintegration process. Eleven Member States are now participating in thesingle currency (the United Kingdom, Finland, Sweden, and Greece arenot), with the preliminary phase-out of national currencies slated for2002.

Vendors can expect greater competition and further convergence inacquisition processes as governments move to embrace the euro morefully. The euro will bring about lower transaction costs by eliminatingcurrency conversions and foreign exchange risk, single European pricing,and a broadened competitive landscape. In this market space, vendorsfocused on government must also be aware of important euro-drivenchanges including customs and tax filing, legacy data-relatedtransactions, emerging EDI issues, and pricing. Drivers of increasedpublic sector efficiency are not likely to recede as the eleven MemberStates are committed to a macro-economic “stability pact” dictatingbudget levels comparable to those set out under the earlier Maastrichtcriteria.



© G2R, 1999

Figure 3

Electronic Procurement Projects

European CommissionDirectorates-General XIII, XV

SPRITE-S2

• Benchmarking

• Standardization

• Promotion ofbest practices

ELPRO

• SME-focused

• “VirtualProcurementNetwork”

• Vienna

• Newcastle• Munich• Lisbon• Aarhus

TED

• On-lineinvitations totender

• CommonProcurementVocabulary

SIMAP

• Standardized,multi-lingualelectronic forms

• Access to nationaldatabases,standards,purchaser profiles

• Infomediaries

Source: G2R, 1999

The Public Market Information System (SIMAP)The Public Market Information System (SIMAP) program is an initiativerolled out under the auspices of the EU’s umbrella Interchange of Databetween Administrations (IDA) project. Begun in 1995, SIMAP is aCommission sponsored project involving “administrative and technicalsupport for EDI standardization on public procurement.” Directorate-General XV (Internal Market and Financial Services) of the Commissionhas jurisdiction over the process and has launched the project toencourage best practice in the use of modern information technology inpublic procurement. The SIMAP project has as its objective “thedevelopment of the information system infrastructure needed to supportthe delivery of an effective public procurement policy in Europe byproviding contracting entities and suppliers with the information theyneed to manage the procurement process effectively.”



© G2R, 1999

SIMAP uses a series of standardized electronic forms in a Windows-based multilingual user interface, sent over X.400 electronic mailchannels by Member State-based “data entry points,” or “infomediaries.”SIMAP’s website also provides hotlinks to national tendering databases,purchaser profiles, updates from standards bodies, and other informationon government acquisitions. Initially a pilot project, the Commissionnow increasingly refers to SIMAP as “the official European procurementsite.” At this point, the project aims to improve the quality ofinformation about EU procurement opportunities, but in the longer term,will address the whole procurement life cycle in a “portfolio of solutions”approach, including bids, award of contracts, delivery, invoicing andpayment.

Electronic Public Procurement System for Europe(ELPRO)Dovetailing with the launch of SIMAP, the Electronic Public ProcurementSystem for Europe (ELPRO) project, funded under the Commission R&Dinitiative, the Telematics Application Program, is another tentative steptowards electronic procurement. While still in the pilot phase, ELPROmay develop into a full-fledged “virtual procurement network,” not onlyin tendering, but across the entire acquisition process from notification toaward. ELPRO trials are underway in public administrations in Vienna,Newcastle, Munich, Lisbon, and Aarhus (Denmark).

Tenders Electronic Daily (TED)In keeping with its commitment to enhance the competitiveness of theEU procurement market, the Commission announced in January 1999,that on-line versions of the Official Journal of the EuropeanCommunities’ Supplement Series would be made available free of chargeunder the web-based, pan-European publication system, TendersElectronic Daily (TED), at http://www.ted.lu. All above-thresholdgovernment contracts from the fifteen Member States, the EU institutionsthemselves, EU funding sources (the European Investment Bank, theStructural and Cohesion funds, etc.), Norway, Iceland, and Liechtensteinare published on the TED site. The system is accessible in all elevenofficial EU languages and relies on the Commission developed CommonProcurement Vocabulary (CPV). The CPV establishes 6000 standardclassifications for contracts to mitigate translation problems.



© G2R, 1999

The Tenders Electronic Daily website effectively removes a substantialnon-tariff barrier in this market: imperfect or late information. In thepast, US vendors have had to invest considerable resources in monitoringOfficial Journal publications for ITTs of interest to them. Frequently,these calls have involved tight deadlines made all the more problematicas vendors await delivery of hard copies of the Commission’sSupplement Series. Loading purchaser profiles onto the site will enableboth vendors and end-users to evaluate contract suitability. Vendors willalso be able to market their solutions more strategically in this context.The TED site improves access, competition, timeliness of information,and overall process efficiency, and should be a focal point for vendors.

Support and Guidance in the Procurement ofInformation and Telecommunications Services(SPRITE-S2)Carried out by the European Commission’s Directorate-General XIII(Telecommunications, Information Market, and Exploitation ofResearch), the SPRITE-S2 program builds largely on a series of earlierCommission projects, particularly the EuroMethod and EPHOS pilots.Begun in 1989, EuroMethod addressed barriers to a single market ininformation technologies (chiefly differing technical standards across theMember States). It began developing common terminologies for ITacquisitions and provided guidance to public purchasing authorities onhow best to make use of procurement funds and work towards commonEuropean platforms, standards, etc. In a related vein, the EuropeanProcurement Handbook for Open Systems (EPHOS) acted as aprocurement library for purchasers, delineating international andEuropean standards in the hopes of facilitating interoperability. Inparticular, EPHOS dealt with character sets, directory services,transaction processing, e-business and EDI, file transfer, ISDN,LAN/WAN, message handling, and security services. Based on theresults of a lengthy independent review process, however, theCommission determined in 1996 that the two existing initiatives were notkeeping pace with the need for reform and technological change.



© G2R, 1999

SPRITE-S2 is essentially the maturation of the EuroMethod and EPHOSprojects. Initiated in July 1997, its mission is to develop a new approachto IT acquisition issues with shorter time frames and more rapidresponses to market developments. A pilot program, it is engineered topromote best practice in European IT procurement processes, to supportthe “application, validation, and demonstration” of these processes, andto develop guidelines for procurement officials in the take-up of ITsystems and services. Specifically, the project works towards:

■ promoting the application of existing international and Europeantechnical standards

■ reinforcing the role of IT vendors themselves in developingstandardization and procurement policies

■ identifying effective procurement methods and supportinginnovative avenues of acquisition

■ conducting comparative analysis and benchmarking of currentprocurement practices

Directorate-General XIII has unveiled calls for proposals in each of thelast two years under SPRITE-S2. 1997’s proposals gave rise to a host ofCommunity financed programs (ten in total, backed by some 2m ECU inEU funding), the most important of which are the Information SystemProcurement Library (ISPL) and a three-pronged approach ofbenchmarking initiatives emphasizing identification, application, anddissemination of best practices. ISPL enables purchasers to accesssupplier company registers and to recommend best procurementpractices. Other proposals, such as ESCROWGUID, deal with innovativeapproaches to software purchases such as the provision of source codeescrow services. Decisions based on 1998 proposals have not yet beenreached by Commission officials, but calls have focused specifically on“standardization projects in support of industrial competitiveness andthe modernization of administrations.”



© G2R, 1999

G2R PerspectiveUntil recently, the unbundling of EU procurement policies hasprogressed at a fairly glacial pace, with inertial political pressuresthroughout the Member States consistently impeding the reform process.Commission legislative activism in this sector, however, signals officials’clear intention to increase the velocity of this change. Moreover,established technical standards and well-defined legislation on amount,type and destination of information flows in public sector electronicprocurement may speed up the reform process. Clearly, significantchanges are underway in this market.

Implications for U.S. IT Vendors■ The plurilateral Government Procurement Agreement has extended

national treatment and redress rights to extra-EU suppliers,dramatically improving the market access picture for U.S. firms.

■ Commission activity in the public procurement sphere underscores astrong political commitment to change acquisition processes,including accelerating infringement procedures, facilitating access ofsmall and medium-sized enterprises, minimizing onerous tenderingrequirements, and making far greater use of information technology.

■ EU policies on both mutual recognition of supplier qualificationschemes and web publishing of purchaser/supplier profilesunderline a move towards greater transparency.

■ Benchmarking, monitoring of best IT procurement practices, andinteroperability rules will continue to shape technology purchasesover the near term.

■ Tenders Electronic Daily must be a focal point for vendors, as mustthe Commission’s development of a Common ProcurementVocabulary.

The result of this process of reform will be a more unified, morestandardized, and more open acquisition process across the Europeanpublic sector. Expansion of the Union will dramatically increase thescope of this market space as Central and Eastern European countriesembrace the body of Community directives – the acquis communautaire –including rules on government purchasing.



© G2R, 1999

Long Term Outlook■ Europe is moving towards a single government market, already

extending beyond the fifteen Member States to include European FreeTrade Area states (Norway, Iceland, Liechtenstein, and Switzerland)and potentially including up to an additional twelve Central andEastern European nations.

■ Although most electronic procurement programs are still in the pilotphase, G2R anticipates public purchasers will support widerimplementation and more rapid deployment of these systems.

■ Electronic procurement systems will also increasingly involveenhanced end to end acquisition processes, encompassingpayment/invoicing and improved bidding mechanisms.

■ Commission officials will continue to work towards increasedcompetition, transparency, interoperability, and use of standards.

■ Finally, G2R also foresees continued emphasis on openness andflexibility, including competitive dialogues between purchasers andsuppliers, and greater use of long term, “framework purchasing”arrangements.

Public Procurement Reform in the European Union - Implications for IT Solution Vendors

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