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Why public procurement openness is more important now than ever

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Why public procurement openness is more important now than ever

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The Trump administration has been tightening the “Buy American” rules making it more difficult for US public buyers to procure foreign goods and services. Most recently, several press reports indicated that the administration is considering a “Buy American” executive order that would require government agencies to procure essential medicines and medical supplies only from domestic suppliers, and to withdraw US international commitments in the area of public procurement (Pitts 2020). Many commentators and business stakeholders have voiced their concerns about the intended executive order and pointed to significant potential negative consequences, given the important global supply chains and independence between different US companies and foreign suppliers involved in public procurement of medicine and medical devices (Athey 2020).

Previous reports already indicated that the US administration had been dissatisfied with international public procurement and the benefits derived from the US membership in the WTO Government Procurement Agreement. A recent Bloomberg article (Baschuk 2020) based on a report by the United States Government Accounting Office (GAO 2019) stated that the US has a huge deficit with the EU in government procurement, as US firms have allegedly won contracts worth $300 million in the EU, whereas EU firms have been awarded public contracts worth almost ten times more in the US.

However, in a recent piece we provided clear evidence that these estimates are incomplete and misguiding (Cernat and Kutlina-Dimitrova 2020). The main reason for that was the methodological approach used by GAO (2019), which was partial and misrepresented the level of EU openness, as it only looked at the ‘tip of the procurement iceberg’ and missed out the most important avenues for international government procurement (see Box 1). In reality, once all three procurement modes are taken into account, EU openness in procurement is much higher vis-a-vis both the US and third countries. Overall, the EU has awarded over €50 billion worth of public contracts to foreign firms, out of which €11 billion went to US firms. 


Box 1: The three modes of international procurement

Procurement mode 1 – direct cross-border international procurement: a foreign company submitting and winning a public contract ‘from abroad’.

Procurement mode 2 – commercial presence procurement: a domestic subsidiary of a foreign company wins ‘locally’ a public contract.

Procurement mode 3 – indirect international procurement: a foreign company participates indirectly in a bid by providing intermediate goods and services.


How open is the EU public procurement market?

According to the official Tenders Electronic Daily (TED) database, in 2017 foreign firms received contracts worth more than €4.6 billion under procurement mode 1 (i.e. directly cross-border) (see Figure 1). This information is obtained from the official TED data subject to above-threshold adjustments and removal compliance errors. In addition to mode 1 contracts, foreign firms won EU tenders worth €27 billion via their EU subsidiaries. This value is obtained based on the total above threshold EU procurement market size and the share of mode 2 procurement, which accounts for 20.4% of the total market. Further adjustments were undertaken to account for the share of extra- versus intra-EU contracts, which means that the €27 billion represent extra-EU procurement only. The underlying shares for these mode 2 calculations are provided in a report on the measurement of cross-border penetration in public procurement commissioned by the European Commission (VVA, LE and JIIP 2017). 

Figure 1 EU openness in foreign procurement, by modes of supply (€ billion)

Why public procurement openness is more important now than ever 2

Source: own estimates, based on TED

Our estimates for mode 3 procurement point to around €18 billion worth of goods and services provided by extra-EU suppliers indirectly to EU public authorities in 2017. This value is obtained by applying the share of procurement awarded to foreign firms via subcontracting, consortia and wholesales. This share (12%) was estimated through a pan-European firm survey, carried out as part of the Ramboll (2011) report. Our estimate for mode 3 international procurement discounts the value of intra-EU indirect procurement and reports only the value of foreign (extra-EU) mode 3 procurement. 

Therefore, as shown in Figure 1, the total value of public contracts awarded by EU public authorities (directly or indirectly) to foreign firms amounts to almost €50 billion. As previously stressed, it is critical to assess the openness in public procurement across all three modes of supply. For example, if only mode 1 public procurement estimates are used (€4.6 billion), roughly 90% of the ‘real’ openness of EU public procurement would be omitted.

The value of EU public procurement awarded to US firms

Following the same methodological approach, we also estimate the value of public procurement won by US firms in the EU (Figure 2). As for the overall procurement openness offered to all foreign firms, the TED database indicates a value for Mode 1 procurement contracts awarded to US firms directly cross-border of more than €1.6 billion in 2017. The procurement value awarded to US foreign subsidiaries in the EU (mode 2) is far more important and amounts to nearly €6 billion. We arrived at this amount by applying the US share (22%) in total EU mode 2 procurement, and discounting for the share of intra-EU foreign subsidiaries contracts (VVA, LE and JIIP 2017). 

Figure 2 Value of EU public procurement contracts awarded to US firms by modes of supply (€ billion)

Why public procurement openness is more important now than ever 3

Source: own estimates.

Based on the same estimates by Ramboll (2011) of indirect procurement via subcontracting, consortia and wholesaling, and using the share of US goods and services in extra-EU imports as a proxy for the value of US intermediate inputs, the value of mode 3 procurement for the US amounts to more than €3 billion.

Comparable data across all modalities do not yet exist for the US, but we do have clear evidence that, since 2009, the US has introduced the largest number of protectionist procurement measures severely affecting international procurement (Cernat and Kutlina-Dimitrova 2020).

The actual cost-benefit analysis of closing international procurement markets

The various elements presented above point out three important facts. First, whether measured on a ‘de facto’ or ‘de jure’ basis, international openness in public procurement remains a major policy objective, as part of a globalized economy. Second, for sound evidence-based policy advice, it is crucial to have a comprehensive assessment of openness of public procurement markets based on the three procurement modes, and not just mode 1 (cross-border procurement). The evidence we provide here indicates that, when all three procurement modes are considered, GPA membership does translate into tangible economic opportunities for foreign companies through winning public contracts in the EU.1

An assessment of removing “Buy America(n)” restrictions points to substantial benefits in terms of job creation and GDP gains for the US (Dixon et al. 2017). Thus, such ‘buy-local’ provisions induce not only costly change in the production patterns of potential foreign bidders, across all modes of supply but affect negatively US firms.  The GPA not only guarantees access for US companies to public procurement markets in major partners like the EU, it also enables US companies to win public contracts from the US government. Nowadays, many US companies are part of complex global supply chains that allow them to remain competitive. Therefore, the GPA also allows US companies to bid successfully for US public contracts without worrying about the Buy American Act, if they use intermediate products from another GPA signatory country.

There is evidence that the current degree of US openness and GPA commitments in terms of market access across all three procurement modes and levels of US government (federal, sub-federal, and local) remains limited and has been subject to a growing number of restrictions and discriminatory measures.2 

In these critical times, international openness in public procurement is more important than ever. Maintaining open trade and avoiding unnecessary disruption of supply chains is essential, especially when it comes to ensuring the adequate production and distribution of critical medical and protective equipment. A global pandemic requires a global, coordinated solution. This logic applies to international procurement as well and a more promising way forward would be to deepen current GPA commitments, while improving the factual basis and the data reporting processes to ensure that all GPA members are fully informed about the benefits of international public procurement openness.

Authors’ note: The views expressed herein are those of the authors and do not necessarily represent the official position of the European Commission.

References

Athey, A (2020), “Big Pharma and free market orgs unite against Trump’s ‘Buy American’ order”, The Spectator, 25 March.

Baschuk, B (2020), “Trump Considers Withdrawing from WTO’s $1.7 Trillion Purchasing Pact”, Bloomberg.

Cernat, L and Z Kutlina-Dimitrova (2020) “Public Procurement: How open is the European Union to US firms and beyond?”, CEPS Policy Insights no. 2020.

Dixon, P B, M T Rimmer and P G Waschik (2017), “Macro, Industry and Regional Effects of Buy America(n) Program: USAGE Simulations”, Center of Policy Studies Working Paper No. G-271 (April), Victoria University.

GAO (2019), “International Trade: Foreign Sourcing in Government Procurement”, United States Government Accountability Office, Washington.

Kutlina-Dimitrova, Z (2017), “Can we put a price on extending the scope of the GPA? First quantitative assessment”, DG TRADE Chief Economist Notes 2017-1.

Pitts, P J (2020), “Buy American’ executive order could slow delivery of a coronavirus cure”. Washington Post, 21 March.

Ramboll (2011), “Cross-border procurement above EU thresholds – Final report for the European Commission”, Copenhagen.

VVA, LE and JIIP (2017), “Measurement of impact of cross-border penetration in public procurement”, Final report for the European Commission, Brussels.

Endnotes

1 On the benefits of extending the scope and coverage of the GPA see Kutlina-Dimitrova (2017).

2 For a comprehensive overview of the US restrictive measures applicable to public procurement, see the Global Trade Alert database (www.globaltradealert.org).

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