PREFERENTIAL TREATMENT?
11. While public authorities in the EU Member States
spend large sums procuring goods and services (estimated in 2003
at 1,500 billion euros a year, equivalent to 16% of EU GDP), little
of this is accounted for by direct cross-border trade: only 10%
of the total in 2003. This is half the rate found in the private
sector.[21]
12. A number of our witnesses were of the view that
UK companies were significantly less likely to be awarded contracts
by public authorities in other countries than foreign companies
were in the UK. The Government has been aware of this concern
for some years; and in 2003, it commissioned Mr Alan Wood, Chief
Executive of Siemens UK plc, to conduct an inquiry into UK companies'
experience of competing for public contracts in other EU Member
States. The resulting report concluded that neither the rules
themselves nor the application of them by Member States were considered
the key problem by UK businesses. Few examples of clear breaches
of EU law were found. However, as Mr Wood summarised in his foreword
to the report, "there are many obstacles ranging from complex
procedures to cultural differences and geographic distance that
can hinder the success of UK firms. Crucially, there is still
evidence of a lack of commitment to international competition
and market liberalisation in some key sectors such as defence,
energy and transportation. And there is room to improve the way
public purchasers carry out their business, to ensure more transparency
and effective competition."[22]
As the Wood report also points out, many of these difficulties
(linguistic and cultural differences, geographical distance, reduced
access to networks of relationships and less familiarity with
institutions) are common to any export activities, and the EU
"is by no means seen as the most difficult of export markets".[23]
13. With the partial exception of Amicus, our witnesses
accepted Wood's main conclusion, that difficulties arose from
deep-seated differences in industrial policy and the culture
of the procurement authorities, rather than from breaches of EU
law.[24] Though it agreed
that these 'grey areas' were significant, Amicus believed that
other Member States were more inclined than the UK to flout EU
law, and it attributed the paucity of specific examples of illegal
activity to companies' decisions not to report breaches for fear
of being excluded from future contracts.[25]
Moreover, Amicus was of the view that: "Cultural differences
are particularly prevalent where procurement is concerned, where
buying locally is the norm and no amount of legislation or regulation
from Brussels will change this."[26]
14. A particular concern of some witnesses was how
different Member States interpreted the partial exemption from
the EU's procurement rules for defence-related procurement. Article
296 of the Treaty establishing the European Community says: "any
Member State may take such measures as it considers necessary
for the essential interests of its security which are connected
with the production of or trade in arms, munitions and war material."
This exemption is phrased in such a way that it does not apply
to other types of goods or to anything not intended for specific
military purposes even if purchased by a defence ministry. However,
according to the TUC, "despite clarifications by the European
Court of Justice, the low number of publications in the Official
Journal of the European Union appears to imply that some Member
States believe they can apply the derogation automatically. Since
the concept of 'essential interests of security' is not defined
either in Community Law or in the Case Law of the Court of Justice,
in practice states allow themselves wide discretion in determining
which contracts could damage them."[27]
A number of our witnesses considered that, in contrast, the UK
failed to apply the derogation even when it was legitimate: one
example given was that of a contract for battledress (although
the complaint here was that the successful bidder sub-contracted
production of the uniforms to a company in China); another was
that in 2000 the Ministry of Defence had concluded that the Roll-On,
Roll-Off ferries it wanted to acquire should not be classified
as 'war material', and the tender was publicised under EU procurement
rules and won by a German shipyard.[28]
Government officials, however, told us that they had no reason
to believe that the Ministry of Defence had done anything other
than try to achieve best value for money for the UK taxpayer.[29]
The TUC saw it rather differently, alleging that the Ministry
just wanted the cheapest, rather than the best value, option.[30]
This exemplifies two recurring themes in the evidence: how value
for money can be judged, and whether procurement decisions should
be made solely in terms of lifetime costs or whether they should
also further other government policies.
15. Wood reported that the SME trade associations
declined to take part in the Review on the grounds that European
public procurement was not a high priority for their members,
but also that the individual SMEs that responded to the Review
considered their main need to be practical support and help from
UK authorities or from other UK companies.[31]
He made a number of recommendations about how the UK Government
could offer more practical advice and support to UK companies
of all sizes and encourage the European Commission and other Member
States to tackle the barriers to greater cross-border competition,
partly through market opening of protected sectors and partly
through the spread of best practice among procuring authorities.[32]
At the same time, he noted that some UK companies had adopted
strategies which helped them to overcome the cultural and administrative
difficulties in tendering for contracts abroad, in particular
using a subsidiary, joint venture partner, distributor or sub-contractor
located in the relevant Member State. The European Commission
estimated that such 'indirect cross-border trade' — where
the supplier, though local, was a subsidiary of a company based
in another country — represented 30% of public procurement
by EU Member States.[33]
More specifically, it found that 'local' firms won on average
35% of tenders in their home markets even if they were under foreign
ownership, while 30% were won by nationally owned companies and
only 25% by companies bidding from a different country with no
local connection.[34]
Most of the rest of Wood's list of 'success factors' for UK companies
competing for public procurement contracts abroad amounted simply
to normal good business practice and commonsense: businesses should
have good products or services to sell, ensure that these fitted
customers' requirements, do some homework on the local market,
seek help from relevant export support services, and have sales
representatives who spoke the local language and understood the
local business culture.[35]
Amicus suggested there was scope for more co-operation between
UK businesses, with those who had succeeded at winning public
contracts elsewhere in the EU acting as mentors to those new to
the process.[36]
16. Mr Fanning
of the OGC thought that there was a good case for updating the
Wood Review on procurement in other EU Member States. We agree.
We also accept that there may be more that companies could do
to fit themselves for competing for overseas public procurement
tenders, such as ensuring that their agents have appropriate language
skills and seeking advice from bodies such as UK Trade and Investment.
The UK Government must continue to encourage the spread of best
practice in procurement by public authorities throughout Europe.[37]
There is also a role for
Chambers of Commerce or trade associations in helping to identify
potential mentors for smaller or new-to-export companies.
17. The DTI's Memorandum lists activities taking
place at European level to reduce barriers to cross-border public
procurement and trade in general, and there have been well-publicised
moves by the European Commission to open up some of the areas
that Wood identified as particularly difficult for UK firms to
penetrate — energy and defence.[38]
However, our witnesses recognised that while formal barriers might
be lifted, there was still room for legitimate differences of
interpretation of EU procurement regulations, and that national
governments varied in their approach to achieving value for money
or, in EU terms, determining the "most economically advantageous
tender". Their main concern was that a rigid interpretation
of EU rules in the UK led to UK companies being disadvantaged
in their home market. We go on to discuss this in Chapter 3.
6 
