Public procurement is subject to the general, basic freedoms enshrined in the Treaty on the Functioning of the European Union, as amended by the Lisbon Treaty; that is, free movement of goods, freedom to provide services, and freedom of establishment within the territories of the twenty-seven EU Member States. In practice, EU Member States within the single market may not discriminate in awarding public contracts against firms from other EU Members; they are obliged to treat contracts based on the principles of equal treatment, nondiscrimination, mutual recognition, proportionality, and transparency. Public procurement has been regulated by a number of Directives, which require further implementation by the Member States. In 2004, following a lengthy debate, the European Union (EU) reformed the rules on public procurement in light of case law of the Court of the European Union and adopted two Directives, the so-called Public Procurement Directives, which replaced prior directives.
Within the EU framework, cross-border procurement occurs in two ways; Direct cross-border procurement and indirect cross-border procurement. Direct cross-border procurement occurs when firms that operate from their home market bid and win contracts for invitations to tender initiated in another EU Member; while indirect cross-border procurement takes places when firms bid for contracts through subsidiaries.
The EU legal regime on public procurement also applies to signatories to the WTO Agreement on Government Procurement. For the purposes of the award of contracts, Member States are required to apply “in their relations conditions as favorable as those which they grant to economic operators (the term includes contractors, suppliers and service providers) of third countries in implementation of the Agreement on Government Procurement (AGP).” Pursuant to the AGP, EU Members are also required to ensure that their entities do not treat a locally established supplier less favorably than another locally established supplier based on the degree of foreign affiliation or ownership; moreover, EU Members must also ensure that their entities do not discriminate against locally established suppliers on the grounds of the country of production of the good and services being supplied, if the country of production is a party to the AGP.
In 2002, pursuant to the European Commission’s estimates, the total public procurement in the EU—that is, the purchase of goods, services and public works by governments and public utilities—was close to 16% of the Union’s GDP or €1,500 billion (US$2,099 billion at the current exchange rate of €1 to approximately US$1.399). The value of public procurement varies among the EU Member States from 11% in Italy to 21.5% in the Netherlands.
II. Public Procurement Legislation
The two basic public procurement Directives, which were adopted in 2004, are as follows:
- (1) Directive 2004/18/EC on the coordination of procedures for the award of public works contracts, public supply contracts and public service contracts; and,
- (2) Directive 2004/17/EC on coordinating the procurement procedures of entities operating in the water, energy, transport and postal services sectors.
The principles governing the award of public contracts are equal treatment, nondiscrimination, and transparency. As for the award criteria, these are the same in both Directives. Contracting authorities—that is, State, regional, or local authorities, or bodies governed by public law—are required to award public contracts on the basis of either the bid that is most economically advantageous in terms of quality, price, technical merit, environmental characteristics, cost-effectiveness, and delivery date, or the lowest price only.
A. Directive 2004/18/EC
1. Scope of Directive
Directive 2004/18/EC applies to public contracts that are not excluded from the scope of the Directive and that have a value exclusive of value-added tax (VAT) estimated to be equal to or greater than the following thresholds:
- a) Euro 125.000 for public supply and service contracts, other than those covered by point (2)©, directly below; in the case of public supply contracts awarded by contracting authorities in the field of defense, this applies only to contracts involving products listed in Annex V; and
- b) Euro 193.000 for (a) public supply and service contracts awarded by contracting authorities other than those listed in Annex IV; (that is, central government authorities); (b) public supply contracts awarded by contracting authorities listed in Annex IV operating in the field of defense, where these contracts involve products not covered by Annex V (related to defense); and (c) for public service contracts awarded by any contracting authority in respect of the services listed in Category 8 of Annex IIA or Category 5 (telecommunications services); and,
- c) Euro 4,845,000 for public works contracts.
2. Excluded Contracts
Directive 2004/18/EC does not apply to the following contracts:
- Public contracts for procurement procedures operating in the water, energy, transport and postal services sectors regulated under Directive 2004/17/EC (see Part II(B), below);
- Public telecommunications networks or services;
- Secret contracts and contracts that require special security measures;
- Public contracts governed by an international agreement between a Member State and one or more third states;
- Public contracts concluded on the basis of an international agreement relating to the stationing of troops; and,
- Those contracts pursuant to the international procedure of an international organization.
3. Specific Exclusions
Directive 2004/18/EC does not apply to public service contracts for:
- The acquisition or rental of land, or immovable property;
- The acquisition, development, production, of program material intended for broadcasting;
- Employment contracts;
- Arbitration and conciliation services;
- Financial services related to the sale, purchase, or transfer of securities;
- Service concessions; and
- Service contracts awarded on the basis of an exclusive right.
4. Reserved Contracts
Member States may reserve the right to participate in public contract award procedures to sheltered workshops or provide for such contracts to be performed within the context of sheltered employment programs where most employees are handicapped.
5. Defense Procurement
Defense procurement is governed by Directive 2009/81/EC on the coordination of procedures for the award of certain work contracts, supply contracts, and service contracts by contracting authorities or entities in the fields of defense and security, and amending Directives 2004/17/EC and 2004/18/EC.
B. Directive 2004/17/EC
Directive 2004/17/EC applies to contracts that have a value estimated to be no less than the following thresholds: (a) €387.000 in the case of supply and service contracts; and (b) €4,845,000 in the case of works contracts.
1. Contracts Outside the Scope of the Directive
Directive 2004/17/EC does not apply in the following cases:
- Works and service concessions that are awarded by contracting entities involved in gas, heat, electricity, water, transport services, and postal services, and exploration for, or extraction of, oil, gas, coal, or other solid fuels, as well as ports and airports;
- Contracts awarded for the purpose of resale or lease to third parties;
- Contracts awarded for purposes other than the pursuit of an activity covered or for the pursuit of such an activity in a third country;
- Contracts that are secret or require special security measures;
- Contracts awarded pursuant to international rules; and
- Contracts awarded to an affiliated undertaking, or to a joint venture.
2. Tenders with Products Originating in Third Countries
Tenders that comprise products originating in third countries outside the European Union are subject to special rules provided for in Article 58 of Directive 2004/17/EC. Under this Article, tenders that cover products originating in third countries with whom the EU has not concluded a bilateral or a multilateral agreement and that ensure comparable and effective access for Community companies to the markets of those third countries may be rejected where the proportion of products originating in third countries, as determined by the Community Customs Code, “exceeds 50% of the total value of the products constituting the tender.”
B. Contracts Below the Required Threshold
Certain contracts below the thresholds prescribed by both Directives are subject to the general rules deriving from the EC Treaty. The following public contracts remain wholly or partially outside the scope of the Directives:
- Contracts below the thresholds for application of the directives—that is, those provided by Article 7 of Directive 2004/18/EC and Article 16 of Directive 2004/17/EC;
- Contracts for services listed in Annex II B to Directive 2004/18/EC and in Annex XVII B to Directive 2004/17/EC; and,
- Awards of services concessions.
Award of the above public contracts is governed by a number of standards, as developed by the Court of the European Union based on the rules and principles of the EC Treaty. Consequently, the principle of equal treatment and nondiscrimination on grounds of nationality require some transparency in the award procedure. The Court has held that it “consists in ensuring, for the benefit of any potential tenderer, a degree of advertising sufficient to enable the services market to be opened up to competition and the impartiality of the procedures to be reviewed.”
III. Economic Benefits Derived from Directives on Public Procurement
In 2004, the European Commission issued a report on the functioning of public procurement markets in the EU. The report states that the EU directives on public procurement adopted in the 1970s have contributed considerably to improving competition and transparency and also to increasing cross-border activity through the requirement of invitations to tender and contract award notices above a certain threshold. The report also suggests that direct cross-border procurement remains low, at approximately 3% of the total number of bids. The rate of indirect cross-border public procurement—that is, bids won by foreign firms through their local subsidiaries—is higher, constituting close to 30% of the total bids. Application of the EU rules also contributed to:
- Reducing prices paid by national, regional and local authorities for supplies, works, and services by around 30%; and
- Increasing intra-EU competition and prices paid by public authorities for goods traded between Member States have been less. For example, regarding small iron and steel rails traded between EU countries, export prices dropped from around 21% in 1988-92 to over 7% in 1998-2002.
Prepared by Theresa Papademetriou
Senior Foreign Law Specialist
 European Commission, A Report on the Functioning of Public Procurement Markets in the EU: Benefits from the Application of EU Directives and Challenges for the Future 8 (Mar. 2, 2004), available at http://ec. europa.eu/internal_market/publicprocurement/docs/public-proc-market-final-report_en.pdf.
 For a discussion of compliance with the enforcement of the Rules Under the WTO Government Procurement Agreement, see Christopher H. Bovis, EU Public Procurement Law 443 (2007).
 Directive 2004/17/EC art. 5, incorporating the “no less favorable treatment” of the World Trade Organization. See also WTO, The plurilateral Agreement on Government Procurement (AGP), http://www.wto. org/english/tratop_E/gproc_e/gp_gpa_e.htm (last visited Feb. 2, 2010) (stating in art. III, paragraph 1 that parties are required to grant to the products, services, and suppliers of any other party to the Agreement treatment “no less favorable” than they give to their domestic products, services, and suppliers).
 AGP art. III.
 European Commission, supra note 1, at 4.
 Directive 2004/18/EC, 2004 O.J. (L 134) 114, available at http://eur-lex.europa.eu/LexUriServ/ LexUriServ.do?uri= OJ:L:2004:134:0114:0240:EN:PDF.
 Directive 2004/17/EC, 2004 O.J. (L 134) 1, available at http://eur-lex.europa.eu/LexUriServ/LexUriServ. do?uri= OJ:L:2004:134:0001:0113:EN:PDF.
 Directive 2004/18/EC art. 53; Directive 2004/17/EC art. 55.
 Directive 2004/18/EC art. 7.
 The thresholds of Directives 2004/18/EC and 2004/17/EC were replaced by Commission Regulation (EC) No. 1177/2009, 2009 O.J. (314) 64, available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri= OJ:L:2009:314:0064:0065:EN:PDF.
 Directive 2004/18/EC art. 13.
 Id. art. 14.
 Id. art. 15.
 Id. art. 16.
 Id. art. 19.
 Directive 2009/81/EC, 2009 O.J. (L 216) 76, available at http://eur-lex.europa.eu/LexUriServ/Lex UriServ.do?uri=OJ: L:2009:216:0076:0136:EN:PDF.
 Directive 2004/17/EC art. 16.
 Id. art. 18.
 Id. art. 19.
 Id. art. 20.
 Id. art. 21.
 Id. art. 22.
 Id. art. 23.
 Id. art. 58.
 Case C-324/98, Telaustria, 2000 ECR I-10745, para. 62 & Case C-458/03, Parking Brixen, Judgment of Oct. 13, 2005, para. 49, quoted in European Commission Interpretative Communication on the Community law applicable to contract awards not or not fully subject to the provisions of the Public Procurement Directives, 2006 O.J. (C 179) 2.
 European Commission, supra note 1; see also Press Release (No. IP/04/149), European Commission, Public procurement: EU rules deliver big savings for taxpayers; scope for more gains (Feb. 2004), available at http://europa.eu/rapid/pressReleasesAction.do?reference=IP/04/149&format=HTML&aged=1&language=EN&guiLanguage=en (summarizing report).
 Press Release, supra note 28.
 The GPL, art. 84.
 The Draft Implementation Regulations, art. 112.
Last Updated: 09/16/2014