Chancellor calls for public procurement reform

"This report shows clearly that there is widespread preference for domestic industries in many parts of Europe," said the Chancellor. "Europe needs to do more to create a genuine single market in public procurement, in which European and international rules are fairly applied, and to allow businesses to compete and create jobs across the EU."

The report, commissioned by the Treasury last year, and published yesterday by Alan Wood, the chief executive of Siemens plc, investigated the experiences of over 100 UK businesses in competing for public contracts in other EU countries, including their concerns about unfair discrimination and different approaches to the application of single market public procurement rules.

At present the EU's procurement regime sets out rules to achieve transparency and equal treatment for all tenderers to ensure that public contracts are awarded to the tender offering best value for money. This has resulted in public procurement markets accounting for some 16% of EU GDP but, according to the report, less than 10% of this relates to cross-border trade – half the amount to be found in the private procurement market.

According to the report, the rules themselves are not the problem, but "grey", behavioural issues such as complex procedures, unfair national preference, and wavering commitment to competition and market liberalisation are key factors holding back the creation of a competitive and dynamic EU public procurement market.

Particular problems include:

• contracts awarded to national suppliers even where foreign bidders are believed to offer better quality or price;
• contract requirements shaped to suit a given, national, supplier; or pressure applied to suppliers to use locally-based sub-contractors;
• overly legalistic approaches to public procurement;
• false competition where international bids are invited but there is little intention of awarding a contract to a non-national firm;
• splitting contracts into small lots to avoid detailed procurement rules;
• 'price-squeezing' to keep foreign competition out of a market, particularly where the state has a substantial stake; and
• instructing successful bidders on the location of manufacturing for a contract.

The report proposes a range of steps to improve the functioning of public procurement markets across the EU and to ensure that UK firms can compete effectively for contracts.

In general, says the report, "The Government should press at EU-level, and bilaterally where appropriate, for the application of policies and practices to make public procurement markets fair, open and competitive."

More particular steps include:

• action to identify and spread best practice among EU Member States, including the use of scorecards, where appropriate, to measure performance;
• action by Member States to open up more markets to public procurement and remove barriers to effective competition, as well as to raise the skills of procurement practitioners and to eliminate bad practice; and
• support from the UK Government through the Office of Government Commerce and UK Trade & Investment to help business compete successfully.

Stressing the need for action by business too, the report also highlights a number of success factors which British businesses can apply to increase their chances of winning public procurement contracts in other EU countries. These include:

• Good products and services with reliable delivery and customer support services;
• Clear commitment to public procurement markets and the resource investment required;
• Structural readiness for export;
• Relevant export support services have been investigated and used;
• Market research has been carried out; issues such as country-specific regulation, customer preferences, standards have been explored;
• Niche or best-in-class product or service is offered;
• Internationally recognised brand;
• Clear and robust country-entry strategy in place;
• A strategy of starting small has been considered, to avoid head-on competition with firms already well established in the market;
• Familiarity with relevant EU public procurement rules;
• Familiarity with informal problem-solving mechanisms in case problems occur;
• Some form of local presence is in place (distribution agreement, joint-venture, local subsidiary, sub-contracting arrangements);
• Linguistic skills and cultural understanding of the target country;
• Sales representatives are natives of the country, or at least fluent in the language, and well integrated within the local culture and business environment;
• Good relationships and dialogue are in place with potential and actual clients;
• Competitive bid;
• Good fit with client requirements; and
• Pragmatic approach to difficulties and cultural differences, and adaptability to customer requirements.

The Commission, which first heard of the Wood review's findings from the UK press, stressed that the UK had also been guilty of breaching the single market procurement rules in the past, highlighting an ongoing inquiry into the awarding of the design contract for the Scottish Parliament building as an example, according to reports.

The Chancellor will present other EU finance ministers with a copy of the report when he meets with them at the monthly meeting in Brussels today.