Current geoeconomic challenges and a new emphasis on the digital and green transition have spurred the comeback of industrial policy in Europe and around the world. Policymakers from different ends of the spectrum are now advocating for more guidance and strategy in European economic policy. And with public procurement being a centrepiece of industrial policy, it deserves more attention.  

Public procurement may – at first glance – not be the sexiest topic. It may not be the first thing that comes to mind when considering the geoeconomic tensions and twin transition that Europe faces. But when looking closer, its importance becomes apparent.

For example, the Inflation Reduction Act (IRA) recently passed in the US opened a debate on the negative consequences of the legislation for European industry. The IRA authorises $391 billion in spending on energy and climate change. Procurement will be key to achieving some of the IRA’s major objectives.

Meanwhile, the EU published a regulation tackling distortions caused by subsidies granted by non-EU countries. Again, public procurement plays a major role. There are a lot of stakeholders affected by this legislation. In the EU alone, 250,000 public authorities are using it to deliver services to citizens.

The economics behind public procurement is unique. It is about efficient ways to conduct tenders (i.e. an invite to bid for conducting a specific project) applying diverse criteria. It is about astounding amounts of money, and it is about actions at the nation-state as well as the local level.

Understanding Why Public Procurement is Important

Concretely, public procurement refers to the process by which public authorities – such as government departments or local authorities purchase work, goods or services from companies. This process can be conducted quite differently, depending on the country, level of government, sector, etc.

It can range from open to closed tenders and from using the most economically advantageous tenders (in which different criteria apply) to processes that use the price only (of course, given that a set of requirements is fulfilled). Key principles for conducting every tendering process, however, are equal treatment, non-discrimination, and transparency.

While those key principles are irrefutable, the criteria to fulfil them are open to debate. Of course, the price for the purchased good or service should play a central role. But beyond that, other aspects, such as social and environmental considerations, can also be implemented. And by doing so, the state becomes an economic agenda setter using public procurement as an industrial policy tool.

This becomes all the more relevant when looking at the sheer size of public procurement spending, which on average amounts to up to 14 percent of GDP for EU-OECD countries (figures for the US and other developed economies are similar). For Germany alone, the total value of public-sector contracts is estimated at 300 billion euros per year.

chart: general government procurement spending in 2020

Thinking About the Interrelation Between Public Procurement and the Twin Transition

With the key role public procurement plays as a tool for industrial policy, it is a decisive factor in tackling Europe’s most pressing challenges – namely the green and digital transition, as well as contributing to a more sovereign Europe.

The use of green public procurement (GPP) will be beneficial for facilitating the green transition. GPP is a tool for Europe’s public authorities that favours products, services and works which respect the environment. The range of potential GPP use cases is broad. From buildings (e.g., Vienna’s sustainable new hospital), waste management (e.g., procurement of solar-powered, compacting litter bins in Dun Laoghaire-Rathdown County Council), electricity (e.g., energy efficient swimming pools in Rotterdam), and many more. The fields of application are diverse.

However, the uptake of making public procurement greener is still small and unevenly distributed across European economies. There is, accordingly, a lack of harmonization. GPP’s application on average is below five per cent, with Malta at the bottom (below 0.5 per cent) and France, as well as Denmark, clinging to the top spots (more than fifteen per cent). Reasons for this are, amongst others, the legal complexity of GPP, a short-term induced bias due to the closeness of public procurement to politics, and that it is optional in nature.

In the field of digitization, certain technologies, such as 5G, are highly security-relevant. So in line with specifying instruments such as the EU International Procurement Instrument that aim towards increasing European sovereignty, a close assessment of special requirements set for purchasing those technologies by public authorities from outside the EU is necessary.

However, digitization can also contribute to improving public procurement. If done in the right way, digitalization of processes will yield efficiency gains and can increase transparency – for example, by making participation in tenders easier for companies. Furthermore, publishing data about awarded tenders and having this information openly available is another way to profit from digitization.

Facilitate the Use of GPP and Open Data for Public Procurement

Where does this all leave us now? In our current world, where the state is set to play a bigger role and act according to the geoeconomic environment as well as to the economic transitions of our time, public procurement as a strategic tool for European economic policy deserves more attention. And while we need to acknowledge that the way it is conducted depends on the size of countries and the structure of economies, efforts should be made by the European Union and its institutions – which set the general regulatory framework and the rules that apply directly when tenders exceed a certain threshold – to make the system more harmonious and transparent.

Two concrete fields of action for the EU could include:

  • Definition of mandatory targets for GPP: While mandatory targets for GPP, at first sight, mean more complexity in the tendering processes, it can also make things easier when rules are implemented that give public authorities clear guidance as well as legal security for awarding tenders.
  • Promotion of meaningful and easily accessible open data for public procurement: When it comes to open data, public authorities, at first glance, will anticipate that more work is incoming. But the potential societal benefits of making meaningful EU data of awarded tenders openly and easily accessible are immense. These could include improved research on the effective use of public money and make assessments about success factors in tendering processes more straightforward. Therefore, the EU should support corresponding efforts by public authorities rigorously.

Efforts could even go beyond the EU level and use fora such as the Trade and Technology Council to discuss potential challenges for a level playing fields in public procurement on an international level. With a renewed focus on industrial policy, it’s critical that we pay adequate attention to public procurement accordingly.

About the author

Markus Overdiek works for the “Europe’s Future” program at the Bertelsmann Stiftung. Previously, he worked for the Bertelsmann Stiftung on the projects “Ethics of Algorithms” and “Global Economic Dynamics”. He has a focus in economics, data science, digitization, and European affairs.

Read more

The European Single Market turns 30: Time for Europe to Celebrate but not Rest on its Laurels 

Asia Pacific: The Test Case for a Geopolitical EU Trade Strategy

Digital and Green Transition Threatens to Widen the Gap between EU Regions

The Future of European and German Industrial Policy – Challenges for the EU and Germany