How EU rules are getting in the way of progressive public policy – and how cities are fighting back

This article is part of the series Cities versus Multinationals by the European Network of Corporate Observatories (ENCO).

Some European cities are trying to use their spending power – via public tendering – to promote social justice and environmental goals. However, this is in a context of neoliberal EU procurement directives that were designed to promote a single market for public procurement, where contracts go to the bidder with the lowest price.

Earlier this week, European Commissioners launched the Single Market Enforcement Action Plan. The action plan, accompanied by a 22-page report, includes a new push for the controversial Services Notifications Directive, a proposed law that many European cities fear would curtail their democratic right to regulate corporate giants like AirBnB or Carrefour.

The Commission also claims that business suffers from “uneven access” to public procurement contracts and that there is a need for stricter enforcement of EU legislation in this field. The European Parliament must intervene and defend the right of cities to regulate and to use public contracts to promote sustainable local development and social justice. Unfortunately, the European Parliament has just decided to downscale its parliamentary activities for the coming weeks – potentially months – due to the coronavirus.

The new municipalist movement

Over recent years there’s been a surge in European cities that, via public tendering, are using their spending power far more pro-actively and strategically to promote social justice and environmental goals. Leading this trend are city governments that define themselves as municipalist and are committed to urban democracy and rejecting neoliberal ideology in order to achieve concrete and radical progressive change in their cities. In some cities public procurement policies have been revised in order to reduce dependency on large corporations and boost more sustainable local economic development. This frequently results in conflicts between cities and multinationals. The total value of services, works and supplies purchased by cities in the EU is nearly €2,000 billion per year, around 14% of GDP, so the transformational potential of progressive public procurement policies is enormous.

Many of these values-based public procurement policies, however, were conceived in a context of neoliberal EU procurement directives that were designed to promote a single market for public procurement, where contracts would go to the bidder with the lowest price. These directives favoured large multinational companies at the expense of local companies, but also contributed to social dumping and other problems. While EU legislation has improved, numerous obstacles remain for ambitious municipalist procurement policies. Cities are developing new approaches to circumvent these obstacles.

The European unification process that entered the fast lane in the 1980s and 90s, via the creation of the single market, initially meant that the use of public procurement for progressive policy purposes became seriously restricted. Public procurement was opened up to cross-border competition, including through obligatory EU-wide tendering for contracts above a certain size. The European Court of Justice (in the Telaustria case), moreover, ruled that the fundamental rules of the EU Treaty apply to all public contracts, including the non-discrimination principle (prohibiting all discrimination based on nationality).

The EU’s 2004 procurement directives had a strong neoliberal focus on “the lowest price” and “the most economically advantageous tender” as the primary criteria, giving limited space to progressive public procurement policies. This has boosted the market share of multinational corporations, which benefit from economies of scale, at the expense of small local businesses. It has also contributed to social and environmental dumping as the lowest bidding companies were able to win tenders by undercutting labour and environmental standards. The 2014 review of these directives, fortunately, has made it possible to add social and environmental criteria when awarding public contracts. But 55% of public procurement procedures still use the lowest price as the sole award criterion

Before citing examples of progressive procurement policies, it is crucial to mention the closely related remunicipalisation trend for public services. More and more municipalities are deciding to end privatisation or outsourcing via procurement contracts with private firms and instead take services in-house, into direct public management.

Remunicipalisation is particularly widespread in the water, energy, waste management and transport sectors, as documented by the Transnational Institute in their report “Reclaiming public services: How cities and citizens are turning back privatisation”. When services are taken into public management, municipalities are not obliged to publish a contract notice for (EU-wide) public tenders. EU procurement legislation allows for public management, but the reality is that obstacles exist for municipalities choosing this path

Preston: community wealth building

One of the most interesting examples of how municipalist city governments are using public procurement as a strategic tool is Preston, in the north-west of England. This city of 140,000 inhabitants uses “progressive procurement of goods and services” as part of its “community wealth building” approach. Preston, which is one of the poorest communities in England, directs its procurement budgets towards supporting small local businesses and socially oriented companies. A procurement contract to renovate Preston’s market was, for example, split into smaller contracts to enable local SMEs to bid, and social clauses are attached (employing workers on real living wages). This approach has given a boost to local economic development, and reduced dependency on multinational corporations.

Critics have accused Preston of partaking in “municipal protectionism”, but the city refutes this. The Preston city council insists that it fully complies with EU and UK procurement law, by applying a “weighting” system for the assignment of contracts, which includes criteria other than simply the price, such as “quality, commitment to apprenticeships, attitudes to skills and training, local labour recruitment, approach to sub-contractors and length of supply chains” and well as the size of the carbon footprint. “The money that Preston repatriated came to 80% from multinationals based in London. Hence, it was not the neighbouring county that lost out, but big transnationals,” says Sarah McKinley from the Democracy Collaborative think tank. The Preston model is one of the most visionary municipalist experiments in Europe, courageously drawing on the significant space that exists in its interpretation of procurement law. So far, Preston has achieved impressive results. The Centre for Local Economic Strategies (CLES) is actively promoting the “community wealth building” approach in other parts of the UK, and a growing number of other cities are embracing this and similar approaches.

Napoli: standing up to transnationals and the mafia

The municipalist government of Napoli is facing the two-fold challenge of preventing “interference not only of multinationals but also of the mafia” in the city’s public procurement contracts, city council member Eleanora de Maio explains. The reality of progressive cities in the south of Italy “is like an obstacle course between the power of transnationals keen to invest in fast-changing cities, and the risk of corruption”. Procurement law makes it difficult to keep these “legal and illegal exploitative powers” out, but the city is doing its best and has made headway since 2011 when the municipalist coalition entered power. As in Preston, the city’s invitations to tender are shaped in a way that provides genuine opportunities for local projects and local companies, while impeding those linked to organised crime. Some invitations to tender have social clauses, including a requirement to recruit a significant percentage of local staff.

The city government also aims to exclude transnational corporations complicit in war or human rights violations. Eleanora de Maio highlights the example of Pizzarotti, a company that builds railway and metro stations, complicit in human rights violations in Palestine. Ideally, there would exist a blacklist of companies barring them from accessing municipal procurement contracts. But blacklisting of this kind is likely at odds with current EU procurement law, a clear obstacle to values-based public procurement.

Barcelona: implementing values-based procurement

The municipalist city government of Barcelona led by mayor Ada Colau of Barcelona en Comú, first elected in 2015 and re-elected in 2019, has a very ambitious strategy of using public procurement (19% of the city’s budget) as a strategic tool for change. Going far beyond green procurement, the city government has introduced gender equality, labour rights, social economy objectives, rights of vulnerable groups and other ethical clauses into the city’s procurement contracts.

But as Alvaro Porro González, commissioner for social economy, puts it, “that’s on paper – the challenge is how to make it operational”. To make the new policies work, the focus is on creating a new internal culture in the city’s administration and developing tools to help civil servants. In order to speed up implementing these new policies, the city has, for instance, created a guide of social clauses for officials to use when preparing a call for tender and provided extensive training. They have also established internal assessment services to monitor how effectively the social and environmental dimension of public procurement contracts is being incorporated. As in Preston, large tenders are split into smaller ones so SMEs have a fairer chance. And while price remains an important criteria, other factors are now weigh far more in the balance than they used to.

Barcelona’s progressive procurement policies have run into a range of legal obstacles. The most dramatic example is perhaps when private energy giant Endesa took the city to court over the clause on energy poverty that was included in a tender. Citing the EU’s Remedies Directive, Endesa challenged the obligation to protect poor consumers from being cut off from electricity, and the court agreed that this condition was at odds with procurement law.

Grenoble: local organic food in school canteens

Grenoble is another city that has run into legal obstacles due to the nature of its public procurement policies. The citizens of Grenoble wanted local organic food in school canteens and the city was keen to revive the local economy by supporting organic farmers. “We are basically trying to get as close as we can to 100% organic, local food in school canteens”, says city councillor Anne-Sophie Olmos. But under EU public procurement law it is illegal to include geographical criteria in public tenders. This makes it difficult for local authorities to respond to the democratic wishes of local citizens, says Olmos. But Grenoble has not given up and is trying to find a way around this obstacle. “In Grenoble we decided to adopt a public procurement policy that is genuinely public”, Olmos says. “That means that price is not the only factor we take into account when purchasing products and services. We also take into account environmental and social criteria in ways that enable small, often local, businesses to win contracts.”

Over the last three years, the city has hosted an annual event where public purchasers inform potential bidders of their social and environmental requirements and present their procurement plans for the coming year. This allows companies, many of which are local, to better understand the needs of public buyers. Another obstacle to achieving 100% organic, local food in school canteens is the fact that the EU’s common agricultural policy has undermined local self-sufficiency. Competition from large-scale industrial farmers, who also receive a larger share of EU farm subsidies, has destroyed countless small, local farms, particularly in mountainous regions. “We’re using complementary tools such as food growing projects and zoning policies to protect agricultural land in order to gradually rebuild the local food sector”, says Olmos.

Blacklisting tax evading companies?

Tax evasion is another issue that could be tackled through a new approach to public procurement contracts. Corporations and wealthy individuals hiding money in tax havens is undermining the welfare state and causing a profound feeling of injustice in countries across Europe. According to a study by Datlab, “tax haven based companies won 5% of the value of public tenders throughout EU countries in 2006-2017”, which means an estimated 100 billion EUR is being awarded annually to such companies.”

In May 2016, Barcelona’s city council passed a decree undertaking to avoid hiring companies that are linked to tax havens. City councilor Gerardo Pisarello explains the thinking behind the decision: “Municipalism is a tool to gain fiscal sovereignty, and today fiscal sovereignty is impossible without a determined fight against evasion, which is a real threat to democracy.” The city is one of 37 cities throughout Spain to have declared itself a “Tax haven free zone”. Barcelona now includes a tax haven clause in every procurement contract. Unfortunately, these clauses have, so far, mainly been of symbolic value. Not a single contract was blocked due to tax evasion because cities lack the power to enforce such clauses. Companies that bid for contracts declare they have no money in tax havens and are not involved in any illegal activity, but there is no way for the city to demand proof of this.

In Copenhagen, the city council wanted to exclude tax evading companies from public contracts, but was told by the city’s economy department that this would violate Danish and EU procurement law. The law only allows cities to exclude companies that are convicted of violating tax law. Unfortunately, the use of tax havens and other tax speculation is, in most cases, not illegal. In both Malmö and Helsinki, progressive city council members ran into the same obstacles when demanding that the city’s procurement policy should exclude tax havens and reward suppliers that embrace public country-by-country reporting (disclosing how much tax the company pays per country it operates in, thereby exposing tax evasion). There is, moreover, no official database of proven tax evaders for procurement officers to refer to.

There is clearly a need for a new legal framework obliging companies to prove they do not use tax havens. In spring 2019, the European Parliament’s Tax3 report called on the Commission to assess the EU Procurement Directive and ensure that “the application of tax-related considerations as criteria for exclusion or even as selection criteria in public procurement” becomes possible.

Fighting social dumping

EU public procurement law has led to widespread problems of social dumping, with companies winning contracts with cheap bids because they pay lower wages and have reduced employer protection. This undermines workers’ rights and has caused justified anger. The 2014 review of the public procurement directives provided more scope to introduce social clauses. Penny Clarke from the public services union federation EPSU regrets that many cities remain cautious about using the opportunities that exist in the directives, both for providing services themselves instead of outsourcing and for progressive procurement, including through social clauses.

Many cities have taken action and introduced ambitious social clauses in their public tendering procedures. Examples are Spanish cities like A Coruna, Zaragoza, Palma, Madrid and, of course, Barcelona. Copenhagen is also a good example of the way in which public procurement can be used to protect labour rights. The Copenhagen approach is twofold: labour clauses are included in procurement contracts and the city boasts a very active approach which ensures that companies with public contracts provide fair wages and working conditions. In 2017 the city council decided to establish an internal deployment team against social dumping, based in the city’s procurement department. To enforce labour clauses, this team carries out “in-depth and dialogue-based checks” of suppliers, including workplace inspections. Violations of clauses can result in sanctions, including termination of the contract. Another aspect of this policy is the obligation to post signs at construction sites to raise awareness of the city’s hotline against social dumping.

The way forward

Examples from cities across Europe show there is enormous potential to use public procurement as a progressive policy tool. A lot is possible on the municipal level, if the political will is there. But it is also clear that there are major legal obstacles and that a far more supportive legal and political environment is needed. The 2014 review of the EU directive opened up possibilities, but the basics of the neoliberal framework are still in place.

In the run-up to the May 2019 European Parliament elections, the citizen platform Barcelona en Comu published a booklet with proposals on how to “municipalize Europe”. One of the chapters zooms in on values-based municipal procurement: “We want a fair, plural local economy but right now the EU limits the ability of public institutions to include these criteria in public procurement. We’ll call for directives relating to public procurement to be revised in order to differentiate between national and municipal contracts, giving municipalities greater flexibility to include social and environmental clauses.”

While some of the changes required to create an encouraging environment for values-based municipal procurement would require a new revision of the procurement directive, others don’t. The European Commission could and should create more clarity via the guidelines and guides that it regularly produces for specific areas of public procurement. This would reassure municipalities that they can embrace values-based procurement without fearing sanctions. Preparing these positive guidelines should be done in consultation with progressive municipalities as well as with trade unions and civil society organisations, which is unfortunately not always the case. This should go well beyond green and social procurement and also include support for blacklisting tax evading companies or corporations involved in violations of human rights.

In addition to the procurement directive, the remedies directive is also in need of an overhaul. This directive is currently used by corporations to threaten cities and – as is the case in Spain – to challenge tendering decisions on a massive scale. The directive needs updating in order to rule out frivolous claims and avoid legal proceedings, used as a pressure tool by big businesses.

Grenoble city councillor Anne-Sophie Olmos summarised her vision as follows: “For me, Europe should first give local and regional authorities independence in matters of basic needs such as food, water and energy. In these areas public authorities should be able to favour the local if they demonstrate that it allows the community to be autonomous.” This points to the need to re-assess one of the fundamental principles of the EU directives: promoting local economic development via public procurement is currently not allowed. This prevents municipalities from using procurement policy to pursue entirely legitimate policy goals or forces them to creatively explore indirect measures to achieve these goals.

But while progressive city councillors and activists are demanding more democratic space for municipalities to shape procurement policies, powerful forces are lobbying for the exact opposite. BusinessEurope, the EU-level federation of employers’ federations and corporations, argues that “public procurement should become more business-friendly”. It has asked the European Commission to intervene against “the dangers […] of the use of strategic procurement”, such as environmental and social clauses. BusinessEurope claims that “unjustified additional barriers” may “impede access to procurement markets” and warns against “overly prescriptive tender requirements and award criteria or for the furtherance of unrelated societal goals.” “Infringements of public procurement rules,” the lobby group demands, “should be rigorously enforced”.

As part of its Single Market Enforcement Action Plan, the Commission earlier this week announced that it will issue guidance on the use of “procurement as a strategic tool to pursue key policy objectives”, including social and green public procurement.

Progressive city governments and municipalist citizen movements clearly need to increase European-wide pressure to defend their democratic space. An overhaul of the EU’s public procurement directive is unlikely to happen in the short term: some countries only integrated the updated 2014 directive into national law very recently, like Spain in 2018. But clearly the directive needs further changes in order to get rid of neoliberal obstacles that stand in the way of values-based municipal procurement. Such changes should make procurement an effective tool to transition to fairer, greener, more vibrant, local economies.

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