Public procurement: a strategic lever for added value and jobs

RSI is a core European industrial sector which employs 400,000 workers and has a global market share of 46%. The sector is also key in delivering on some of our ‘grand societal challenges’ such as sustainable transport or climate change. However, the recent merger of the two biggest Chinese railway equipment-makers to become China Railway Rolling Stock has aroused fear that China could become the dominant global player in the sector. Indeed, the new company has already started to make inroads into the European market. In order to provide a bulwark against the Chinese expansion, Siemens and Alstom, two of the biggest RSI companies, decided to merge their rail equipment activities. The merged entity would generate combined revenues of €16bn, just half of the total revenues of their Chinese competitor.

During the Forum of 5 October a large number of challenges related to public procurement were discussed:

  • The need for exploiting synergies between policies. A comprehensive approach by creating synergies between different industrial policy initiatives (circular economy, sustainable transport, trade, digitalisation, innovation, investment, skills) would definitively maximise the impact of industrial policy
  • The need for reciprocity in trade relations as “Buy American” policies are spread over the world with the rail industry as one of the main victims. Countries try to protect their own national suppliers or try to minimise the impact of on the national economy. Consequently, market access in many of the most important markets is hindered by high localisation requirements. The EU is currently involved in a number of trade negotiations (Japan, Mercosur, Mexico, Singapore…). Reciprocity in market opening is a key element in these talks. In this respect, the EU finds itself in a weak position because it does not want to close its own markets, meaning that something else has to be offered in order to push third countries to open their markets. Besides the opening up of public procurement, trade negotiations also aim to reduce import tariffs and to enhance collaboration on non-tariff barriers (technical specifications).
  • The importance of finance. Financing issues are becoming progressively more important in the competition for international railway contracts. Japan and China are offering huge all-in packages combined with soft loans (while ensuring that their companies capture the largest part of the value added). In this respect, the European Investment Bank could play a bigger role in supporting international projects.
  • Respect for European rules. European public procurement rules are not always respected, like in the project for a high-speed rail connection between Belgrade and Budapest (offered by China with no open public tender, which is a European requirement).
  • The challenge of China. Existing overcapacities are pushing the Chinese railway industry abroad. This strategy is also part of the Chinese economic diplomacy and of overarching initiatives like the ‘One Belt One Road’ strategy or ‘Made in China 2025’, which identified railway equipment as a key sector for the industrial development of China. The so-called “16+1” cooperation between China and Central-Europe is providing China with a new entry point into the EU and creating a strong pro-China lobby inside Europe by financing large railway projects abroad, China is also exporting its standards and thus closing these markets to European companies. Meanwhile, Chinese markets are almost impenetrable. Companies need to acquire a license to bid but there are no criteria about how to obtain one and tender criteria do not exist. Unfair competition. The new Chinese rail giant, CRRC receives 450m state subsidies per year. The European railway industry will receive the same amount but over 5 years… While the EU has also established a helpdesk for companies that want to export to the EU, this kind of support does not exist in most countries, certainly not in China.
  • As export credit schemes are often used as a hidden subsidy there is need for an international binding agreement that governs the work of export credit agencies. Today, the voluntary OECD export credit rules for railways are too often circumvented.
  • Rapid adoption of the International Procurement Instrument. In order to promote open access to public procurement markets, the European Commission has presented a proposal for an International Procurement Instrument. The tool aims to promote open access to public procurement markets around the world. While the EU is an open economy, many trading partners apply restrictive practices which discriminate against EU businesses. The new instrument would allow the Commission to initiate public investigations in cases of discrimination of EU companies in procurement markets. In case discrimination is proven, goods and services from the country concerned would be considered as offering a higher price than the one they have put forward, thus providing European goods and services a competitive advantage.
  • The many SME’s in the sector need to be supported in their international expansion by setting up business cooperation centers in third countries, providing market intelligence, support for market development and protection of intellectual property rights.
  • Strategic public procurement should play a much bigger role by integrating innovative, green and social criteria in public tenders instead of just looking for the lowest price. The MEAT-principle (Most Economically Advantageous Tender) should by applied systematically. It is a powerful tool for spending public money in an efficient, sustainable and strategic manner, which deserves much more promotion.

“We very much welcome this initiative for the rail supply sector. This is a strategic sector, which provides quality jobs to industrial workers. A bottom-up approach involving all stakeholders will make it possible to fine-tune the toolbox for industrial policy in support of this specific sector. By identifying gaps as well as synergies between the different instruments, by grasping the opportunities while at the same time addressing the weaknesses, by addressing the many global challenges, it will be possible to maintain European leadership and to contribute to job creation inside Europe” said Luc Triangle, General Secretary of industriAll Europe.