COVEC affair showcases loopholes in EU rules
By Joanna Sopinska | Friday 16 September 2011
Disaster and scandal - these are the two words used most often by commentators to describe the case of the Chinese state-owned company COVEC, which has recently failed to fulfil a road building contract in Poland subsidised by EU funds. The case sufficiently illustrates three main problems the European Union’s public procurement market is facing with regard to the increasing presence of Chinese firms. Firstly, as a state-owned enterprise allegedly subsidised by the government, COVEC was able to offer a price 50% lower than the government’s budget for the project and some 20% lower than that quoted by European bidders. Secondly, current EU rules on abnormally low tenders (Article 55, Paragraph 3 of Directive 2004/18 and Article 57, Paragraph 3 of Directive 2004/17) enabled the Polish contracting authority to accept the price despite being far out of line. Finally, European companies are hardly allowed to bid for equivalent projects in China or hardly ever win any public contracts there because the country has not yet joined the WTO’s Agreement on Government Procurement (GPA), which regulates public procurement at international level (see box below).
In 2009, COVEC won a contract for building two sections of the A2 motorway between Lodz and Warsaw with a dramatic knock-down bid – based on the use of cheap Chinese employees working below European labour and environmental standards. It was the first such public contract won by a Chinese state-owned company in the European Union. In early 2011, the company signalled the first problems, requesting the renegotiation of the contract due to the increase of construction material prices. However, the Polish contracting authority rejected COVEC’s arguments and decided to cancel the contract at the end of June 2011. This left the highway half-finished, and the chances are slim for it to be completed in time for the European Football Championship in 2012.
The case has triggered strong criticism of the current EU rules governing public procurement at international level. The European Construction Industry Federation (FIEC) has called for far-reaching changes, which would level the playing field for European constructors facing competition from Chinese and other third-country enterprises. It spoke in favour of introducing “carefully targeted and meaningful restrictions” on access to parts of the EU’s procurement market “in cases in which important trading partners profit from the general openness of the EU, but have no intention to move towards reciprocity (or ‘symmetric access’).” “This should encourage these partners to offer reciprocal (or ‘symmetric’) market opening,” argued FIEC in its response to the green paper on the modernisation of the EU’s public procurement policy. Speaking at a public hearing on the EU’s public procurement policy, on 8 July in Brussels, Urlich Paetzold, director-general of FIEC, advocated amending in particular the rules on the abnormally low tenders and on the use of state aid by third-country companies. He argued that EU legislation should be much stricter in these two particular areas. Other business organisations present at the hearing, such as BusinessEurope, echoed FIEC’s opinions. They spoke in favour of making the rules stricter towards state-owned third-country companies, without, however, resorting to protectionism. “Locking up Europe against foreign bidders would be a big mistake,” argued a representative of the German business community. BusinessEurope also spoke in favour of certain amendments to the rules on abnormally low tenders. It advocated the introduction of a “test exercise” to define “what the low bid is”. “Now responsible authorities are not obliged to do so,” BusinessEurope representative Anna Constable underlined.
The sufficiently illustrates three main problems the EU’s public procurement market is facing