Germany’s 2016 public procurement reform provided profound changes to the procurement system and affected all levels of government. This chapter analyses the legal framework and governance structure of the German public procurement system. It does so while also drawing attention to procurement at the state and municipal levels, which account together for almost 80% of procurement activity in Germany. The chapter identifies areas in which the reform has harmonised regulations, and identifies potential avenues for further streamlining Germany’s layered procurement system.
Public Procurement in Germany
Strategic Dimensions for Well-being and Growth
OECD Public Governance Reviews
2. Enhancing the legal framework and governance structure for public procurement in Germany
Abstract
The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.
2.1. Transformational reforms of the legislative framework for public procurement in Germany
2.1.1. Germany’s public procurement system balances subsidiarity and complexity
The principal goal of procurement law in Germany is to ensure the cost-effective and efficient use of budgetary resources to meet the needs of the public sector (BMWi, n.d.[1]). International good practices provide guidance on how to structure public procurement law to achieve this goal. At the same time, public procurement has the power to attain achievements beyond purchasing. To facilitate the inclusion of sustainable, ecological, social and innovative criteria in procurement, an adequate legal framework for public procurement must be established.
The challenge for the German procurement system is to reconcile the principle of subsidiarity with the inherent complexity of the German procurement system. According to the EU definition, the general aim of subsidiarity is to “guarantee a degree of independence for a lower authority in relation to a higher body or for a local authority in relation to central government” (European Parliament, n.d.[2]). This principle is inscribed in the German constitution (in Article 70). In the German system, the federal state sets out the overarching legal framework. However, due to the strong subsidiarity prevalent in Germany, municipalities and Länder (German states) have the authority to shape public procurement law by transposing federal-level laws. In addition, both municipalities and Länder can create their own laws. Municipalities also have a degree of autonomy ascribed to them in the constitution. The constitution states that municipalities are primarily responsible for matters in their communities (German constitution, Art. 28 § 2).
In Germany, the autonomy of different levels of government creates a complex legal and regulatory framework in all areas – including public procurement. The laws and regulations at different levels of government have evolved independently. Due to historic reasons, the legal framework of public procurement at the federal level in Germany is embedded both in economic and budgetary law (Deutscher Bundestag, 2016[3]). A complex legal and regulatory system for public procurement creates costs for contracting authorities and suppliers, and necessitates a highly skilled public procurement workforce. The OECD Recommendation of the Council on Public Procurement advocates for a legal, institutional and regulatory framework that is as clear and simple as possible. A clear framework can increase supplier participation and assure a sustainable and efficient public procurement system (OECD, 2015[4]). There is tension, however, between the goals of subsidiarity (and the associated autonomy of each governmental level) and a clear and accessible legal and regulatory framework. Therefore, the existing system must be evaluated to determine how simplification can be balanced with the benefits of subsidiarity (OECD, 2015[4]).
The first section of this chapter examines Germany’s legal and regulatory framework for public procurement, looking at how the 2016 reform helped to modernise and streamline regulations. The second section analyses governance structures, and the third section provides insights from the Länder level and municipal levels of government.
2.1.2. EU directives have sparked a major revision of Germany’s legal framework
The EU regulations on public procurement must be reconciled with the national legal and regulatory framework of EU member countries. This adds another layer of complexity. In 2014, the EU passed three new directives on public procurement. These directives then became a catalyst for the modernisation of German public procurement laws in 2016. The EU reform had the following main goals: 1) to reduce red tape by making procedures simpler and more flexible; 2) to encourage innovation; and 3) to serve society by facilitating the inclusion of social, environmental and other considerations in procurement decisions (European Commission, 2014[5]). Furthermore, in addition to these central goals, the reform also aimed to: 1) facilitate the inclusion of small and medium-sized enterprises (SMEs) in procurement; 2) combat favouritism and corruption; and 3) create a simplified regime for social services. Moreover, a directive on concessions sought to increase legal certainty, transparency and provide business opportunities (European Commission, 2014[5]). The reform was also aimed at streamlining regulations across European public procurement systems. In Europe, approximately EUR 1.9 trillion is spent on public procurement each year (European Commission, 2016[6]). This underlines the potential for EU governments to lead by example in formulating policy objectives and in sending a strong signal to markets (UNEP, 2015[7]). EU member countries had to incorporate three directives into their national laws by 18 April 2016. These directives provided the basis for the recent German public procurement reform. Table 2.1 sums up the European directives currently in force.
Table 2.1. European Procurement Directives
Source: (Beuter, 2014[8]), The Scope of Directive 2014/24/EU on Public Procurement, (European Commission, 2014[5]), New rules on public contracts and concessions.
Critics argue that recent EU reforms of the European regulatory framework have increased regulations and fragmented the public procurement system at the European level. They point in particular to regulations on individual sectors, such as defence and public transport that have made procurement increasingly complex (Eßig, 2013[9]). The renewed emphasis on environmental and social considerations has also been criticised for the same reasons. Critics argue that if these standards are too high, they risk creating market restrictions (Eßig, 2013[9]).
In 2016, Germany incorporated the EU reform by passing a law that modernised public procurement law (the VergRModG). These efforts also resulted in major amendments to the Law against Restraints on Competition (GWB) and other laws. The reform of the German public procurement system went further than the EU directives required, as lawmakers used the EU reform as an opportunity to improve several aspects of the national procurement system. This can be seen in the provisions that set standards for procurements with a value that is lower than the threshold set by the EU (BMWi, 2015[10]).
2.1.3. Additional reforms have further simplified and streamlined the legal and regulatory framework of Germany’s public procurement system
Germany’s Federal Ministry for Economic Affairs and Energy (BMWi) identified the following 11 objectives for the reform of the country’s public procurement framework (BMWi, 2015[11]):
1. simplify the procurement process and make it more flexible;
2. strengthen sustainable and innovative procurement;
3. simplify the rules regarding the suitability of participants;
4. respect work and social obligations (especially Tariftreue – the principle of conforming with collective wage agreements – and minimum wage laws);
5. uphold leeway for public authorities;
6. facilitate procurement for social services;
7. ensure SME-friendly procurement;
8. serve the needs of people with disabilities;
9. fight economic crime effectively;
10. use electronic communication in the procurement process; and
11. generate reliable data on public procurement.
A number of policy priorities derive from these goals: a modern legislative framework, an effective institutional framework, a system that works with integrity, inclusion of strategic goals, an accessible system for suppliers and a transparent and quantifiable process. This chapter discusses how Germany’s legislative and institutional procurement framework reflects these objectives.
To begin with, the BMWi sought to make the procurement process more flexible, and to increase efficiency and competition by limiting legal requirements. One reason for this is that costly procurement processes have a negative impact on price-performance ratios. Simplifying the rules regarding the suitability of participants (especially the examination of their qualifications) was one part of these efforts. Additionally, a goal of the reform was to facilitate the procurement of important services in the health, social and education sectors. The BMWi also sought to give more freedom to municipalities so that they could provide certain services themselves without publishing a call for tender. To accomplish this, policy makers defined specific conditions so that municipalities would have the legal certainty they needed to complete governmental tasks in co-operation with other municipalities or through state-owned enterprises (BMWi, 2015[11]).
Lawmakers also aimed to achieve complementary policy objectives through Germany’s public procurement reform. These policy objectives included observing minimum wage, SME support, social and ecological aspects, and life-cycle costing. Lawmaker efforts were facilitated by amendments to the Law against Restraints on Competition (GWB).
Due to differing regulations at the Länder level, contracting authorities used to find it difficult to verify companies’ criminal records. To sanction economic crime in public procurement more effectively, lawmakers created a central register to standardise the publication of records and make them more accessible. The register is expected to be set up by 2020, housed within the Federal Cartel Office.
Data collection is another key topic addressed by the reform, due to a lack of reliable data on public procurement in Germany. Data need to be collected systematically in order to analyse the impact of different procurement methods and the use of social and green criteria. One step towards better data collection is the use of e-procurement (see Chapter 4 on e-procurement). EU public procurement guidelines mandate the implementation of electronic communication in the procurement process. This measure could result in significant conversion costs, especially for lower governmental levels and SMEs in Germany. Therefore, Germany granted small municipal procurement entities and SMEs a longer time limit for implementing electronic communication.
2.2. Modernising Germany’s legal and regulatory framework to comply with international standards
2.2.1. Germany’s tiered legal framework provides separate rules for tenders below and above thresholds
The priorities formulated by the BMWi are expressed in the legal and regulatory framework of the public procurement system. Before discussing the reform of the legal and regulatory framework in more detail, Table 2.2 provides an exhaustive list of German procurement legislation on the national level, and indicates which parts were updated during the reform process.
Table 2.2. Public procurement laws and regulations in Germany
Source: (BMWi, n.d.[1]), Übersicht und Rechtsgrundlage auf Bundesebene.
The German legal and regulatory framework for public procurement has a complex structure. This is partly due to the three divisions of government (federal, Länder and municipal levels), and different laws that fall above and below EU procurement thresholds. Furthermore, public procurement in Germany is not regulated by a single law. One part of procurement is included in competition law, which covers many other matters beyond procurement. The other part is integrated into budgetary law (Eßig, 2013[9]). This is an uncommon arrangement, as a stand-alone law regulates procurement in most OECD countries.
In Germany, public procurement law used to be based exclusively on budgetary law. With increasing European integration, however, Germany decided it was no longer feasible to keep procurement law as a part of budgetary law and still comply with European standards. Therefore, a transformation process took place in the 1970s, which placed the rules for procurements valued higher than the EU threshold within competition law. Regulations for procurements below the EU threshold remained in budgetary law (Eßig, 2013[9]). As Figure 2.1 shows, the legal and regulatory structure remains complex, with two strands of law and regulations below and above the EU threshold.
Figure 2.1. Procurement law above and below the threshold
Source: Authors’ illustration.
State-level procurement laws present another layer of legislation. In addition to federal-level procurement law, 15 out of 16 Länder have implemented additional procurement laws (Forum Vergabe, 2017[12]). These additional laws have added complexity to the German procurement system. The German constitution grants special rights to sub-central levels of government. Article 72 paragraph two of the constitution establishes that the federal level can only exercise the right to regulate if the creation of equal living conditions in the country or the maintenance of legal and economic unity make a federal law necessary (German Constitution, Art. 72). Thus, federal law can only set standards where the Länder level cannot regulate (Leunig, 2015[13]). This means that lower levels of government can create legislation in domains that have not been regulated at a higher level (OECD, 2010[14]). This also means that the federal government cannot impose legislation on the states in every domain. In procurement below EU thresholds, Länder have the freedom to decide whether they want to transpose a federal-level law or whether they prefer to regulate through state-level procurement laws.
The same principle of subsidiarity applies at municipal level, as Länder are limited in what they can impose on municipalities. This is particularly important due to the crucial role that sub-central government plays in the German procurement system. As Figure 2.2 shows, almost 80% of procurement activity takes place at the sub-central level. This places Germany well above the OECD weighted average of 63% for decentralised spending on procurement. Only four countries have a higher share of sub-central public procurement, and each of them shares a similar tiered structure of government.
Figure 2.2. General government procurement by level of government, 2013
Note: Data for Australia, Chile, and Turkey are not available. Local government is included in state government for the United States. Social security funds are included in central government in Ireland, New Zealand, Norway, the United Kingdom and the United States.
Information on data for Israel: http://dx.doi.org/10.1787/888932315602.
Source: OECD (2013) National Accounts Statistics (database).
To summarise, Germany’s public procurement legal framework is split between: 1) different levels of government; and 2) regulations that govern procurement above and below the EU thresholds. The following sections analyse Germany’s post-reform legal and regulatory framework – including those regulations that fall above and below the EU threshold.
2.2.2. A revision of Germany’s legal framework simplified the rules for tenders above the EU threshold
The legal and regulatory framework above the EU threshold consists of three layers of laws, ordinances and regulations, as displayed in Figure 2.3.
Figure 2.3. Procurement law above the EU threshold
Source: Illustration by Germany’s Federal Ministry for Economic Affairs and Energy (BMWi).
The central piece of legislation in the German public procurement legal framework is the Law against Restraints of Competition (GWB). Policy makers have reworked and restructured Part 4 of this law extensively. Part 4 covers public procurement and now includes a full description of the procurement process (an aspect that was not previously included in the law) (BMWi, 2015[10]).
The ordinances that fall under the GWB further clarify its provisions. As a part of the country’s 2016 procurement reform, the Ordinance on the Award of Public Contracts (VgV) gained importance. Prior to the reform, the VgV only had a co-ordinating function, referencing certain contracting regulations: Regulations on Contract Awards for Public Supplies and Services (VOL/A), Regulations on Contract Awards for Services of Freelancers (Vergabeordnung für freiberufliche Leistungen, VOF) and Regulations on Contract Awards for Public Works Contracts (VOB/A). Following the reform, VOL/A and VOF (which regulated contracting regulations for services, supplies and freelance services) were eliminated. The provisions of the VOL/A and VOF are now included in the VgV (BMWi, n.d.[1]). Additionally, a new ordinance-level law has been created: the Ordinance on the Award of Concession Contracts (KonzVgV). The KonzVgV incorporates regulations on the award of works and service concessions for the first time. Lawmakers updated the SektVO (described in Table 2.2) in order to incorporate the EU Utilities Directive. Now it contains many of the norms found in the VgV and applies them to the specific aspects of the utilities sector (BMWi, n.d.[1]).
The regulations on the Länder-level specify the procedural details of the procurement process. In the reform process, policy makers have eliminated two tertiary laws: the Contracting Regulations VOL/A and the VOF. The only regulation lawmakers maintained as an independent regulation was the VOB/A (BMWi, n.d.[1]).
These modifications in the legal structure have presented a number of considerations for public procurement:
Lawmakers have achieved a significant simplification of the legal framework at the level of procurement regulations. As detailed above, policy makers have eliminated two out of three regulations on the Länder-level , keeping only the VOB/A. According to legal experts, the reform has improved Germany’s regulatory environment and simplified the structure of the public procurement law (Knauff, 2016[15]); (Krönke, 2016[16]). Supplies and services are no longer regulated by an independent regulation. Instead, VOL/A and VOF have been integrated into the VgV. Nevertheless, the partial deletion of the contract provisions leaves an incoherent system. According to some reports, the opposition of certain members of the responsible procurement committee prevented the deletion of these provisions (Pünder, 2015[17]).
Public procurement committees are a unique element of the German public procurement framework. These bodies serve as forums for stakeholders from the federal, Länder and municipal levels to contribute to the drafting of procurement legislation. Among the members of the committees are representatives from the public sector (federal ministries, Länder ministries and municipal associations (Kommunale Spitzenverbände), the private sector, chambers of industry and commerce, and unions (DVAL, 2009[18])The main purpose of this committee-based approach is to capture the concerns of different stakeholders (Deutscher Bundestag, 2016[3]). While the BMWi is the main institution responsible for devising public procurement policy and drafting primary legislation in Germany, procurement committees draft tertiary legislation. The procurement committees have been criticised for their lack of democratic legitimacy (Deutscher Bundestag, 2016[3]). Yet, they have allowed for the integration of business and other stakeholder interests into contract regulations.
There used to be two procurement committees in Germany: the DVAL (German Procurement and Contracts Committee for Suppliers and Services, Deutscher Vergabe- und Vertragsausschuss für Lieferungen und Dienstleistungen), which was involved in tertiary legislation on supplies and services, and the DVA (German Procurement and Contracts Committee for Works, Deutscher Vergabe- und Vertragsausschuss für Bauleistungen), which focused on public works. As a result of recent reforms, the procurement committee for supplies and services DVAL has lost its standing. The reason for this is that policy makers have eliminated two out of three pieces of tertiary legislation on procurement. As mentioned prior, the regulations that have been deleted are the VOL/A and VOF – which fall under the responsibility of the DVAL. Thus, on most matters, the DVAL serves an advisory function. That said, public procurement regulations on public works still rest partially under the purview of the committee for works DVA (Deutscher Bundestag, 2016[3]). The reason for this is that the only regulation that remains is the regulation on contract awards for public works. The elimination of some regulations has already streamlined the legal and regulatory framework. However, it is not apparent why the remaining regulation has not also been eliminated. Research on the subject has found that policy makers maintained the third regulation because of resistance from members of the responsible procurement committee (DVA) (Pünder, 2015[17]). A joint solution for all Länder-level regulations and their respective procurement committees would lead to a more cohesive outcome. Eliminating the final procurement committee would eliminate one level of the legal and regulatory framework for measures whose provisions fall above the EU threshold. In addition, such a move would help streamline regulations. Considering new ways to include procurement committees’ views in the framework, such as by creating regular working groups with external stakeholders, could provide a more balanced approach.
Practitioners see potential to further streamline regulations and increase user-friendliness. In interviews with the OECD, practitioners highlighted the fact that the complexity of Germany’s procurement legislation has hindered its application. Especially at lower levels of government, practitioners often lack the capacity and qualifications to understand and implement policy changes. As the procurement process became increasingly complex through more complex demands and expectations, practitioners faced an increasingly large burden. Because the GWB now includes additional demands, this major part of the procurement legal framework has become longer and more complex (Knauff, 2016[15]); (Pünder, 2015[17]). In a survey carried out between November 2016 and February 2017 of around 100 respondents from the German construction industry on procurement procedures falling above and below the EU threshold, practitioners said that they struggled with the levels of complexity of procurement regulations, and that procurement law could be more practice-oriented (Ernst & Yong Real Estate GmbH, 2017[19]). Respondents also commented that further action was needed to achieve one of the main goals of the reform – to simplify the procurement system and to make it more user-friendly.
Another finding of the survey has important implications for the legal framework for procurement in Germany. Although German laws increasingly encourage the use of complementary policy objectives and other non-price considerations as award criteria (such as quality and life-cycle costs), price is still the prevailing criteria in the award of tenders in Germany (Ernst & Yong Real Estate GmbH, 2017[19]). In the interviews carried out by the OECD, procurers frequently highlighted that an implementation gap can result from a lack of capacity. Contracting authorities at lower levels of government do not always employ full-time procurement positions. If government officials are conducting procurement on a part-time basis, they are less specialised and often act under time constraints. This leaves less room for becoming familiar with new regulations and policy options. The correct application of procurement law requires that the burden on procurers at lower levels of government be reduced. Germany could disseminate more communication and guidance materials to ensure their effectiveness. Regular assessments of procurement activity would enable policy makers to evaluate the effectiveness of the legal and regulatory framework as well, indicating in which areas regulations need to be expanded or amended.
2.2.3. Germany has aligned laws and regulations applicable to tenders below the EU threshold with its broader legal framework
In an effort to streamline regulations above and below EU thresholds, Germany also reformed the legal framework applicable to tenders below the EU thresholds. The Code of Procedure for Procuring Supplies and Services below the EU Threshold (UVgO) applies many of the norms set in the GWB to below-threshold tenders (BMWi, 2017[20]). Figure 2.4 shows the structure of procurement law below the EU threshold, which is located in budgetary law. Procurement law at this level comes into force through application commands in the Federal and Länder Budget Code. In this process, states can decide to what degree they want to implement the UVgO, and how they want to prioritise their Länder-level procurement laws. Before the reform (which entered into force as of 2 September 2017 for the federal level), Part 1 of the VOL/A regulated procurement law below the EU threshold. At present, the UVgO has replaced Part 1 of the VOL/A (BMWi, 2017[21]).
Figure 2.4. Procurement law below the EU threshold
Source: Illustration by Germany’s Federal Ministry for Economic Affairs and Energy (BMWi).
The UVgO has successfully aligned regulations above and below the EU threshold, but challenges remain. With the implementation of the UVgO, the regulatory framework below the EU threshold has been modernised to comply with EU standards. This modernisation has streamlined procedures by aligning regulations below the threshold with the regulations above the threshold, in particular the VgV (Frenz, 2018[22]). Critics have argued that the UVgO is less user-friendly than the regulation it replaced, given that it increased from 20 paragraphs to 52. They argue further that it would have been possible to reduce the amount of provisions in the UVgO without leaving regulatory gaps (BDI, 2016[23]); (Ley, Altus and Wankmüller, 2017[24]). Additionally, critics have stated that the inclusion of regular references to the law and the regulation covering procurement above the EU threshold have required practitioners to read both regulations above and below the EU threshold in parallel in order to correctly interpret the law (Ley, Altus and Wankmüller, 2017[24]). Other observers have evaluated the new UVgO and its rules for below-threshold procurements more positively. They have highlighted that improvements in the regulations for procurements above the threshold were successfully mirrored in regulations for procedures below the threshold. They have also lauded the new system for procurement procedures below the thresholds, which have rendered the procedures above and below the EU threshold more uniform (Frenz, 2018[22]). At the same time, some observers argue that works contracts have not been included in the new UVgO, due to the resistance of some stakeholders (Frenz, 2018[22]); (Siegel, 2018[25]). With the streamlining of procedures above and below the threshold, the reform also aimed at strengthening electronic procurement below the threshold.
Legal protection below the threshold does not meet the same standards as above the threshold. Above the EU threshold, domestic and foreign bidders can appeal to Germany’s public procurement review bodies (Vergabekammern). Below the EU threshold, no comparable mechanism exists. The review system introduced in Germany by the EU Remedies Directive 92/13/EEC is considered to be a strength of the procurement system (European Commission, 2016[26]). The EU remedies directive mandated the creation of specialised procurement review bodies that institutionalised legal protection. These bodies also aimed to ensure legal standards with respect to the interpretation of procurement laws and legal certainty regarding the interpretation of procurement law. However, a comparable specialised review system does not exist for procurements in Germany that fall below the EU threshold (European Commission, 2016[26]). For cases in Germany that deal with procurements valued above the EU threshold, public procurement review bodies can decide whether the applicant’s rights were violated, and can take suitable measures to remedy rights violations. After this, the court of appeals (Beschwerdegericht) can perform a judicial review. Below the threshold, bidders need to file a suit for damages before a civil court (European Commission, 2016[26]). This split between review chambers in charge of reviews of procurements valued above the threshold and civil courts for those below the threshold has been widely criticised (Bundesanzeiger, 2017[27]). Germany’s reform of procurement regulations has not contributed to bridging this divide. Addressing this divide would align legal protection below the threshold with standards above the threshold, and would also contribute to setting legal standards with respect to the interpretation of procurement law.
2.2.4. Germany has advanced its integrity framework through the newly introduced competition register
A recently introduced competition register (Wettbewerbsregister) has enhanced the anti-corruption framework, constituting another element of Germany’s procurement reform (BMWi, 2017[28]). The law establishing the register was passed on 1 July 2017, and the BMWi estimates that it will enter into force between 2019 and 2020 (BMWi, 2017[29]). The register enables procurers to verify electronically whether potential suppliers have committed a criminal offence. It also enables public authorities to access company information, and includes information on whether suppliers have final convictions, warrants or fines that would lead to exclusion from the procurement process. Germany’s Federal Cartel Office will run the competition register (Deutscher Bundestag, 2017[30]).
The competition register supplements the integrity framework of the public procurement system. Prior to the creation of the competition register, information about suppliers had to be requested from the commercial central register for every selected company (BMWi, 2017[29]). The new competition register will ameliorate this process, as it enables contracting authorities to demand information online, reducing costs. The obligation to consult the registry applies to procurement below and above the EU threshold, and to procurement with a contract volume of EUR 30 000 upwards. Below this threshold, it is also possible, but not mandatory, to demand information (BMWi, 2017[29]). After a period of three to five years, companies are deleted from the register. In addition to this, companies can submit a request for early deletion from the register if they have put in place the necessary preventive measures to inhibit future violations (BMWi, 2017[31]).
The corruption register has been welcomed as a useful complement to Germany’s integrity framework (DGB, 2017[32]; Transparency International, 2017[33]). Procurers and lawmakers alike welcomed it as an important step toward preventing and fighting economic crimes (Byok, 2017[34]; Kubiciel, 2017[35]). Reactions by other countries show that Germany is perceived as exemplary for its fight against corruption with regards to public procurement. The Phase 4 Report: Implementing the OECD Anti-Bribery Convention of the OECD Working Group on Bribery, which looked at bribery in international business transactions, commended Germany for the creation of the competition register (OECD, 2018[36]). However, by other institutions such as the German Trade Union Confederation (Deutscher Gewerkschaftsbund, DGB), Germany has been criticised for the fact that companies only appear in the registry once they have been sentenced (Transparency International, 2017[37]; DGB, 2017[32]). In the local registry in North-Rhine Westphalia (Nordrhein-Westfalen, NRW), companies are already included in the record before legal proceedings have been completed (Transparency International, 2017[33]). In six Länder, corruption registers have existed for some time and have become well established. These Länder include Hamburg (where corruption registers have existed since 2012), Bremen (since 2011), Hessen (since 2010), Schleswig-Holstein (since 2008), Berlin (since 2006), Baden-Württemberg (since 2005), Bavaria (since 2004), NRW (since 2004) and Rhineland-Palatinate (since 2003) (Mayer, 2013[38]).
International good practices show that all communications between procurers and the business community, interest groups and NGOs should be conducted in a transparent way that keeps these groups informed of legislative changes and makes it possible for procurers to receive feedback. In order to address the comments from the business community or NGOs, it would be most effective for Germany to base arguments for the effectiveness of the register on data. Once the competition register is in place, continuous monitoring could help to determine its effectiveness. This could also provide an indication on whether existing regulations need to be modified.
As previously explained, the legal and regulatory framework of the German public procurement system is complex and has many levels, though the recent reform achieved some simplifications. At the same time, different levels of government are strongly independent of each other. This creates a need for effective co-ordination and co-operation.
2.3. Understanding governance challenges in a multi-level system
2.3.1. Structured communication improves co-operation and co-ordination between different levels of government in Germany
The complexity of the legal and regulatory framework described in the first part of the chapter creates a need for efficient governance. The OECD found in a 2017 study that “strong core public sector institutions and systems, such as public financial management and procurement systems, are essential for fiscal health and sustainability, as well as for the effective delivery of public services” (OECD, 2017[39]). The following section looks at how procurement functions are allocated, and how co-ordination and co-operation functions horizontally and vertically, between ministries and different levels of government. Lastly, it will look at the procedural changes initiated by the reform.
A legal and institutional framework alone does not make for an effective public procurement system. The ways in which laws and regulations are applied within institutions are crucial to the effectiveness of the system. Figure 2.5 displays the multi-level governance structure of the German administration across federal, state and municipal levels.
Figure 2.5. Administrative units
Source: Authors’ illustration.
At the federal and state levels in Germany, responsibilities for public procurement are divided between different ministries. At the federal level, responsibilities are broadly split between the BMWi, which takes the lead on policy development and the overarching legal and regulatory framework, and the Federal Ministry of the Interior, Building and Community (BMI), which leads on e-procurement, the centralisation of procurement, and the rules for the procurement of public works. The BMI has also formed a competence centre on sustainable procurement. The BMWi leads the competence centre on innovation (discussed further in Chapter 5).
The Federal Ministry of Finance (BMF) is responsible for financing and financial compensation of different federal governmental levels. In addition to their overarching responsibilities, each of these ministries also has several internal procurement entities that procure for the ministries. The official junction between ministries at the federal level is the Federal Chancellery, which co-ordinates the collaboration between different ministries in order to prevent overlap and manage issues that touch upon several ministries (Bundesregierung, 2017[40]). The Federal Chancellery is also responsible for guiding the exchange between federal and state-level ministries (Bundesregierung, 2017[40]).
There is no supervisory authority, however, responsible for co-ordinating vertically between ministries at federal, state and municipal levels. That said, the Bund-Länder-Ausschuss (federal-state committee) is a regular meeting between federal- and state-level policy makers that serves to co-ordinate topics of interest for different governmental levels, such as procurement. In this context, the BMWi invites representatives of the Länder to the Bund-Länder-Ausschuss on a regular basis to discuss and co-ordinate questions linked to the application of procurement law.
These structural arrangements lead to the following issues with respect to co-operation and co-ordination at the federal level:
Co-operation between ministries at the same level of government is limited. The division of the procurement function between different ministries creates a risk of overlap and a lack of cohesion. Because of this, effective communication and co-ordination is vital. However, Germany has no central co-ordinating body or agreed-upon protocols for co-ordinating between the ministries. The Federal Chancellery is located at the highest level of government and provides federal oversight over many government functions. That said, co-ordination through this channel regarding procurement is rare. The Federal Chancellery is charged with organising all cross-ministerial co-operation, but it only has limited capacity. It is therefore not an adequate channel for organising regular communication and identifying synergies. Instead, the Federal Chancellery provides strategic guidance. Despite limits to co-operation, some project-related communication does take place between ministries. With the introduction of e-procurement, a working group on e-procurement has been set up, including representatives from all federal-level ministries. This working group meets twice a year and is co-ordinated by the BMI (Ministry of the Interior, Building and Community).
Vertical communication can be improved. The Bund-Länder-Ausschuss (federal-state committee) facilitates vertical communication, allowing for exchanges between different levels of government on the application of procurement law. The committee meets at least once a year, or more often in cases of special need, such as the implementation of the new procurement law. The committee includes representatives from federal and state-level ministries of the economy that work on procurement. Representatives from the central municipal associations can also attend (Von Engelhardt, 2015[41]). In interviews with the OECD, interviewees from the Länder level described the committee meeting as a helpful forum for exchange, and a good opportunity to raise issues, ask questions and share practices across different Länder. Although there does not appear to be unanimous support for the committee, it shows that Länder can benefit from regular exchanges.
Overall, communication between state-level ministries in Germany can be described as ad-hoc and fragmented. A lack of institutionalised communication and a co-ordinating entity has led to low levels of co-ordination and co-operation. The Bund-Länder Ausschuss provides a platform for regular exchanges between different levels of government, yet are limited to Ministries of the Economy. Similar working groups could be created on different topics, such as e-procurement or sustainable procurement, for the responsible procurement professionals at different levels of government. Increased dialogue between ministries will enable ministries to inform each other about their work, identify overlap and find synergies.
Independent procurement systems developed in each ministry add to the complexity to the system. In every ministry, several procurement entities are responsible for the procurement of different product groups. The development of independent procurement entities in each ministry can be partly explained by the strong independence given to ministries by the constitution. The Ressortprinzip (the department principle) gives strong authority to individual ministries (German constitution, Article 65), with every minister leading their department independently and taking responsibility for that ministry’s work. This creates a situation where each ministry has its own domain of influence – domains that ministers are often eager to defend (Döhler, 2002[42]). The expression Mitzeichnungskrieg (“co-signature war”) has become a term to describe the defence of responsibilities and organisational self-interest (Hustedt and Veit, 2014[43]) that has resulted from this system, as well as the tendency of ministries to seek influence in a large number of areas. In all, the situation has engendered long bureaucratic processes that are highly inefficient.
These insights from research about institutions in Germany can explain why procurement entities developed independently from each other, and why there is still resistance to change. OECD interviews confirmed that some still object to grouping procurement activities within ministries. One of the principal reasons mentioned was the fear of losing decision-making power. The incentive to maintain control over a product decision is bigger than the willingness to co-ordinate procurement with other entities. This situation also highlights that co-operation and co-ordination depend on personal dispositions. If there is no willingness to achieve greater co-ordination, there is no incentive for increased communication.
Routines keep the governance structure in place. Organisational culture describes how the members of an organisation interact with each other, as well as the norms and values by which they operate. Organisational culture can help to explain how established governance structures remain in place. The way members of an organisation or ministry interact with each other creates unquestioned habits, views and interpretative patterns that determine the understanding of how and when co-ordination is needed (Hustedt and Veit, 2014[43]). OECD interviews with stakeholders in Germany reflected this dynamic. In Germany, there is a strict separation between ministries (Ressortprinzip). A lack of regular evaluations to assess co-operation mechanisms, as well as a lack of institutions to identify functional overlaps and potential synergies has reinforced a certain organisational culture. Assessments are carried out by the Supreme Audit Institution and audit institutions at the Länder level on a case-by-case basis. It could be beneficial for Germany to conduct a regular assessment of current processes aimed at improving processes and identifying inefficiencies and overlaps. This pertains to governance issues in general and the governance of procurement practices specifically.
A communication strategy can help to develop more targeted results. By systematising communication and defining target groups, communication can trigger and support changes in management processes. A comprehensive and effective communication strategy should go beyond one specific objective, such as communication between ministries. Rather, a communication strategy should support reform efforts by ensuring that messaging is clear, while also minimising the risk of misinterpretation. Furthermore, communication can reduce resistance to reforms by building confidence and trust in government. In Italy, an extensive communication programme was put in place to accompany the reform process, which is further detailed in Box 2.1.
Box 2.1. Change management in Italy
In Italy, the Ministry for Public Administration led a communication strategy to raise awareness for reforms of the public administration prior to their 2014 public procurement reform. The central purchasing body (CPB) CONSIP then applied the same strategy at the practitioners’ level in order to communicate the country’s 2014 procurement reform. This reform significantly changed the public procurement system to reduce fragmentation. To communicate the reform, CONSIP used strategic communication elements provided by the Ministry for Public Administration. The communication strategy consisted of both providing support and information internally and externally, as displayed in Figure 2.6.
The strategy was divided into two separate elements: 1) training support to respond to technical questions from procurement officials; and 2) information transmission, including internal and external communication on the content of the law and its applicability.
Figure 2.6. Information strategy of CONSIP
Source (CONSIP, 2014[44]), Communication Strategy and Change Management; (Ministry of Finance, 2015[45]), 2014: A turning point for Italy - Structural reforms in Italy since September 2014.
2.3.2. Governance processes have been simplified by changing procedural requirements
Germany’s procurement reform made a number of changes to procurement procedures that impacted governance structures. The most relevant changes are discussed below.
The European Single Procurement Document (ESPD) reduces the administrative burden associated with procurement procedures for all involved stakeholders and facilitates access to cross-border tendering opportunities. Before the ESPD, companies had to submit various documents to prove that they had fulfilled European Union exclusion and selection criteria (European Commission, n.d.[46]). The ESPD changed this, adopting a self-declaration form to simplify the qualification examination for bidders. Only the winners of tenders have to provide actual documents proving that they have fulfilled exclusion and selection criteria (European Commission, n.d.[46]). In Germany, the ESPD has been included in the Ordinance on the Award of Public Contracts (VgV), as mandated by EU guideline 2014/24/EU (BMWi, 2016[47]). Companies can voluntarily choose to use the ESPD, and contracting authorities are obliged to accept their submissions.
Digitalisation reduces the administrative burden. The current data collection process for public procurement in Germany is human resource-intensive and error-prone. Increasing digitalisation can make administrative processes more efficient. According to the BMWi’s estimates, EUR 1.8 billion in administrative costs can be saved by process improvements for procurement below the EU threshold (BMWi, 2017[21]). To date, the BMWi still has to request data from each federal ministry and aggregate them. On the state level, ministries have to request information from lower levels, which creates long bureaucratic processes. As many contracting authorities lack a systematic way of processing public procurement information, data collection is costly and inaccurate. The governmental programme Digitale Verwaltung 2020 (Digital Administration) aims at creating standards for digitalisation (Die Bundesregierung, 2014[48]). The goal of the programme is to increase digitalisation of public administration in order to improve its services (Die Bundesregierung, 2014[48]).
E-procurement can improve administrative processes (see Chapter 4). Since Germany’s procurement reform, the UVgO has provided legal grounds for the use of e-procurement below the EU threshold (BMWi, 2017[21]). This could have important consequences for procurement processes, because it would align e-procurement processes above and below the threshold. If implemented successfully, it could create coherent processes throughout the system, and could help to overcome capacity deficits – especially for procurers at lower levels of government. However, implementing e-procurement at all governmental levels will require a strong initial effort supported by clear communication about the degree to which e-procurement can reduce administrative burdens. Respondents to OECD interviews stated that resistance arises because employees, particularly at lower levels of government, do not want to adopt new practices. This resistance has to be countered by training procurers on the benefits of digital technology in procurement.
2.4. Subsidiarity has led to a diversity of legal frameworks across states
Having detailed the legal framework and governance structures on the federal level, the following part of the chapter will describe practices at the Länder level, adding a new perspective to the central-level view. As in the previous sections, the chapter will review the legal and regulatory framework first, followed by governance aspects.
2.4.1. The majority of procurement is conducted at the state level
Procurement law at state level consists of laws from the federal level and the public procurement laws of the Länder. Both are displayed in Figure 2.7. Procurement law below the threshold enters into force at the state level through the application commands integrated into the Länder Budget Code. Länder have the power to add provisions that are related to the Länder context to the application commands.
Figure 2.7. Procurement law at Länder level
Source: Illustration by Germany’s Federal Ministry for Economic Affairs and Energy (BMWi).
State-level procurement laws are a unique element of Germany’s legal framework. They exist alongside the regulations above and below the EU threshold, and they allow state-level governments to adopt state-specific regulations. State-level procurement laws are a relatively recent phenomenon, yet they already exist in 15 out of 16 states in Germany, with Bavaria being the only exception (Forum Vergabe, 2017[12]). North-Rhine Westphalia was the first state to adopt state-level procurement laws in 2002 (see North-Rhine Westphalia’s law on compliance with the minimum wage, Tariftreuegesetz).
2.4.2. State-level procurement laws could be harmonised to reduce complexity in the German public procurement system
The ability of states to customise procurement law by adding state-level laws increases the complexity to the procurement system. At the same time, it allows states to set standards and provide an example for the federal level.
State-level procurement laws increase the complexity of the system. In the following section, the development of a procurement-specific minimum wage and the increase in the use of social criteria will be used as examples to illustrate the complexity of the legal framework at the state-level.
State-level procurement laws have their origins in the desire of state-level governments in Germany to implement a minimum wage in the early 2000s. As there was no consensus regarding implementing a minimum wage at the national level at that time, some state-level governments decided to leverage state-level procurement laws to implement a minimum wage. Over the years, more and more states followed. However, the minimum wage level differed strongly between states over time, as illustrated in Table 2.3. When a nation-wide minimum wage was implemented in 2015, some states adopted the national minimum wage of EUR 8.50 per hour, while others maintained their procurement-specific minimum wage.
Table 2.3. Development of procurement-specific minimum wage (in EUR per hour)
Note: Bavaria has no state-level procurement law and Saxony has not included provisions on minimum wage
Source: (Forum Vergabe, 2017[12]), Übersicht über den Stand der Tariftreue- und Vergabegesetze in den Ländern; Auftragsberatungsstelle Bayern (2013), Übersicht Mindestentgeltregelungen Bundesländer.
These differences in regulations create costs for suppliers and contracting authorities. Suppliers are obliged to monitor regulations in different states and over time to be able to participate in tenders. If regulations are different and complex, states risk discouraging suppliers from competing in public tenders. Contracting authorities that have to monitor whether suppliers comply with provisions and adapt specifications in calls for tender also face additional costs.
The second example from state-level procurement laws illustrates how provisions have increased over time. Since the first state-level procurement laws were implemented in the 2000s, a number of additional provisions have been added, such as social and environmental standards. Figure 2.8 illustrates this by showing the increasing number of social criteria included in state-level procurement laws, ranging from one or two in some states to as many as 13 in others (Sarter, Sack and Fuchs, 2014[49]). These social criteria do not include environmental and economic criteria, however, such as carbon emissions or SME integration. The criteria that are included in most state-level laws are the International Labour Organisation (ILO) Core Labour Standards. States with extensive qualifications include North Rhine-Westphalia (regulation TVgG NRW §18), Thuringia (regulation ThürVgG §11) and Schleswig-Holstein (regulation TTG §18.1). Berlin, Bremen and Hamburg also have a number of additional specifications, but they only apply to a limited number of products. North Rhine-Westphalia, Thuringia and Schleswig-Holstein go further in creating regulations not only on specific goods, but also on the countries of origin (Sarter, Sack and Fuchs, 2014[49]).
Figure 2.8. Social criteria are increasingly included in the public procurement regulations of German states (number of references)
Source: (Sarter, Sack and Fuchs, 2014[49]), Public Procurement as Social Policy? An introduction to social criteria in public procurement in Germany.
Differences in social, environmental and economic criteria create costs both for suppliers and contracting authorities. This was stressed in a 2015 evaluation of the procurement law in North-Rhine Westphalia based on a sample of around 300 contracting authorities. When asked about their biggest implementation challenges, contracting authorities cited problems in verifying whether the various certificates and declarations meant that bidders complied with the regulations of the law (Kienbaum, 2015[50]).
A 2014 study by the University of Bielefeld confirms the difficulties suppliers in Germany face in finding information on the differences in state-level procurement regulations, as highlighted by respondents from the construction industry (Sarter, Fuchs and Sack, 2014[51]). The administrative burden is particularly challenging for SMEs, as they do not have the capacity to adapt their offers to different states or to constantly monitor changes in regulation. The study also found that, while the integration of social criteria is increasingly prevalent, administrative practices are not always consistent with legislation. This inconsistency creates an implementation gap where price remains the prevailing criteria (Sarter and Sack, 2016[52]).
The response of the federal level to the complex structure at state-level is the UVgO. As German states have the freedom to partly adopt the UVgO, it is not clear whether all Länder will adopt the UVgO to the same extent. As observers point out, this means that inconsistencies could potentially persist across state-level regulatory frameworks, depending on the approaches individual states take in adopting the UVgO or alternative regulations (Ley, Altus and Wankmüller, 2017[24]; Vergabeblog, 2017[53]; DStGB, 2017[54]). As the only state without state-level procurement law, Bavaria is an exception, as further detailed in Box 2.2.
Seven of the Länder had to reform their state-level procurement laws because they referenced the VOL/A, the regulation preceding the UVgO, in their state laws (Vergabeblog, 2017[53]). In spite of some criticism of the UVgO, most states (with the exception of Hessen, which does not plan to adopt the UVgO) argue that the UVgO should be adopted in full, according to a survey of Länder-level competence centres that are in regular contact with procurement professionals to assist in procurement procedures (Vergabeblog, 2017[55]; ABSTSH, 2017[56]). The Länder-level competence centres consider the coherence of state-level regulations as the most important goal.
Box 2.2. Bavaria: The only state without a state-level procurement law
Bavaria is the only German state that has not implemented a state-level procurement law. In contrast, 15 of the 16 states in Germany adopted state-level laws since North-Rhine Westphalia adopted the first in 2001.
In interviews with the OECD, Bavarian ministerial officials explained that Bavarian lawmakers did not want to impose obligatory regulations on contracting authorities. Instead of creating obligations, Bavaria as created guidelines and statements to provide direction on ecological, social and sustainable considerations that are not regulated by federal law. The Bavarian approach aims to avoid creating additional bureaucracy, while simplifying procedures for contracting authorities. Therefore, instead of relying on legal obligations, Bavarian officials try to provide the necessary tools for contracting authorities to integrate additional criteria. However, without an evaluation of the degree to which complementary policy objectives are taken into account, it is not possible to make a definitive statement on the effectiveness of voluntary additional criteria.
At the same time, Bavaria was one of the first Länder to implement the UVgO, effective as of 1 January 2018. Bavaria followed Hamburg’s adoption of the law in October 2017. Bremen has also implemented the UVgO, and the governments of Thuringia, Mecklenburg-Vorpommern, Rhineland-Palatinate and Schleswig-Holstein are currently working on implementation (B_I Ausschreibungsdienste, 2018[57]). As opposed to other Länder, Bavaria does not have the constraint of an existing state-level procurement law that might conflict with the UVgO.
Source Responses from German federal and state-level institutions to an OECD questionnaire and interviews.
State-level procurement laws can set standards for federal-level procurement law. State-level procurement laws give states a degree of autonomy, given that states can add provisions that do not exist at the federal level. One example is the minimum wage that was first implemented in state-level procurement laws in 2001. The federal level implemented minimum wage laws much later. Similarly, with respect to complementary policy considerations, Länder have included a broader range of standards into their state-level procurement laws than the federal government has included in federal-level laws, such as on sustainability, economic impact and social standards. State-level procurement laws provide states with leverage that allow Länder governments to shape the direction that legislation takes in other states and at the federal level.
2.4.3. States could strengthen co-operation and co-ordination both within their administrations and with other states
The OECD review of German legal framework for public procurement included an analysis of the co-ordination and co-operation efforts at the state level, drawing parallels with the federal level in order to make the following observations.
The federal structure of horizontal co-ordination is reproduced at Länder level. At the Länder level, responsibilities are strongly divided between ministries (see Table 2.4). As every state government can decide on the structure and responsibilities of ministries, the setup differs between states. Ministries of the economy in all Länder are responsible for legal and regulatory politics, while e-procurement is typically managed by ministries of the interior.
Table 2.4. Division of responsibilities between ministries
Note: Only Länder that have responded to questionnaire or interview request are included.
Source: Responses from German federal and state-level institutions to an OECD questionnaire and interviews; (Umweltbundesamt, 2014[58]), Regelungen der Bundesländer auf dem Gebiet der umweltfreundlichen Beschaffung.
As at the federal level, there is no superordinate body at the state level that co-ordinates communication between ministries. Figure 2.9 provides an overview of the co-ordination between state-level ministries. Figure 2.9 shows that half of respondent states do not have an institutionalised way of communicating, like working groups, committees or regular informal meetings. Instead, co-ordination takes place mainly on an ad hoc basis. When an issue arises that requires co-ordination across ministries, such as the procurement reform, ministries exchange relevant information either formally in writing, through informal meetings or through calls. Such ad-hoc communication instead of a structured approach to co-ordination may inhibit opportunities to identify synergies.
Figure 2.9. Regular, structured co-ordination between state-level ministries
Note: Only Länder that have responded to questionnaire or interview request are included.
Source: Responses from German federal and state-level institutions to an OECD questionnaire and interviews.
In Berlin and North-Rhine Westphalia, some regular and structured communication is already in place. In Berlin, the Department for Economy, Energy and Businesses co-ordinates regularly with the Department for the Interior and Sport. In addition, in Berlin, a working group on e-procurement comes together four times a year. In North-Rhine Westphalia, an inter-ministerial working group on procurement co-ordinated by the Ministry of Community, Municipal Affairs, Construction and Equality meets every four months. Yet such regular, institutionalised co-ordination does not occur between ministries in other states.
The second element of horizontal co-ordination relates to co-ordination between Länder. There is no institutionalised co-operation between the same ministries in different Länder. Some Länder report that they observe practices in other Länder to draw inspiration for their own policies, yet this does not reach the level of direct exchanges. The only occasion on which officials from different states get together is the aforementioned Bund-Länder Ausschuss. In general, the relationship between Länder would be better characterised as competitive, as opposed to co-operative. The competitive nature of these relationships can be beneficial, because, in a strongly decentralised system, competition between states can enhance the spillover of good practices (OECD, 2010[14]). The reverse side of this is that every state is focused on its own needs and has no incentive to co-operate (OECD, 2010[14]).
While co-operation between Länder is rare, practices in Lower Saxony demonstrate the potential of cross-border state procurement initiatives. Lower Saxony initiated cross-Länder co-operation during a procurement of work clothes. In fact, the Logistikzentrum Niedersachsen (LZN), a central purchasing body in Lower Saxony, started to purchase police uniforms for other states in 2001, and it now purchases work clothes for 130 000 public officials. Over the years, the number of states participating and the variety of products available has increased. To date, Bremen, Schleswig-Holstein, Mecklenburg-Vorpommern and Bavaria purchase their work clothes through the LZN. In addition, the LZN purchases work clothes for penal institutions in six Länder, for forest administrations in 15 Länder and for a number of municipal entities (Ordnungsämter).
Vertical communication is more developed. Communication between Länder and municipalities faces several challenges, though there are more structured communication channels than between state-level ministries. Figure 2.10 illustrates that in half of the interviewed Länder, regular and structured co-ordination takes place with municipalities in each state. Due to the large number of municipalities, direct communication between state and municipal levels would be time consuming and costly. Therefore, communication is mostly organised through municipal associations (Kommunale Spitzenverbände). That said, there are different ways in which Länder and municipalities co-ordinate. In some Länder, such as NRW and Bavaria, a working group located at the Ministry of the Interior leads communication with municipal associations. In other states, the ministries of the economy lead co-ordination with the municipal associations. As a city-state, Berlin does not have as many municipalities under its authority. This allows the state of Berlin to be in touch directly with its boroughs (called Bezirke, which are the equivalent of a municipality in a city state).
Figure 2.10. Regular, structured co-ordination between Länder governments and municipalities
Note: Only Länder that have responded to questionnaires or interview requests are included.
Source: Responses from German federal and state-level institutions to an OECD questionnaire and interviews.
Significant differences exist with respect to the guidance that is available for municipalities. In some states, guidance and Länder-level helpdesk services can be accessed by municipalities and some states offer guidance that is specifically tailored to the needs of municipalities. Other states have made no dedicated material available for municipalities. Similarly, some municipalities in certain Länder have access to e-procurement platforms. In other Länder, e-procurement platforms are only available for a service fee, which can discourage their use. In interviews, respondents from state-level authorities argued that it is challenging to provide services to such a large number of municipalities.
2.4.4. Good practices in terms of co-ordination at the municipal level
The municipal level is vital to public procurement in Germany, considering the large amount of procurement activity that takes place at this level, as indicated in Figure 2.11. According to the BMWi, procurement at the municipal level accounts for an estimated 58% of German procurement activity.
Figure 2.11. Procurement activity at governmental levels (estimates)
Source: Authors’ illustration based on data provided by BMWi.
Co-operation between municipalities is more frequent than at other government levels. In every state, multiple examples of successful co-operation initiatives exist at the municipal level, whereas successful co-operation is rarer at the state level (Kommunaler Kompass, n.d.[59]). The fact that co-operation is more frequent at the municipal level is also due to the fact that procurement entities at the municipal level are much more restricted in terms of capacity. Therefore, co-operation is a welcome possibility to pool resources.
An initiative featuring municipalities joining together to participate in centralised information technology (IT) procurement called IT Group Schleswig Holstein (IT-Verbund Schleswig-Holstein AöR, ITVSH), provides an example of the benefits that can be achieved through co-operation between municipalities (described in Box 2.3).
Box 2.3. Co-operation of municipalities participating in central purchasing
In Schleswig-Holstein, municipalities created an entity that allowed them to participate in centralised IT procurement. In 2011, 42 municipalities from Schleswig-Holstein created the IT Group Schleswig Holstein (ITVSH). By 2018, 75 members belonged to ITVSH. Together, these municipalities can participate in IT procurement through Dataport, the central purchasing body for IT in Schleswig-Holstein (since ITVSH became a shareholder of Dataport). This allows member municipalities to use Dataport for in-house procedures, simplifying them. ITVSH is responsible for carrying out procurement for its member municipalities, as well as for the delivery of products (ITVSH, 2018[60]). Member municipalities are not obliged to procure a specific amount of goods or services.
The initial contribution required from cities or municipalities wishing to join ITVSH is relative to their number of inhabitants:
Cities and municipalities with more than 100 000 inhabitants pay EUR 2 500.
Cities and municipalities with up to 100 000 inhabitants pay EUR 1 250.
Cities and municipalities with up to 20 000 inhabitants pay EUR 500.
Dataport is the first IT service that is jointly held by states and municipalities. In 2016, the overall revenue of Dataport amounted to EUR 484.7 million. Out of this amount, the state of Schleswig-Holstein and municipalities residing within the state generated EUR 102.7 million. The use of Dataport increased by 18.5% between 2015 and 2016, with Länder such as Hamburg, Bremen, Mecklenburg-Vorpommern, Lower Saxony and Saxony-Anhalt using it for IT purchasing (Ministerpräsident Schleswig Holstein, 2016[61]). Thus, Dataport is not only an example for municipal co-operation, but also for procurement across Länder.
Sources: (ITVSH, 2018[60]), Zahlen, Daten, Fakten zum ITVSH; (ITVSH, 2011[62]), Entwurf einer Organisationssatzung für das gemeinsame Kommunalunternehmen.
Germany’s procurement reform gave more legal certainty to municipalities on inter-municipal co-operation. Before the reform, regulations did not state clearly how municipalities should comply with different legal standards if a project exceeded a threshold due to purchasing in co-operation with other municipalities. OECD interviews with policy makers revealed that some municipalities shy away from co-operating with other municipalities out of fear that the bureaucratic burden would increase once they reached a higher purchasing volume. The new reform specifies the conditions under which entities are exempted from certain directives (European Commission, 2014[5]). This provides contracting authorities at the municipal level with more legal certainty, and gives them clear criteria to follow.
However, the limited financial means of municipalities can make it difficult for procurement bodies to cooperate. The LZN has reported that municipalities find it hard to commit to binding agreements, given that they struggle to estimate their needs. As an example, municipalities often report their needs to the LZN, but ultimately do not buy the products they have previously committed to buying, making the planning process for the LZN difficult. The LZN communicates with municipal associations (Kommunale Spitzenverbände) about these issues, but municipal associations do not have the authority to impose anything on their member municipalities. Finally, for the LZN, communicating with individual municipalities would be a time-consuming and costly task.
Due to the influx of refugees in recent years, municipalities have been confronted with particular challenges in procurement related to the sudden demand for accommodation and services. Box 2.4 shows how municipalities adapted to manage the increase in demand.
Box 2.4. Providing for refugees: How municipalities adapted
In 2016 and 2017, the annual expenditure of municipalities in Germany increased sharply. The increase was due to the influx of refugees in 2015-2017, which amplified the need for the procurement of goods, services and construction in municipalities. According to the German Association of Cities and Towns (Deutscher Städtetag), these expenditures increased by 10% in 2016 (Deutscher Städtetag, 2016[63]).
Procurement volumes at the Länder level show a similar trend. In several states, such as Berlin and Baden-Württemberg, procurement volume increased by around 20% in 2015. In 2016, the procurement volume dropped down to a prior level. These volumes only include procurement expenditure above the EU threshold. Respondents in interviews with the OECD confirmed that the increase was due to expenditure on refugee accommodation. Below the threshold, the impact might have been higher, but there is no data to substantiate this.
A sudden increase in procurement volumes and an urgency of need create challenges for procurement systems. In order to facilitate the provision of services and housing for refugees, Germany could use a number of special legal provisions. The BMWi is aware of the issue, and published a circular on the “application of procurement law in the context of the accommodation and care for refugees” which explained where these circumstances apply (BMWi, 2015[64]).
Temporary legal changes were implemented to facilitate procurement
In order to accelerate the investment in accommodation and service provision for refugees, some Länder included additional provisions into their procurement laws. For example, Rhineland-Palatinate decided to simplify refugee-related procedures. According to the new provision, which remained in place for one and a half years, direct awarding could be used for refugee-related procurement without providing a detailed explanation up to a higher threshold (Bundesanzeiger, 2015[65]).
The additional pressure on the procurement system did not only lead to short-term changes in legislation, it led to a re-evaluation of existing processes. In 2016, Lower Saxony formulated an IT strategy called Digital Administration 2025. The strategy took problems encountered during the refugee crisis into account, and acknowledged that difficulties in the interoperability of IT processes slowed down asylum procedures (Landesregierung Niedersachsen, 2016[66]). Closing the gap between different IT systems would entail common purchasing of hardware and software for state- and municipal-level governments in Germany (Kommune 21, 2016[67]).
Sources: (Deutscher Städtetag, 2016[68]), Integration fair finanzieren – Schlaglichter aus dem Gemeindefinanzbericht 2016; (Deutscher Städtetag, 2016[63]), Integration fair finanzieren – Handlungsfähigkeit aller Städte sichern – Appell zum Gesetz über die Entlastung der Kommunen.
Länder can incentivise municipalities to co-operate. While common procurement activities between states are rare, they encourage municipalities to increase their co-operation. There are different ways in which Länder seek to encourage co-operation at the municipal level, such as by subsidising co-operation activities. If, for example, Bavarian municipalities purchase goods or services together, they receive a state-level subsidy of 5-10%. Municipalities have made use of this subsidy, for example in the procurement of fire trucks or road salt. However, there is no data or evaluation on how frequently these subsidies are used. Evaluations and data collection could help Germany to analyse how effective the subsidy is and in which areas it is most used. While these steps have not yet been taken, in 2008, Germany established a contact point at the state level to respond to questions on inter-municipal co-operation initiatives, such as common procurement (Regierung Oberpfalz, n.d.[69]).
States have limited legal authority on what they can impose on municipalities, however. If states want to impose a law on municipalities, they also have to consider any potential cost increases that it may create. The connectivity principle (Konnexitätsprinzip) inscribed in the constitution holds that the entity with the political authority for a law carries the costs it creates (German constitution, Art. 104a). That said, the degree to which a service needs to be provided in a decentralised system, as well as where costs should lie, are determined on a case-by-case basis (Scherf, 2010[70]). The same principle applies at the federal and Länder levels. With respect to procurement law, the connectivity principle obliges Länder that want to impose a certain type of procurement practice on municipalities to provide compensation. The state of Schleswig-Holstein imposes their state-level procurement law on municipalities, and reimburses municipalities with between EUR 1 million and EUR 9 million.
Co-operation and co-ordination between different levels of government in Germany – and even between ministries at the same level – have potential for improvement. Successful initiatives already exist that demonstrate the potential benefits that can be achieved through more structured co-ordination mechanisms.
Proposals for action
The German public procurement reform has contributed to the streamlining and modernisation of the country’s legal and regulatory framework. The reform successfully updated Germany’s legal and regulatory framework for public procurement to meet the new standards set by the 2014 EU procurement directives. In spite of the complex structure of German procurement legislation, a number of improvements can still be achieved. The governance structure of the German procurement system can be described as layered. This originates on the one hand in the split competencies at the federal, Länder and communal levels. On the other hand, the layered nature of the procurement system stems from the strong Ressortprinzip (department principle) and the shared responsibility of different ministries for procurement. Regular and structured communication can improve co-ordination and co-operation at all governmental levels. Improved communication, co-ordination and co-operations can be achieved by undertaking the following actions:
Consider further streamlining of the legal framework by eliminating the remaining regulations at the tertiary level, as well as aligning legal protections below the EU threshold with standards above the threshold.
Assess procurement processes regularly in order to evaluate the effectiveness of the current system and identify where different regulations are needed. Increased data availability can also serve to improve procurement processes.
Create a working group for states that have their own procurement laws to map the gaps between the new federal legal framework and their own laws. A working group of this nature can help states understand possibilities for harmonisation, and even potentially enable a future elimination or reduction of procurement laws at the state level.
Consider implementing regular working groups on procurement-related topics that bring together procurement professionals from different entities to exchange policies, procurement practices and challenges. This would enable entities to identify overlaps and reduce duplication.
Ensure that the reforms are well communicated through all governmental levels and the capacity to implement reforms is guaranteed at lower governmental levels to prevent implementation gaps.
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