By SRF PREKSHIT PRASHANT
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11 November, 2020
Paradox of China's Public Procurement Market
Public Procurement is an important dimension of world trade and is becoming increasingly important in trade negotiations. It represents on average 13% to 20% of GDP of major economies. Procurement policies are at times used as a policy tool to stimulate domestic production and consumption. Countries around the world exercise varying degrees of restrictions in their public procurement activities but the Chinese public procurement market has remained largely inaccessible to foreign firms.
China has long been accused of distorting public procurement market, both domestic and international, with the help of State Owned Enterprises (SOEs) and government subsidies. Despite the progress made by China in creating a more structured public procurement system, foreign firms often face challenges with transparency and gaps in regulation. Domestic procurement policies in China are aligned to give preference to Chinese firms. Foreign companies view fragmented markets, uneven access to information, transparency in determining bid criteria and bid winners as priority concerns. The lack of an effective appeal process is one of the greatest hurdles to creating a competitive procurement system in China.
The discrimination is not limited to the domestic public procurement market. Similar cases of blatant discrimination in China funded OBOR projects have been widely reported in media. The limited publicly accessible information suggests that Chinese suppliers/contractors win the majority of OBOR projects. There has been allegation of inequitable treatment to the non-Chinese firms while awarding OBOR contracts. China Pakistan Economic Corridor (CPEC) projects are a case in point. The process used to select contractors for high-value projects in the CPEC were not made public. The procurement was restricted to a limited number of Chinese contractors. Another glaring example is Budapest-Belgrade railway link, the OBOR’s most important European project. The project was announced in 2013 but was stalled on the Hungarian side until 2019 due to allegations of violation of EU tender regulations.
Affected countries have been demanding reciprocity and equitable treatment from China in public tenders. However, little evidence is visible on the ground of any progress made in this direction. As a retaliatory measure in Jul’19, the European Commission issued guidelines on the participation of third country bidders and goods in the EU procurement market that would make it harder for foreign Companies to win public contracts in Europe. It is the first deliverable of the 10 actions set out in the Communication on EU-China relations and supported by the European Council in its Mar’19 conclusions. It proposed a legal instrument, International Procurement Instrument (IPI), to address issues relating to foreign subsidies that facilitate the acquisition of EU companies and harmful of foreign subsidies on public procurement in the EU. EU as a bloc represents the largest public procurement market.
Meanwhile, at least on the policy front China appears to have started opening up the domestic procurement market and addressing the issue of national treatment and reciprocity in public tenders. In Oct’19 China submitted the seventh offer to join the WTO’s Agreement on Government Procurement (GPA). The offer includes all provinces, 16 SOEs and military entities, as well as all construction services. Although, the offer does not include any autonomous regions, the move is being projected as China’s willingness to open the public procurement sector for outside world. It has also proposed to revise Tendering and Bidding Law (TBL) to make it compliant to provisions of GPA and enacted the New Foreign Investment Law (FIL), Article 16 of which ensures national treatment for foreign firms in public contracts. FIL prohibits discrimination against foreign firms in procurement. However, its government procurement provisions only apply to foreign-invested enterprises (FIE) in China and do not extend to participation by foreign firms operating outside of China.
On the contrary, the EU-China Comprehensive Agreement on Investment (CAI) was carefully crafted to keep the trade issues out of the purview of the agreement, thus excluding substantive rules on public procurement, subsidies, etc. On 12 Apr’21, the EU called on Member States to support the efforts to conclude negotiations in the Council on the IPI as soon as possible. The friction between EU and China on the issue of public procurement does not seem to be getting resolved anytime soon. Interestingly, recently concluded RCEP agreement included government procurement at a later stage of negotiation in 2017 and resulted only into a very modest procurement chapter without any procurement commitment. The lack of substantive market access commitments in RCEP is not surprising since China is yet to include any such commitments in its bilateral agreements.
The Covid-19 has added another dimension to it. China recently announced new big ticket infrastructure projects under 14th Five Year Plan and Dual Circulation Strategy (DCS) aimed to boost domestic consumption as a tool to overcome corona induced slowdown and a long term economic policy objective. Public procurement forms substantial part of China’s internal consumption. It would be interesting to see how China creates balance between DCS, OBOR project implementation and partner countries demand to liberalise its public procurement market.
(The views expressed in the article are of the author and do not reflect official views.)