Canada: Canada-EU Comprehensive Economic And Trade Agreement: Sub-Federal Procurement Challenges Ahead

Since the signing of the Comprehensive Economic and Trade Agreement (CETA) in October of 2016, Canada and the European Union have been moving quickly to enact the required implementing legislation to give CETA full force and effect. In Canada, Bill C-30, which received Royal Assent on May 16, 2017, contains a broad range of changes to a number of Federal laws to give full effect to Canada's commitments under CETA. The Canadian government had hoped to announce the provisional application of CETA on July 1, 2017. This has been delayed, most likely by at least two months, for a number of reasons. These include European concerns regarding whether the procedure and content of Canada's regulatory changes to date fully reflect its commitments under CETA and whether the provinces will be opening up their procurement on a timely basis.

Notably, a number of key concessions within CETA fall within the powers delegated to the provinces under section 91 of the Constitution Act, 1867. Access to provincial and municipal procurement under Chapter 19 of CETA is one such concession. The opportunities for companies doing business with government are significant as procurement spending by Canadian provinces and municipalities dwarfs that of the federal government. Although this article focuses on implementation challenges and issues for Canada's most populous province, Ontario, many of the issues discussed here are likely to rear their heads in other jurisdictions.

Key CETA Procurement Commitments

Chapter 19 of CETA imposes numerous obligations with regard to procurements conducted by federal and sub-federal entities including municipalities, utilities, hospitals, and other institutions not generally covered by Canada's other trade agreements. These obligations include:

  • extending treatment to EU suppliers no less favourable than that accorded to goods, services, and suppliers located in the province;
  • prohibitions on less favourable treatment to any supplier based upon degree of foreign affiliation and ownership of the supplier or the geographic origin of the goods;
  • barring the use of "offsets" – preferences granted to local or domestic industry either for entire contracts or portions thereof;
  • creating codified procedures for offering bid solicitations, including requiring electronic submission mechanisms, and limiting of selective tendering processes;
  • forbidding purchasing entities from limiting the scope of any financial or experiential criteria in a bid or pre-qualification to the domestic market; and
  • strictly delineating how technical specifications may be issued – with favour given to requirements phrased in a functional or performance based method rather than in a descriptive way. In particular, unless otherwise impossible, no parts or criteria may be described by use of any terms subject to trademark, trade name, patent, copyright, design, or type.

Whether these rules apply to a procurement depends on who is conducting the procurement, what is being procured, and the total value of the procurement.

Who is conducting the procurement?

All covered entities are listed in Annexes 19-1, 19-2, and 19-3 of CETA. The first annex, Annex 19-1, lists all Federal entities, such as the Department of National Defence and Statistics Canada. These are entities that are generally covered by Canada's other trade agreements (though, there are certain entities excluded from coverage under certain agreements, such as NAFTA, which are included under CETA).

Annex 19-2 provides coverage for all sub-central government entities – in other words, coverage of provincial entities. Generally, these entities include provincial departments, ministries, councils, commissions, and boards. This also generally includes municipalities, academic institutions, and hospitals.

Annex 19-3 covers "other entities". For both Canada and the provinces this annex generally applies to Crown Corporations, though individual provinces have created carve outs for certain crown corporations or other entities. Ontario is bound by commitments under both Annex 19-2 and 19-3.

Ontario's commitments under 19-2 include all provincial ministries and classified agencies but not energy agencies, agencies of a commercial or industrial nature, and the Ontario Infrastructure and Lands Corporation (also known as Infrastructure Ontario).

All Municipalities, Academic institutions, School boards, and Health and social service agencies (so-called "MASH" entities) are also included in this Annex so long as they are publicly funded (and excluding all municipal energy entities). This would include Ontario's hospitals, health units, universities, colleges, and school boards. This also includes various Ontario Crown Corporations – such as OLG, the LCBO, and Hydro One.

This represents a significant departure from prior trade agreements. Provincial procurement has traditionally been subject only to the Agreement on Internal Trade (AIT) between the Federal and provincial governments (which has been replaced by the new Canada Free Trade Agreement (CFTA) on July 1, 2017). The obligations under that agreement were difficult to enforce in the context of provincial procurement, owing to the lack of a separate, specialized administrative tribunal devoted to the AIT. Consequently, there have been few challenges to provincial procurement under the AIT and less visibility of these obligations with procuring entities.

Up until now, MASH entities in particular have been more sheltered than others from procurement obligations under our trade agreements. They were previously only subject to the obligations of Annex 502.4 of the AIT. Not only were those AIT obligations flexible and relatively benign, the enforcement mechanisms under the AIT were weak. These entities will now be thrust into a world of strict and rigorous enforcement of treaty obligations with little background or experience in these matters.

This is especially true with respect to offsets. While federal procurements not relating to defence have been effectively prohibited from including most offsets since the ratification and implementation of the North American Free Trade Agreement (NAFTA), provincial procurements remained unaffected. As result, they have continued to include "Canadian content" requirements or preferences intended to support local and domestic businesses and development. Under CETA, such requirements or preferences are generally prohibited, with one major exception: offsets relating to and benefitting Aboriginal businesses. Accordingly, provincial procurements may still provide local development benefits focused on Aboriginal corporations and communities. Careful consideration will have to be given to any such provisions in provincial procurements as this exception represents a major opportunity as well as risk to be managed.

Ontario's Annex 19-3 commitments appear more straightforward – all provincial and government-owned entities of a commercial or industrial nature (most notably crown corporations) plus Hydro One and Ontario Power Generation. However, the Independent Electricity System Operator – the crown corporation responsible for operating the electricity market and directing the operation of the bulk electricity system in Ontario, is not covered by either Annex.

What is being procured?

While Annex 19-1 through 19-3 govern the "who" of procurement, Annexes 19-4 through 19-6 govern "what" is being procured. For a procurement to be governed by the obligations of Chapter 19, it must be listed in these annexes.

Generally speaking, all goods are subject to the procurement discipline as set out in Annex 19-4 with a few exceptions. For example, procurement for public order and national defence entities applies if the goods are specifically listed in the Annex. These listed goods are not directly associated with the public order and safety aspects of their functions (for example furniture, office supplies, or toiletries). This largely exempts critical equipment, such as firearms, ships, aircraft, and other military equipment, from the scope of the procurement obligations in CETA.

Another important carve out for goods is the procurement of mass transit vehicles in Ontario and Quebec. While the obligations under CETA will generally apply to procurement of these vehicles, the two provinces have an exemption allowing them to accord a preference for Canadian content. Specifically, both provinces are allowed to require bidders to allocate 25% of the contract value to domestic Canadian content. In this case, "contract value" is defined broadly to include the cost of components, raw materials, labour, maintenance services and all "final assembly" costs incurred in Canada.

Importantly, this exemption provides a preference for Canadian content, and not specifically Ontario or Quebec content. This is a departure from the current status of most major transit agencies in Ontario and Quebec – which are largely exempt from the provisions of the AIT and Canada's other trade agreements. This is an important distinction as CETA's protections in this context benefit Canadian firms from other provinces by prohibiting bias in specifications in favour of Ontario or Quebec suppliers, goods, or services.

Service procurement under Annex 19-5 is more limited in nature. Rather than a negative list approach, only procurement of those services specified in the Annex covered by CETA.

While construction services are generally covered by CETA, these services have one very important constraint. Many of the CETA obligations do not apply to any construction services contracts which involve, as complete or partial consideration, any grant to the supplier of the construction service, for a specified period of time, of temporary ownership or a right to control and operate the civil or building work resulting from such contract and demand payment for the use of such work for the duration to the Contract. In other words, Public-Private Partnerships have broad exemptions from CETA obligations.

What is the value of the contract?

Finally, the procurement obligations will only apply where a procurement is of sufficient value. This is intended to prevent needless complexity and rigor being required to purchase $1,000 worth of office supplies for a local municipality. These thresholds are expressed in "Special Drawing Rights" or "SDRs". SDRs represent a fictional basket currency developed by the IMF for its own internal accounting purposes. Currently, 1 SDR is valued at approximately $1.86 Canadian, though this will adjust with time.

The current thresholds vary depending on the entity conducting the procurement, and what is being procured. Generally speaking, where:

  • a federal government entity is conducting the procurement of goods or services, the threshold is 130,000 SDR;
  • a provincial government entity is conducting a procurement of goods or services, the threshold is 200,000 SDR;
  • a crown corporation, municipality, or energy utility is conducting a procurement of goods or services, the threshold is 355,000 SDR; and
  • if any entity is procuring construction services, the threshold is 5,000,000 SDR.

Implementation & Enforcement

One of the interesting questions that remains to be answered is how Ontario and the other provinces will implement their commitments under CETA. Federal procurement will continue to be subject to the jurisdiction of the Canadian International Trade Tribunal (CITT) that follows an expedited process designed to move a complaint from cradle to grave within 90 days.

This is in marked contrast to the regular court process in most provinces where time frames are usually measured in months and years rather than days. The requirement for a specialized body which has knowledge of treaty law and interpretation, and the time and resources to hear a large volume of cases in short time frames, strongly indicate that some manner of administrative tribunal (such as the CITT) or a dedicated branch of the court (such as the Commercial List of the Ontario Superior Court of Justice) may be ideal.

Given the recent announcement of the CFTA between the federal government and the provinces, now may also be a time to implement a pan-provincial administrative body that may be designated by each province to hear procurement complaints. Adopting such an approach would have numerous benefits, including splitting the cost of maintaining an administrative tribunal, allowing for presiding members from each province for the purpose of impartiality, and unifying precedential rulings between the provinces regarding alleged treaty violations and thereby minimizing the potential for inconsistent decision-making.

This would also preserve the important distinction between treaty-based challenges, judicial reviews resulting from duties of procedural fairness, and common law actions for contractual breach in a procurement.

In addition, the obligations under CETA must also be fully implemented into provincial law. Without such codification, it is difficult to see how a complainant would have access to any form of redress or forum to settle a dispute. Until Ontario and the other provinces implement their provincial procurement obligation, aggrieved suppliers cannot bring any claim or complaint against them.

Conclusions

Government procurement, especially at the sub-federal level, constitutes a major market for potential suppliers both in Canada and the EU. The changes under CETA greatly expand the scope of this procurement to provincial and sub-provincial entities which have never before been subject to such stringent standards. It is highly likely that there will be growing pains and both procuring entities and suppliers must be especially vigilant and should be taking immediate steps in preparing for CETA.

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