China: Government Procurement In China: Can You Get A Piece Of The Pie?

Last Updated: 9 September 2009

Article by Dr. Björn Etgen and Egmont Seeber

1. OVERVIEW

On 9 November 2008, the PRC announced an RMB 4 trillion stimulus package in response to the global financial crisis. The funds will be invested in ten key sectors over the course of two years, and a considerable part will be distributed in accordance with government procurement laws. Although foreign investors in China have been eager to take advantage of the stimulus plan, recent events and reports have raised concerns about whether they are receiving the same treatment as entities in China that are owned by the state or purely domestic shareholders.

In order to clarify this issue, this article addresses the regulatory framework for government procurement with regard to the treatment of foreign investors in China and examines how this framework is put into practice.

2. GOVERNMENT PROCUREMENT LAW IN CHINA

2.1. Obligations Under International Law

China is not bound by any international agreement concerning its domestic government procurement laws. It is not party to the WTO's Government Procurement Agreement ("GPA"), which guarantees non-discriminatory access to the signatories' government procurement markets. However, China promised to take steps toward acceding to the GPA in its WTO Accession Protocol and initiated negotiations on its accession in December 2007 by submitting its initial GPA market access proposal. China's proposal disappointed the other GPA parties, and negotiations continue over a revised submission. During the U.S.-China Strategic and Economic Dialogue on 27 July 2009, China agreed to submit a report to the WTO Government Procurement Committee that contains the improvements in its proposal before the Committee meets this October.

2.2. Domestic Law

2.2.1. Relevant Provisions

Several legislative and administrative acts express an open preference for domestic goods and services. China's Government Procurement Law ("GPL") went into effect on 1 January 2003. Its Article 10 directs government entities to give priority to domestic goods, projects and services, except when they are either unavailable in China or unavailable in China under reasonable commercial conditions. A Ministry of Finance notice dated 27 December 2007 imposed the need for its prior approval for using imported products in government procurement projects.

The document that sparked the recent controversy about an alleged "Buy Chinese" is known as Circular 1361.1 It was jointly issued on 27 May 2009 by the National Development and Reform Commission ("NDRC") and eight other government agencies, and posted on the NDRC's website on June 4. This document requires government investment projects to give priority to domestic goods, construction engineering or services, except when they are either unavailable in China or cannot be acquired on reasonable commercial terms. It also subjects projects requiring imported products to the prior approval of relevant government authorities. Circular 1361 is not legally binding--it simply provides guidelines for local officials' procurement decisions. But similarities between Circular 1361 and existing legal provisions indicate it reiterates existing obligations in the context of increased public spending. Chinese officials responding to foreign investor concerns about unfair treatment have indicated that the circular has been misinterpreted. They claim that it actually intends to counter widespread discrimination against domestic products in public bids for projects involving government procurement.

2.2.2. Treatment Of Foreign-Invested Enterprises (FIEs)

Both the GPL and Circular 1361 refer to preferential treatment of "domestic" goods and services, which seems to distinguish domestically produced goods and services from imported ones.

From a strictly legal viewpoint, FIEs are considered domestic producers of goods and services because they are usually incorporated as a legal person under PRC law. This distinguishes them from a foreign enterprise. As an entity incorporated outside China, a foreign enterprise is not entitled to preferential treatment. Only China's accession to the WTO's GPA would result in equal treatment, as long as the foreign enterprise is based in a state that has joined the agreement.

This view complies with recent government statements that emphasise that foreign-invested companies in China will be treated as Chinese companies. Most importantly, this position was expressed in a joint statement by the NDRC and the Ministry of Commerce issued on 26 June 2009. Also, in the U.S.-China Strategic and Economic Dialogue, China committed to treat the products of foreign-invested enterprises in China the same as those of enterprises with solely Chinese shareholders.

3. GOVERNMENT PROCUREMENT IN PRACTICE

Although the legal and administrative framework by itself appears to provide for equal treatment of FIEs, the enforcement of the GPL or Circular 1361 does not paint such a clear picture.

To begin with, the legal form of the FIE can be relevant. Accordingly, in certain cases and industries wholly foreign-owned enterprises have been advised to form a consortium or joint venture with local companies to enhance their prospects in public tenders.

Observers, including Chinese offices, note that the provisions of the GPL have been only loosely enforced in practice, especially by local officials. This is especially significant because local officials now are responsible for financing nearly three-quarters of the stimulus plan. As Circular 1361 only provides guidelines for the procurement decisions of local officials, strong local relationships could be important for foreign investors who pursue procurement deals.

The European Union has criticised the "increasing gap between messages conveyed by Chinese officials and the situation on the ground". In one highly publicised case, Joerg Wuttke, the president of the European Union Chamber of Commerce in China, accused the PRC on 28 May 2009 of deliberately locking foreign suppliers out of stimulus plan contracts by setting bidding criteria that made it impossible for them to compete. In the pertinent case, foreign firms that included the world's leading turbine makers failed to even make it to the second round of bidding for a package of 25 wind turbine orders worth more than EUR 5 billion.

The European Commission also noted "Buy Chinese" or "Buy Local" initiatives implemented by provincial or municipal authorities in 12 provinces. These measures express local preference and, in some cases, even prohibit foreign products. The most heavily targeted sectors appear to be automobiles, medical devices and pharmaceuticals.

In contrast, many large contracts based on the stimulus package have been awarded to U.S. and European companies. As of yet, though, there are no figures available on the proportion or the value of foreign products purchased under stimulus funding.

Accordingly, the implementation of the local preference provisions appears to be ambiguous. The findings of the "Consultation on Buy National/Local Provisions in Public Procurement", launched by the Directorate-General of Trade of the European Commission on 22 July 2009, may clarify the picture. The consultation aims to assess discriminatory third country measures on EU businesses--explicitly addressing China and the United States--and sets 15 September 2009 as the preferential deadline.

Footnote

1. Full title: Opinions on the Implementation of Decisions on Expanding Domestic Demand and Promoting Economic Growth and Further Strengthening Supervision of Tendering and Bidding for Construction Projects

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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