Turkey: New Era In Procurement: Industrial Cooperation In Turkey

Last Updated: 20 May 2015
Article by Safak Herdem

On a number of occasions in the recent past, policy makers required for some reasons to define or to refer to the same procurement mechanism with different terms including but not limited to "offset", "industrial participation" and the "industrial collaboration". The dilemma for governments applying civil offset programs is to prefer different terminologies while discussing the same under WTO rules and to defend themselves in this regard in case of any incompliance. This actually demonstrates the reality: Focusing on the tactics often reveals the strategy behind, even the terminology differs; in other words, the undeniable fact which constitutes the common understanding remains same.

On February 15th Turkey launched a value-oriented procurement mechanism for large procurement programs since the economic picture has led the government to focus on strategic sourcing processes. It may be that ensuring sustainability of added value in procurement was indeed a reason for launching such programs. However the current legislation arouses concerns about covering expectations in terms of enforcement and compliance with WTO regime. Like some others, Turkey did the same and defined this new procurement mechanism as "Industrial Cooperation". In this article you will find more about how "industrial cooperation" or "offset" as commonly known is of particular importance to Turkey and the legal understanding to be approached from Turkey.

"Turkey has made considerable advances in industrialization thrust over the past decade", has said Nurettin Özdebir, the chairman of Ankara Chamber of Industry and added "Public procurement shall not only be considered in terms of cost effectiveness; it should contain transfer of revenue to encourage development at industry, R&D and innovation" in his speech during the panel on "Local Content in Procurement and Offset" dated 26 May 2014.

It is true that the real question is not relates to one of the procurement tactics; whether the efficient use of public funding is all for delivering value on supplier side. The real question is how the further improvement in an emerging economy should be in public procurement.

According to the statics of Turkish Statistical Institute ("TUIK") 1.9 % of the 2.9 % of the GDP growth came from the rise in export in the year 2014 however the reality of 15% decrease in value of Turkish Lira against USD in 2015 requires parties of offset programs to be wary of positioning and should urge policy and decision makers to set a course in this new procurement mechanism.

The orientation towards such a new mechanism which is full of complicated transactions will surely need some time to test and to experience as Turkish defense industry did in the past. However, like all governments applying civil offset programs, Turkey must be able to define its strategy at first. Requirements and authorities must be defined and criterion needs to be put in context accordingly. More broadly, an independent regulatory and supervisory authority should be established as quickly as possible with the objectives of to regulate and supervise the functioning of offset programs.

The pit before WTO is the compliance of the strategy not just a procurement but of the factors involved in it. And the first rule is to understand how WTO defines it: "Any condition or undertaking that encourages local development or improves a party's balance of payments accounts, such as the use of domestic content, the licensing of technology, investment counter trade and similar action or requirement".

The second rule is to understand what WTO restricts in procedures: "Entities shall not, in the qualification and selection of suppliers, products or services, or in the evaluation of tenders and award of contracts, impose, seek or consider offsets" (Article XVI/1 Uruguay Round- Agreement on Government Procurement)

"Nevertheless, having regard to general policy considerations, including those relating to development, a developing country may at the time of accession negotiate conditions for the use of offsets, such as requirements for the incorporation of domestic content. Such requirements shall be used only for qualification to participate in the procurement process and not as criteria for awarding contracts. Conditions shall be objective, clearly defined and non-discriminatory. They shall be set forth in the country's Appendix I and may include precise limitations on the imposition of offsets in any contract subject to this Agreement." (Article XVI/2 Uruguay Round- Agreement on Government Procurement)

Even Turkey holds observer status in Agreement on Government Procurement of WTO, ignorance of the content of this Agreement in total is not reasonable for a developing country as a party to General Agreement on Tariffs and Trade that does not choose not to trade and remain self-sufficient especially for issues such as offset which contains elements of counter-trade and relates to anti-dumping and non-discrimination matters.

Not only WTO rules, "Union Acquis" might seem pretty dire when European Commission requires conducting trade barrier investigation under wide-scale procurement programs to be undertaken in energy, healthcare, transportation and communication in which the offset programs are proposed to apply. Not long ago, on 2nd October 2013, the barrier about local content requirements in Turkey's Law 6094 amending the Law of 2005 on the utilisation of renewable energy sources for the generation of electricity has been reported to European Commission upon several complaints from EU business world as well as from several EU states and it is still ongoing.

Turkey has started to gain experience of offset programs in defense industry, in a field which is much more flexible and not direct trade oriented. However, if it is the subject of procurement then the situation calls for a deepening of strategies in a field that the overall spending of governments reaches to % 15–20 of GDP.

In conclusion, Turkey can only manage and overcome those transactional, legal and procurement related challenges of sophisticated offset world by understanding the fundamental elements that links it to principles of international trade law and defining a strategy to procure while countertrading.

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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Safak Herdem
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