The European Union Chamber of Commerce in China has just released a 54 page report on the findings of European businesses bidding for procurement contracts in China. In a hard hitting study, the findings demonstrate that foreign businesses are effectively barred from the US$1 trillion public procurement market in China due to poor and opaque implementation of procurement regulations.
An unprecedented number of complaints concerning foreign companies bidding for Chinese contracts were received by the chamber last year, which stated that rules were “disjointed and inconsistently implemented, causing substantial missed opportunities for European businesses.”
European companies attack Chinese procurement policy
The report says a core problem lies in having two different laws on government procurements in China.
A relatively small range of contracts – such as office equipment and the car fleets of central government ministries – fall under the government procurement law. But the vast majority of what are commonly defined as public contracts in other countries – such as public infrastructure contracts and state-owned enterprise tenders – are governed by the bidding law, which offers much less clarity on eligibility requirements for suppliers.
Chinese procurement rules shut out European firms
Common challenges encountered by European business competing for public contracts included;
• The difficulty of obtaining timely, accurate information about upcoming projects.
• A lack of communication of projects’ evaluation criteria.
• The trend towards decentralisation of tender information - leading to higher costs and less transparency.
• The unfair implementation of public procurement awards.
• An unsatisfactory appeals procedures.
EuroCham China's Position Paper on Doing Business with China.
EuroCham China's European Business Experiences Competing for Public Contracts in China
Before describing the current public procurement system in China, it is worth bearing in mind the unique characteristics of China’s public procurement system. As a socialist country, direct and indirect state spending accounts for a larger proportion of economic activity than in most countries and most ministries have significant budgets. In the former command economy, there was no distinction between government and the market; demand was government driven and production was state planned. All ministries awarded tenders based on their own policies and procurement was seen as an administrative task to control government investment. Authorities were supplied almost exclusively by state owned enterprises (SOEs). Bidding did not exist.The report then analyzes the data it received from its review of Euro Business experience, against the context of the China procurement regime(s). That part definitely should be read.
In the opening up of the 1980s, the state council began to view procurement as a means to economic reform and new bidding provisions were introduced by government agencies in charge of works construction. After this, various authorities at both local and central level began to issue their own bidding regulations and set up bidding agencies. This led to a fragmented procurement market with conflicting rules and policies. In 1999, the State Planning Commission (later the NDRC) enacted the Tendering and Bidding Law, introducing market-based bidding mechanisms. Yet while this was in drafting, a parallel initiative for reform was launched and the National People’s Congress began to consider government procurement reform. The Government Procurement Law was enacted in 2002 and the Ministry of Finance took charge of implementation of this new law.
Thus public procurement in China has been fragmented, with regulation by different ministries and different levels of government. Such complexity and uneven implementation have increased the risk of corruption in China. Reforming China’s public procurement is therefore not only a means of improving economic performance, but of fighting official corruption.
Three characteristics differentiate the EU approach from the Chinese approach:
• Transparency: a clear scope of application of relevant EU laws, access to information and time for companies to bid. For example, procuring entities in several sectors organize public seminars to invite all potential bidders for them to discuss and promote solution options.
• A united appeals process for both the public sectors directive and the utilities directive.
• Level-playing field: All EU companies and companies from GPA signatory countries (and more: EFTA, Mexico, Chile) enjoy equal rights to compete for public procurement contracts in the EU. This level-playing field means that China’s GPA accession will open market access for Chinese companies to public procurement in the world’s largest economy. That said, Chinese companies competing for government contracts in the EU must grapple with a complex legal framework. They encounter national rules and European rules, implemented and administered by different authorities in each member state.
Many of the barriers to competition in public procurement tend to relate to national policies on issues such as market opening (for example in defence and transport), market liberalisation, state aids and remaining barriers to the Single Market. Continued action is needed in each of these areas to achieve a genuine EU Single Market. In recognition of this, in 2010 the European Commission launched a comprehensive EU-wide evaluation of the impact of EU procurement policy to guarantee transparency and equal treatment for economic operators. The Commission also launched a review of service procurement in order to consider more extensive regulation of procurement in services.
It concludes with a discussion of some recommendations, including:
6.1 Ensure all bidders have equal access to information at the start of the bidding process
6.2 Enforce Transparency and Fair Evaluation during the Tendering Process
6.3 Mind the impact of public procurement on other policies areas. De-link Indigenous Innovation from Government Procurement at all levels.
6.4 Streamline the Legal Framework for Public Procurement in China- in particular, ensuring uniform enforcement of public procurement regulations nationwide.
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