How will it help China comply with World Trade Organization requirements?

On 8^th December 2020, China’s Ministry of Finance solicited public comments on the draft revision of the Government Procurement Law (GPL). The GPL is one of two major Chinese pieces of legislation that deal with public procurement, and was implemented at the beginning of 2003, one year after China’s accession to the World Trade Organization (WTO). The proposed revision would be the first major overhaul of the law, apart from some minor streamlining in 2014. The proposal intends, amongst other things, to align China’s government procurement system with international best practices; an effort which has to be seen in connection with China’s negotiations to join the WTO Government Procurement Agreement (GPA). During negotiations, member states will have to confirm that China’s procurement system complies with the requirements of the GPA. This article by Johannes Weilharter of Schulz Noack Bärwinkel will introduce several highlights of the proposed revision to the GPL and shed some light on their compliance with GPA requirements.

Scope of application

Under the GPL revision, ‘government procurement’ refers to the purchase of goods, projects or services as defined in the ‘centralised procurement catalogue’, provided that they are procured by governmental authorities, public service institutions and group organisations for the pursuit of governmental and public purposes, by using budgetary means or public funds and that exceed certain thresholds. ‘Government authorities’, according to the GPL, include central, judicial and prosecution authorities. ‘Public service institutions’ are defined as nonprofit entities established by government authorities, using state-owned assets, to engage in education, science, culture or similar activities; and ‘group organisations’ refer to political parties or non-profit groups approved by the government.

While nominally covered by the draft revision, construction and planning services are exempt from the GPL insofar as they fall under the Bidding Law (BL). This, strongly simplified, would be the case for construction and design services performed under infrastructure projects, projects in the public interest, and projects financed by the state (such as those involving state-owned enterprises (SOEs) or joint venture (JV) projects in which SOEs hold a controlling stake) that exceed certain thresholds (which are slightly higher than under the GPL). This dichotomy between the GPL and the BL is probably particular to the Chinese public procurement regime; examining the compliance of such dichotomy with the requirements of the GPA would certainly exceed the scope of this article. On a positive note, however, one can observe that SOE projects, while not covered by the GPL, fall under the BL and are thus subject to a public bidding regime.

‘Buy China’ policy

The proposed GPL draft continues to set forth a ‘Buy China’ policy, which requires agencies and procuring entities to purchase—with certain exceptions—domestic goods and services. The exceptions are narrowly drafted and provide for cases where the relevant goods and services are not available in China, cannot be obtained in China at reasonable prices, or are designated for use abroad.

The definition of a ‘local’ product or service is therefore of paramount importance, and is to be provided in regulations to be issued by the State Council. Subject to further indications, one may expect the definition to be made in accordance with rules and regulations on the origin of goods (as in the Regulation of the People’s Republic of China on the Place of Origin of Import and Export Goods), which would open procurement markets to wholly foreign-owned enterprises and JV products. Obviously, the suggested ‘Buy China’ policy finds itself in a sensitive relationship with the GPA’s requirement for national treatment. As the ‘Buy China’ policy appears in the draft legislation as well as in the current GPL, it is fair to expect that it will be retained, but may be waived for procurement covered by the GPA. A similar approach has been adopted by the United States Government in order to uphold its 1933 Buy American Act.

National security reviews

Of potential concern may be a new requirement for a national security review for any procurement that “may affect national security”. The draft stipulates that the GPL shall not be applicable in such cases. At first glance, this may seem contradictory to the GPA, which allows exemptions based on security concerns only insofar as they relate to the procurement of arms, ammunition or war materials; or to that indispensable for national security or national defense purposes. Given the above, the term ‘national interest’ requires further clarification, which is expected to be provided in GPL implementing regulations or other side legislation.

Procurement methods

One of the stated goals of the draft GPL is to improve the reglementary framework for the different methods of procurement, such as open tendering, selective tendering, competitive negotiation, single-source procurement and framework agreements. In light of this goal, the revision prohibits the use of any procurement method likely to prevent or restrict suppliers from entering a certain procurement market. This requirement is highly commendable and serves to realise the principles of openness and transparency, fair competition, justice, honesty and trustworthiness – which are likewise inherent to the new draft. Given the aforementioned ‘Buy China’ policy, the economic effect of such prohibition must, however, be taken cum grano salis. 

Conditions for participation

Consistent with the GPA, the revised GPL would require suppliers participating in a government procurement bid to have the ability to undertake the relevant project. The procuring entity can stipulate the requirements and conditions that all suppliers must meet in order to qualify to bid for a project, but must “not subject the supplier to differential or discriminatory treatment” based on unreasonable conditions such as location and ownership. The proposed GPL revision’s conditions for excluding a supplier from a procurement, such as failure to pay taxes or illegal acts, correspond to the GPA.

Tendering period

The draft revision sets a minimum 20-day bidding period (between issuance of bidding documents and bid deadline), allowing for a reduction to 10 days in certain cases. This contrasts with the GPA’s 40-day minimum requirement, which can be reduced to 25 days if electronic procurement is used, or 13 days for commercial goods and services.

Dispute settlement

The proposed draft permits a supplier that believes the procurement documents, shortlisting, selection of the winning supplier or other parts of the process, have harmed its rights and interests to raise its concerns with the procuring entity or bidding agency, which must answer within seven business days. If the bidder is unsatisfied with this reply, it can file a complaint within 15 business days with the supervising agency, which shall then decide on the matter within a further 30 business days. The supervising agency may suspend the ongoing procurement procedures during this time. Complainants may file a lawsuit at the competent People’s Court to appeal the decision of the agency. In this respect, it is noteworthy that, during conclusion of the contract, a lawsuit may also be directly filed at the People’s Court. The claimant should inform the supervising agency of its suit, upon which notice the agency will stop handling the complaint.

The relevant provisions seem to suggest that complainants are not obliged to wait for the decision of the supervising agency before applying for judicial help, or may even do so in circumvention of the supervising agency. The said provisions will require further clarification in the implementing regulations; subject to the promulgation of such legislation, it is, however, imaginable that such direct access to the Courts shall enable the issuance of injunctions and other interim measures.

Conclusion

Overall, the proposed revision would create a modern law which brings China’s procurement system close to overall compliance with GPA requirements. This process could be further enhanced with implementing regulations that clarify many of the aforementioned aspects. Whether the GPL opens a new chapter in the book of international trade of goods and services will depend on the further talks regarding China’s current offer for accession to the GPA.

Schulz Noack Bärwinkel is an independent German law firm with a strong focus on Asian markets and offices in Hamburg, Shanghai and Ho Chi Minh City. Through a co-operation, the firm is also represented in Jakarta. SNB was founded in 1929; in 1995, it was the first German law firm to open an office in Shanghai. The firm focuses exclusively on business law, with a high degree of specialization and is marked by its in-depth knowledge and many years of experience in the fields of Intellectual Property Rights protection, company law/M&A as well as construction & real estate.