Lutnick to Lead Commerce, a Final Biden-Xi Meeting, and USCC Supports PNTR Repeal
Despite progress in regulating government procurement, issues of transparency and enforcement remain problematic. China’s government procurement policies—regulations that govern how and what products can be purchased using public funds—have been a source of controversy in recent years, both for their connection to protectionist policies and their influence over China’s accession to the World Trade Organization’s Agreement on Government Procurement (GPA). China’s public procurement market has grown 10-fold over the last 10 years to $180 billion, and analysts expect that growth to continue. While government statistics put the size of the Chinese market at less than half of the US government procurement market covered under the GPA, these statistics do not take into account the significant purchases by China’s giant state-owned enterprises (SOEs).
Market access to China’s public procurement market remains a vital issue for international companies that do business in China. In the summer of 2012, the US-China Business Council (USCBC) interviewed more than 20 member companies from a broad range of industries to learn more about the current realities of China’s public procurement market. USCBC staff members asked a series of questions concerning the tendering and bidding process, the challenges companies face in navigating the system, and the best practices they use to overcome those challenges to sell into China’s public procurement market.
Until the turn of the century, there was no legal framework at the national level to regulate government purchases. Now, a series of Chinese laws and regulations have created the public tendering and bidding process, which in most cases has improved transparency in China’s public procurement market.
Despite progress, there are significant problems that continue to plague China’s public procurement system, which have a negative impact on competition for international and domestic companies alike. Fractured administrative authority and dispersed markets make China’s public procurement market difficult to navigate and compromise the ability of Chinese government agencies to obtain high-quality products. USCBC interviews showed, however, that there are a group of foreign companies that are successfully selling to government agencies and SOEs in China.
Unlike GPA signatory countries, which have a unified framework to govern all public procurement that occurs within their borders, China has two sets of laws that govern public procurement: the Tendering and Bidding Law (TBL), which was issued in 2000, and the Government Procurement Law (GPL), which was issued three years later. Each law is regulated by a different agency and covers different types of industries and end-users (see Figure 1).
The TBL can be traced back to a State Council measure in the 1980s to promote competition among SOEs. The measure introduced a tendering and bidding system for construction and public works projects. Several localized systems emerged throughout China in the 1980s and early 1990s. Though these systems were successful in introducing market mechanisms and reducing corruption in government purchases related to construction projects, they also led to a fragmented system. As the deficiencies in the system became apparent, there was a push in the 1990s to create a national law that would have authority over the various local regulations. In 2000, the State Development and Planning Commission (the predecessor to today’s National Development and Reform Commission) implemented the TBL. With its historic roots in the State Council’s regulation on the tendering and bidding process, the TBL maintained a similar focus on construction and public works tendering, covering all projects whose value exceeds ¥500,000 ($79,400), regardless of whether the end-user was a public agency or private company.
The GPL developed separately as a result of the rampant corruption in government purchases that occurred after China’s market reforms in the late 1970’s. Fiscal and tax reforms of government agencies were the first steps in implementing stricter regulations on the use of public funds. By 2000, the Ministry of Finance (MOF) had developed a fuller regulatory framework for government procurement of goods and services, and MOF published a series of ministerial orders regulating purchases made by government agencies. In June 2002, the National People’s Congress passed a national GPL, which omitted state-run hospitals, public schools, and social and sports organizations.
Goods and services covered under the GPL are listed in China’s centralized government procurement catalogue as well as local govern-ment procurement catalogues. The catalogues use broad terminology to cover a host of products, making it simple for any company’s product to fit into the catalogue system and become eligible for purchase.
Chinese regulations clearly lay out the tendering and bidding processes, which vary slightly by end-user, the size of the bid, and the industry involved. Though the tendering and bidding process has improved since the 1990s—when a company’s ability to retain a government contract was largely based on relationships—companies have varying opinions on the current state of tendering and bidding in China.
The creation of national laws governing procurement and bidding as well as a more formalized process has been a positive development that has been welcomed by many company representatives. However, many interviewees stressed that continued protectionist tendencies by local governments and a lack of rule of law undermine any progress that has been made. Unwritten quotas on the purchase of domestic products and the lack of a meaningful system to challenge unfair selection decisions make well-crafted legislation meaningless in practice, and hurt the ability of foreign companies to compete on a level playing field.
Many of the challenges in navigating China’s tendering and bidding process are inter-related. General issues of government transparency contribute to other major concerns, such as price pressures and internal compliance.
Transparency
Company representatives noted improvements in transparency in China’s public procurement system. Many pointed out that large SOEs and central government agencies have strong incentives to comply with regulations to maintain a good image with suppliers, international and domestic regulators, and the public at large. But transparency is still a primary issue of concern for most companies at the local and provincial level.
Transparency issues can take many forms. Multiple firms stated that under-the-table deals occur between certain end-users and suppliers that come from both China and other countries with more relaxed anti-corruption laws than the United States. Others complained of a term coined as “local branding,” an off-shoot of China’s indigenous innovation policies, a set of industrial policies focused on aiding Chinese companies to become internationally competitive by creating and holding their own intellectual property rights. Local branding in practice means unwritten quotas are passed down to local government agencies, requiring agencies to purchase brands that are wholly Chinese owned. The tendering and bidding system also lacks a functioning appeals system. Nearly all foreign companies said that challenging a review panel that makes the decision on who wins the bid was not practical because winning such cases are rare, and even a win might come at the cost of upsetting a future customer. Without the ability to appeal decisions, review panels and end-users have little incentive to keep detailed records of how they make a decision.
Price pressure
Chinese review panels evaluate products by price, quality, and life-cycle costs to pick the most valuable product for purchase, but company representatives say government agencies usually end up choosing products at the lowest price to meet budget targets. Multinational companies have no ability to compete in such an environment, and say they would benefit from clearer standards for calculating review criteria.
Domestic content
The lack of clearly defined domestic content regulations also continues to be a challenge for multinational companies. Domestic content regulations should establish a clear definition of what is considered a “Chinese product.” Many foreign firms manufacture products in China, hire Chinese employees, and source many materials locally. The PRC government has yet to release domestic content regulations, however, leading some government agencies to mistakenly interpret a domestic product by the company’s country of origin. MOF has stated that it will release final domestic content standards by the end of 2012, but the regulations still had not been released before this article was published.
Despite these problems, there are a series of best practices that companies can follow to mitigate challenges and sell successfully into the public procurement market in China.
Stakeholder outreach
Developing relationships is vital to any business endeavor, both in maintaining long-standing customers and educating potential customers about the benefits of the company’s product. Practices for stakeholder relations varied among companies, but most companies adhered to several general principles:
China has made progress over the last 20 years in creating a more structured public procurement system, but issues with transparency and gaps in regulation cannot be overlooked. Discrimination against foreign products that are locally sourced and produced continues to be an issue, both through discriminatory standards written before the tendering process begins, or through de facto quotas that force local governments to buy local products even when they would prefer to invest in a higher-quality item produced by a foreign company.
Some companies, however, continue to profit from selling into China’s public procurement market. The strategies they employ will likely be even more useful as China moves to improve transparency and decrease discrimination in preparation for a legitimate accession offer to the GPA. Patient and consistent outreach to key stakeholders combined with strong internal communication and a focus on key markets can help more companies as they attempt to navigate China’s public procurement market.
[author] John Lenhart ([email protected]) is a manager of business advisory services at the US-China Business Council (USCBC) in Beijing and Kyle Sullivan is a former manager of business advisory services at USCBC in Shanghai. [/author]