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GLOBAL ECONOMICS LTD.

Patrick Grady and Kathleen Macmillan
Taming Procurement
from Seattle and Beyond: the WTO Millenium Round (1999), Chapter 5.

The Rules or Lack Thereof

Governments like to think that they are a rule unto themselves. Consequently, government procurement has never been subject to the discipline of multilateral trading rules under the WTO and its predecessor GATT. Under Article III:8 of the original 1947 GATT, it was excluded from the national treatment obligation for goods. More recently, in the GATS negotiated in the Uruguay Round, it was carved out of the main commitments made for services. Since procurement of goods and services by governments and their agencies accounts for 10 to 15 per cent of GDP, this is an important gap in the international trade covered by multilateral rules.

The lack of rules is made even more serious by the fact that government procurement is often not guided by the principle of best value for money as determined by fair and open competition on the free market. Instead, it often results from political decisions made behind closed doors. In most countries, purchasing is frequently used to support local firms and regions. This can be the result of specific prohibitions on foreign suppliers, or various types of preferences. Alternatively, it can result from more insidious measures and practices that deny foreign firms the opportunity to bid on government requirements. These include excessive sole source tendering, tailored technical requirements, and a general lack of transparency.

The first successful international effort to tackle the problem of government procurement was made during the Tokyo Round of multilateral trade negotiations. In the first Agreement on Government Procurement that entered into force on January 1, 1981, a select group of participating countries offered to open up their procurement opportunities to other countries in return for access to their procurement markets. This agreement was plurilateral rather than multilateral meaning that, unlike most of other GATT agreements, it only applied to countries that specifically signed on to the agreement.

The WTO Agreement on Government Procurement, which came into effect on January 1, 1996, is based on the earlier agreements, but expands the scope of coverage to include some services and construction as well as goods by specified public entitities. Purchases of goods and services over SDR 130,000 (over $250,000) by governments and agencies are covered and purchases of construction services over SDR 5 million (or around $10 million).

The GPA provides an opportunity to bid on more than $250 billion per year in government contracts. The total value of contracts won by foreign supplies covered by the agreement was US$30 billion based on information collected for the 1990-94 period. The juxtaposition of the large opportunities with the modest results shows that, even with the GPA, foreign suppliers are only getting a small share of the government procurement market.

There are now 26 GPA member countries, including Canada, the United States, the European Union and Japan, 15 observer governments, and two observer international organizations.

The foundation, on which the Agreement on Government Procurement rests, is the simple, but powerful, principle of non-discrimination or national treatment, which means that member countries are required to give the goods, services, and suppliers of other members treatment that is "no less favorable" than they give their own. To ensure that there is no discrimination, the agreement sets out procedures for providing transparency of laws, regulations, procedures and practices governing procurement. It also establishes norms in respect of technical specifications and tendering procedures and prohibits offsets. Finally, it requires member countries to establish formal bid challenge procedures.

The GPA is not the only procurement agreement to which Canada is a party. The rules governing procurement among Canada, the United States and Mexico are also covered by Chapter 10 of the NAFTA. And government procurement relations between Canada and Chile are subject to the Canada-Chile Free Trade Agreement.

Signatory Member Countries of Agreement on Government Procurement
AustriaGermanyKoreaSingapore
BelgiumGreeceLiechensteinSpain
CanadaHong KongLuxembourgSweden
DenmarkIrelandNetherlandsSwitzerland
EUIsraelNetherlands for ArubaUnited Kingdom
FinlandItalyNorwayUnited States
FranceJapanPortugal
Observer Governments
ArgentinaChinese Tapei*LatviaPoland
AustraliaColumbiaLithuahiaSlovenia
BulgariaEstoniaMongoliaTurkey
ChileIceland*Panama
*Negotiating Accession
Observers - International Organizations
IMFOECD

Limitations of the Agreement

There are important limitations to the scope and coverage of the Agreement on Government Procurement. As a plurilateral agreement, it only applies to member countries and then only to procurement by specified government departments and enterprises, and non-central levels of government. Moreover, it covers only specified goods, services and construction services, above specified monetary thresholds. The rule is if it's not specified, it's not covered.

The first limitation is that membership in the Agreement has so far only embraced the major industrialized countries. No developing countries have yet joined, although some are observers. The developing countries usually have the most discriminatory procurement practices, either out of misguided efforts to promote economic development or out of simple corruption. Consequently, they're the ones that need to be brought under the agreement the most, both for their own sakes as well as for everyone else's. Their taxpayers would benefit from lower cost goods and services, and other countries would benefit from expanded markets. The United States is pushing to extend the AGP to all WTO members.

The second important limitation is peculiar to Canada. It's Canada's lack of access to procurement of non-central levels of government under the agreement. Since the Canadian Government was not prepared to make commitments with respect to Canada's provincial and local government procurement, other countries are allowed to have derogations from Most Favoured Nation (MFN) status for Canada with respect to their own sub-central government procurement. Canadian exporters are thus not able to benefit fully from the Agreement in obtaining access to procurement by non-central levels of government in other member countries.

Motivated in part by worries about opening up procurement in the health and education sector to foreign suppliers, the Canadian provinces refuse to go along with any deals negotiated by the Canadian Federal Government that allow the Americans to retain Buy American and small business carve-outs. But this may just be an excuse to say no.

It is particularly ironic that Canada, which has a preferential trading relationship with the United States under the NAFTA, has less favorable access to state and local government procurement in the United States than other countries such as the European Union and Japan, which have no such special trading arrangement. Canadian suppliers have their provincial governments to thank for this.

The third important limitation pertains to the scope and coverage of the Agreement that is set out in the general notes provided in the appendix of each signatory. Important listed exclusions include urban transportation and defence, and set asides for small and minority businesses.

There are also technical problems with the Agreement. Many of the procedures specified are unnecessarily complex and need to be updated to reflect the way business is currently being done using computers and modern telecommunications. For instance, the forty day period for tendering is considered unduly long now with computerized bidding for many goods and services, and the requirements that invitations to participate in an intended procurement be published in a listed publication and that "tenders normally be submitted in writing directly or by mail" are not consistent with computerized procurement systems. Accepted modes of transmission of information in the Agreement need to be brought into the information age and should include e-mail.

A review of the Agreement on Government Procurement as required under Article XXIV:7 is currently underway in the WTO Committee on Government Procurement, which is made up of representatives of signatories of the Agreement, and is scheduled to be ready early in the fall of 1999. The review is aimed at simplifying the administrative rules in the Agreement and making them consistent with current business practice. It is also seeking to cover more procurement and to eliminate "discriminatory measures" or exceptions to coverage. An effort is being made to complete these negotiations before the Seattle Ministerial. These improvements are expected to increase the attractiveness of the GPA to other prospective new members.

The Canadian Government, under pressure from the provinces, has been preoccupied with bilateral Canada-US issues in government procurement. These include Buy American provisions and the small business "set-asides." This is how they work. In the United States, the Federal Government often provides funds to state and local governments requiring that the money be must spent on suppliers and products that have a certain minimum proportion of US content. This is allowed under both the GPA and the NAFTA because it is not a direct purchase of the Federal Government that is covered by the Agreements. For example, the Transportation Equity Act for the 21st Century (TEA-21), which provides financing for transit, highway and airport projects carried out by state and local governments and private sector organizations, has Buy American provisions that require all steel and manufactured stock to be 100 per cent American content and all rolling stock to be 60 per cent American and assembled in the US.

The small business "set-asides" are Federal Government procurement preferences in the United States that reserve a certain proportion of government contracts for small business. These set asides are large, amounting to 23 per cent of the Federal Government's contract budget, and have usually been met or exceeded. And the US businesses benefitting are not so small either by Canadian standards, having as many as 500 employees in manufacturing (even 1,500 in some sectors) and revenue of up to US$17 million in services.

Without assurances that the Americans will eliminate, or at least reduce, such discriminatory measures, the provincial governments have been unwilling to make commitments with respect to the procurement under their jurisdiction. These provincial government concerns are understandable. But, without the ability to commit provincial government procurement, the Canadian Government has come under heavy fire in the WTO Committee on Government Procurement for failing to deliver on its own commitments in its Annexes 2 and 3 of the GPA to cover procurement under provincial jurisdiction. Canada's response to this criticism is that these commitments were conditional on getting commitments from the provinces, and, since no such commitments were received, there was no obligation to make an offer under these Annexes.

Regardless of who is right or wrong, the result is still the same: Canadian suppliers are deprived of preferred access under the GPA to the procurement market of sub-central levels of government in the other signatory countries. In addition, Canada's inability to get agreement from provinces to make procurement commitments is a major embarrassment that makes it difficult for the Canadian Government to provide the necessary leadership in the government procurement negotiations leading up to the Seattle Ministerial and that will undermine its credibility at the bargaining table.

The GPA has been important in opening up the large government procurement market of the major industrial countries to suppliers from other countries. Extending the Agreement to other, particularly developing, countries and improving its functioning is important for the future of the international trading system. The industrialized countries that are members of the GPA need to push harder to get developing countries, particularly the newly acceding countries, to join the GPA.

If Canada is to play a key role in negotiating a new strengthened Agreement on Government Procurement that will open up sub-central procurement markets in other countries to Canadian suppliers, federal-provincial cooperation is absolutely essential. The Canadian federal and provincial governments need to sit down and come to an agreement that will enable the Canadian Government to offer access under the GPA to provincial procurement in return for access to sub-central levels of procurement in other countries, including at the state level in the United States.

Disputes under the GPA

There have been three disputes under the new GPA. The first one dealt with Japan's procurement of a navigation satellite. On March 26, 1997, the European Community requested consultations with Japan regarding a Ministry of Transport procurement tender to purchase a multi-functional satellite for the installation of a navigation system for air traffic management. The EU complained that the specifications referred specifically to a US satellite based system called MTSAT Satellite-based Augmentation System (MSAS) and consequently discriminated against European companies that supplied another comparable system called the European Geostationary Navigation Overlay Service (EGNOS). Consultations resulted in a mutually agreed solution for the establishment of technical cooperation in the field of interoperability to produce a global seamless navigation system, thus ending the dispute. Requirements for interoperability will have to be mentioned in all future procurement starting in 1998, provided that it proves feasible.

The second dispute concerns the complaints of the European Union and Japan about a Massachusetts state law that prohibits state authorities and other state entities from procuring goods and services from anyone doing business with Myanmar (Burma), a country with a particularly odious human rights record. The request for consultations and the establishment of a panel was made in June 1997. As a US court case was underway, the panel did not report according to the normal timetable. In February 1999 following a US court ruling barring the implementation of the state law at issue, the European Union and Japan requested that the panel suspend its work. Unless the US court decision is overturned, the dispute appears to be resolved.

The third dispute, which was launched in February 1999 and is still underway, concerns the Korean Government's procurement practices in the construction of the new Inchon International Airport. More specifically, the United States contended that four particular practices were inconsistent with Korea's obligations under the GPA: requirements that prime contractors must have manufacturing facilities in Korea; requirements that foreign suppliers partner with Korean firms; the absence of access to challenge procedures; and bid deadlines that are shorter than the GPA-required 40 days. During the consultations, Korea asserted that the entities responsible for the procurement were not covered by the GPA. Consequently, in May 1999, the United States requested that a panel be established. The panel is now underway with an interim report due before the end of the year.

A fourth dispute relating to government procurement practices is also brewing. The United States is considering making a complaint against Japan concerning Japanese government construction contracts. It particularly irks the Americans that a Japanese company is building the ne Los Angeles subway, while their construction companies are shut out of Japanese governmental markets.

The disputes show that governments are starting to exercise their rights and obligations under the GPA. At least for the countries covered, the Agreement is beginning to impose significant discipline on government procurement.

Transparency in Government Procurement Agreement

In an effort to make government procurement practices more transparent, the United States proposed at the Singapore Ministerial in 1996 that a Working Group on Transparency in Government Procurement Practices be established. The purpose of this Working Group was "to conduct a study on transparency in government procurement practices, taking into account national policies, and based on this study, to develop elements for inclusion in an appropriate agreement." In contrast to the plurilateral Agreement on Government Procurement, this is a multilateral exercise aimed at achieving a WTO agreement on transparency. The intention was that the text of such an agreement could be ready for the Seattle Ministerial and that it could possibly be part of an early harvest of the negotiations.

The objective of an agreement on transparency is the worthy one of making certain that potential suppliers are provided with adequate information on the rules governing particular tenders. This allows suppliers to make an informed decision on whether or not to participate. This would save much wasted and frustrated effort by suppliers who never really had a chance to be selected under existing rules, but who didn't have enough information to know this in advance.

The information that would have to be published should at a minimum include: notices of procurement; policies and procedures; laws; evaluation criteria; contract awards; reasons for sole source procurement; bid challenge provisions for suppliers; and dispute settlement provisions for countries. While it is understood that a transparency agreement would not require countries to change preferential or discriminatory policies, at least it would make the rules clear for everyone.

The transparency agreement should apply to all levels of government, non-central as well as central. Again the Canadian Federal Government and the provinces, with the shared objective of increased transparency, need to cooperate if Canada is to offer a unified and credible front in the transparency negotiations.

A transparency agreement is a useful step in the direction of a multilateral Agreement on Government Procurement to replace the current plurilateral one. Once governments become accustomed to transparent procurement, it may not be as difficult to convince them to go the rest of the way to non-discriminatory procurement on a multilateral basis.

A transparency agreement will also help to combat corruption and related practices in government which is a big problem in some countries where government procurement decisions are often influenced by bribes or favouritism of one sort or another. The twenty-nine OECD countries have already entered into a Convention on Combating Bribery, which took force in February 1999. Under this Convention, OECD countries have agreed to cooperate in adopting and enforcing national legislation making it a crime to bribe public officials. This is good as far as it goes, but action also needs to be taken in the countries where the bribes are being received to make sure that the offending officials are punished.

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