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2011-04-21 | All chapters

European companies attack Chinese procurement policy
the Financial Times, 20th April,2011

European businesses have accused China of having a public procurement system which excludes foreign businesses and encourages corruption.

“The regulatory framework for government procurement in China is a drag on efficiency and innovation for the Chinese economy as a whole,” the European Chamber of Commerce in China said in a study to be published on Wednesday.

“This represents a missed opportunity the size of the South Korean economy for European business in China”.

The criticism about accessibility to the Chinese public procurement market, which is estimated to be as big as Rmb7,000bn ($1,072bn) comes as Beijing is preparing another proposal for its long-delayed accession to the Government Procurement Agreement, a group of 40 World Trade Organisation members who allow each other’s companies equal access to their public contracts.

The chamber said rules that exclude foreign businesses from public contracts continued unabated in provincial and local government procurement despite Beijing’s pledges to end the practice.

China triggered an outcry from foreign business in late 2009 when it announced that only products with Chinese-owned intellectual property and brands would be eligible for government procurement contracts.

Following widespread criticism, Beijing suspended that policy. However, the European Chamber said that due to Beijing’s decentralised system of government procurement, the practice had continued for the majority of public contracts issued by institutions outside the central government. 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.

Beijing had submitted two earlier two proposals for GPA accession covered mainly the area covered by its Government Procurement Law and virtually excluded state-owned enterprises. Foreign businesses are lobbying for an inclusion, because the narrow sector defined as government procurement by Beijing is estimated at just Rmb700bn, one tenth of the market for public procurement according to international definition.

The chamber said the lack of clarity and central control in the large market under the bidding law encouraged local governments and state-owned enterprises to set contract requirements in a non-transparent way.

“Because the companies drafting such standards are often very large, being shut out from supplying them can have a significant negative impact on would-be suppliers,” the report says.

“These company standards are particularly restrictive to European Chamber member companies aiming to contribute to China’s burgeoning ‘smart grid’ [electricity metering] sector.”

Other examples highlighted in the report included the increasing practice of provincial and city governments and state-owned companies to require suppliers to comply with a new strict set of information security guidelines.

The report said this had led to the exclusion of international firms from government contracts for products such as smart cards, firewalls and secure databases, and discrimination of foreign companies continued to spread on the same grounds to other sectors.

The chamber asked China to try and merge the two laws governing public procurement to make the rules simpler and more transparent.

“We know that public procurement everywhere is an area where corruption can happen. A way to mitigate that is to introduce more transparency,” said Jacques de Boisseson, chamber president.