China's New Government Procurement Law: A Major Step Towards Establishing a Comprehensive System?

Since 1999 several drafts of the GPL have been prepared, discussed and commented on by Chinese and international experts at various symposia held by the Financial and Economic Committee (FEC) of the Chinese National People's Congress (NPC) with the assistance of the GTZ Advisory Service to the Legal Reform in China. The final version of the law will be effective from January 1 2003.

What is the GPL for?

The GPL applies to the acquisition of goods, construction and services with fiscal funds in the PRC that exceed the threshold set by the State Council for central government procurement, and by the respective people's governments for procurement at the provincial level (Article 2 I, II; Article 27 II). Excluded are military procurement (Article 86), so called "emergency procurement" in case of natural disasters (Article 85), and procurement involving issues of national security and state secrets. The circumvention of the threshold by breaking down procurement projects into smaller units is expressly forbidden (Article 28).

The GPL lists "openness", "transparency", "fair competition", "fairness", "honesty" and "good faith" as principles to be observed when conducting government procurement (Article 3). While some of these principles, such as "honesty", "good faith" and "fairness" have no further footing in the GPL to actually implement them, others are backed by provisions that make them more than mere intentions. The vital principle of "transparency" was introduced into the draft GPL on the recommendation of international and Chinese experts, and it is backed by rules on documentation of procurement activities, as well as the obligation to publicize this information (Article 63). For procurement using competitive negotiation and quotation inquiry as methods, and in cases to which the Bidding Law will apply, some transparency is introduced by the obligation to specify criteria for bid assessment in the documents inviting the different forms of tendering. The principle of transparency has, however, lost some of its impact as the right of the parties to acquire information about procurement included in the last draft has not been included in the GPL. The obligation to "announce government procurement information publicly" (Article 11) does not have the same function, as it does not constitute a corresponding right of suppliers to acquire particular information about their special interest.

The GPL distinguishes between "centralized"and "decentralized" procurement. Centralized procurement is conducted by "centralized procurement agencies" on behalf of the procuring entity and decentralized procurement is conducted at the procuring entity's choice by the procuring entity itself, by an intermediary procurement agency (Article 19 I), or by a centralized procurement agency. Centralized procurement agencies are non-profit government institutions set up by people's governments at the level of autonomous prefectures and cities divided into several districts and above (Article 16). Procurement agencies acting as intermediaries are agencies authorized by the relevant departments to conduct certain procurement activities (Articles 18 and 19). In case the subject of procurement is included in the "catalogue for centralized procurement" promulgated by a people's government at or above the provincial level, (i.e., the State Council) (Article 7), the procuring entity has to entrust a centralized procurement agency - not an intermediary procurement agency - of its choice with the procurement procedures.

In the case of decentralized procurement, the entrustment of a centralized or intermediary procurement agency is optional. The use of intermediary agencies remains possible under the GPL, against experts' recommendations; the latter reasoned that the use of intermediaries would not only produce unnecessary costs but also hinder the development of expertise in the relevant government departments. The use of intermediaries is, however, current practice in procurement for construction projects under the Bidding Law, while procurement for other products and services under local legislation is generally centralized. It seems that the reason for keeping both methods is merely that procuring entities are acquainted with this distinction.

To be able to take part in government procurement procedures a supplier has to meet certain qualifications (Article 22). Suppliers have to possess the ability to assume civil responsibility, a good professional reputation and proper accounting system, the equipment and expertise to fulfil the contract, a good record of paying taxes and social security premiums, no record of serious illegal business practices within the last three years, and other requirements stipulated by laws and administrative regulations.

The GPL applies once a government procurement project exceeds the threshold set by the relevant people's government, or the State Council. The GPL provides for five methods of procurement: public tender; bid invitation; competitive negotiation; single-source procurement; and quotation inquiry (Article 26 (1-5)). Further methods can be approved by the government procurement supervisory authority (Article 26 (6)). The main method of procurement according to the GPL is public tender. Only under special conditions that would impede the feasibility of public tender, and upon approval by the supervisory authority, shall other methods be adopted.

Government procurement contracts are generally governed by the PRC, Contract Law (Article 43). The GPL is intended only to regulate the process leading to the formation of procurement contracts.³ It does, however, also contain some specific regulations concerning the procurement contract itself: it empowers the government procurement supervisory authority to stipulate standard provisions for government procurement contracts (Article 45) and allows subcontracting only upon approval by the procuring entity (Article 48).

Further, the GPL establishes a complaint system that must be heeded, as it is the key to effective supervision (as in any procurement system). Unfortunately, in the case of the new Chinese GPL, how the complaint system functions is unclear on various points. The GPL does contain provisions on legal liabilities, however, that can serve a similar function, although to a lesser extent.

SCOPE OF APPLICATION

The main point of concern with regard to the scope of application rests with the treatment of procurement for government construction projects.

The wording of the GPL first includes procurement for construction in the scope of application, but then refers to the Bidding Law for "procurement for government construction projects by means of public tender and bid invitation" (Article 4). It does not give a clear answer to the question of whether construction projects are actually covered by the GPL at all.

Through repeated consultations with members of the FEC drafting group, it was determined that construction is included in the scope of application of the GPL. The reference to the Bidding Law is accordingly only supposed to refer to the procedures of the Bidding Law. Hence, when undertaking procurement for any construction project, the determination as to which method of procurement is to be used will be made according to the GPL. In the case where this method is public tender or bid invitation only, the procedures provided by the Bidding Law will apply. Apart from these procedures, construction project procurement, including the procurement contract, supervision and complaints, are subject to the GPL. But it is unclear if the Bidding Law will apply to construction projects in a case where such a project does not fall under the scope of the GPL but is formally covered by the Bidding Law (for example, in a case where thresholds for the two laws are different). This lack of clarity in wording and interpretation, probably resulting from a dispute among the drafters over the question as to whether construction will be covered by the GPL or not (as well as the fact that two different bodies were responsible for preparing the draft), is very unfortunate and will hopefully be amended by future implementing provisions and interpretations.

DETERMINATION OF SUPPLIER'S QUALIFICATION

With regard to the determination of a supplier's qualification to take part in government procurement, three points have not been addressed in sufficient detail in the GPL: the question as to when and how the assessment takes place; the absolute preference for "national" goods; and the possibility of suppliers forming bidding consortiums.

The GPL does not expressly refer to the procedures for assessing a supplier's qualifications. As all methods of procurement except single-source procurement include a detailed and broad assessment of the different bids involving economic, technical and other relevant expertise, part of the evaluation of suppliers' qualification seems to take place during the final assessment of bids.

While requirements for foreign suppliers were originally laid out in the draft GPL, the final law only refers to "suppliers", which consequently must include foreign suppliers. The GPL does, however, contain a de facto additional requirement for suppliers in the form of the preferential treatment for national goods (Article 10). The State Council will define what constitutes national goods. This is a major difference from the draft GPL, which contained detailed provisions regarding when national goods were to be preferred to foreign goods, and what goods were actually to be considered national. To replace such details with the State Council's determination of a definition is in line with the usual Chinese practice of leaving more detailed regulations to implementing provisions and interpretation by state organs, rather than incorporating the details into a law itself. Another reason for this change is that the drafting of "rules of origin" by the Ministry of Foreign Trade and Economic Cooperation (MOFTEC) is currently under way. These rules of origin shall apply broadly to different legislation, and will introduce certain quotas of national value-added content to different kinds of products and services. These quotas will have to be met for the goods to be considered national.⁴ It is, however, very likely that national products and services will generally include those of foreign investment enterprises (FIEs), as FIEs are legal persons incorporated according to Chinese law. Currently the procurement of "foreign goods" is subject to prior approval, and foreign goods means goods with less than 50% in value-added content from within China.⁵

The GPL only allows a group of suppliers to jointly engage in government procurement when each individual supplier separately meets the qualifications stipulated by the GPL (Article 24). This provision is also contained in the Bidding Law (Article 32, Bidding Law); it was criticized during the drafting of that law and again during the GPL drafting process. Critics have expressed worries that if only those suppliers are allowed to form a consortium that are able individually to meet the requirements, then the free formation of supplier consortia would not come about and there would not be open competition for projects.

The main concern on this point rests with the impact of this provision on small and medium- sized enterprises (SMEs). Effectively, SMEs who individually do not qualify as suppliers because they do not possess all the necessary equipment or expertise have no chance of compensating for this by forming a consortium. They are therefore barred from government procurement. This is curious, as it is a declared aim of China's policymakers to support SMEs, and the Standing Committee of the NPC promulgated a SME Promotion Law at the very same session that the GPL was
adopted.⁶ A provision granting preferential treatment to SMEs contained in the draft GPL did not find its way into the final law.

PROCEDURES FOR DIFFERENT PROCUREMENT METHODS

Even though public tender is expressly declared as the "main method of procurement", the GPL neither includes any definition of what "public tender" shall mean for the purpose of the GPL, nor are any procedures laid down that could govern how public tender shall be conducted. The same problem applies to a lesser extent for the method of bid -invitation. No definition is given for bid invitation and the procedural regulations are fragmentary. Besides the lack of definitions and of clear procedures for inviting tenders by suppliers, the most important shortcoming is the absence of any regulations specifying how the tenders will be evaluated.

Originally the GPL was supposed to refer back to the Bidding Law for the procedures to be followed in case procurement was being conducted by way of public tendering or bid invitation. The idea was that the GPL would only make minor modifications to these regulations. This is the likely reason for the incomplete specifications in the final GPL. These two methods of procurement agree with the two procurement methods in the Bidding Law; public tender corresponds with "public invitation for bids" and bid invitation corresponds to "private invitation for bids" (Article 10, Bidding Law). The general reference to the Bidding Law with respect to those procedures has, however, been removed.

It will be necessary for future implementing provisions or interpretations to fill this gap, as without sufficient procedures these important methods of procurement will not be applicable.

It should be noted, however, that as the Bidding Law contains detailed regulations on the procedures for public tender and bid invitation procurement that anticipated the principles and objectives of the GPL,⁷ it is very likely that future interpretations of the law and its implementing provisions will revert to the Bidding Law's provisions rather create a completely new set of rules.

Apart from "other methods approved by the regulatory authority under the State Council", all the alternative methods of procurement are tailored to apply when special circumstances do not allow the method of public tender to be used. They all provide for specific procedures to be applied for the respective method of procurement.

GOVERNMENT PROCUREMENT CONTRACTS

The government procurement contract is not subject to the contractual freedom of the parties after its conclusion. No alteration or discontinuation is permitted once the contract has been concluded. This provision is mandatory, as any formalized system for the formation of contracts with certain content would be a farce if the contracting parties could amend or discontinue the provisions of such a contract after its conclusion.

A major point of concern is that a discontinuation or termination of the contract is possible on the vaguely stated grounds of the state, or public interest, making such a change necessary (Article 50 II).

The main worry with respect to discontinuation is that the procuring entity might try to avoid liability for breach of contract under the Contract Law by terminating the contract on grounds of state, or public interest being harmed. In this instance, the supplier has no other means but to seek a court decision as to whether the conditions of this provision are fulfilled or if the procuring entity is liable under the Contract Law. Discussions with members of the FEC drafting commission have shown that it is unclear if this kind of conflict will be subject to complaints under the GPL complaint system. However, as the Contract Law applies to government procurement contracts, it seems logical that a regular civil court will deal with this kind of dispute.

With respect to the possibility of amendment of the contract after its conclusion, the obvious worry is that the procurement procedures will be dodged. There should be no possibility whatsoever for the contract once concluded to be amended. In case of a change of circumstances, the only acceptable solution is the discontinuation of the contract and conducting of new procurement procedures.

QUERIES, COMPLAINTS AND SUPERVISION

The financial departments of people's governments are the supervisory authorities for government procurement activities (Article 13). This is contrary to the present situation. In addition, these departments will not be allowed to conduct procurement themselves or to set up centralized procurement agencies (Article 60). Besides the fact that the supervisory authorities are not granted any clear authority to act vis-à-vis the procuring entities and procurement agencies, the criticism has also been levelled that only those procurement activities exceeding the prescribed price standard are to be inspected. With respect to other procurement activities, the supervisory authorities are mainly limited to receiving the audits of procurement activities.

Only in the case of a procuring entity failing to entrust a centralized procurement agency where it should do so (Article 74) or failing to publicize procurement criteria and results (Article 75) can the supervisory authority order the procuring entity to correct its behaviour. In other cases, the authority of the supervisory departments to inspect procurement activities and enforce compliance with procurement regulations is still unclear.

The complaint system is the core of any government procurement legislation and its importance cannot be overestimated, as only the suppliers affected by misconduct or faulty decisions can guarantee effective supervision. In China's case, a functioning complaint system is even more essential given the shortcomings of the GPL provisions on supervision. Unfortunately the GPL complaint system is unlikely to meet the needs we have identified.

The GPL provides for a three step complaint system: an inquiry to the procuring entity (or the procurement agency); a complaint about the procuring entity's response, which is to be filed with the regulatory authority; and an administrative review or administrative lawsuit with respect to the decision made by the regulatory authority. While existing laws govern administrative review and administrative lawsuits, respectively,⁸ the regulations on inquiry and complaint under the GPL do not contain any procedural provisions apart from deadlines for their filing and for responses to be made to such complaints. The lack of provisions for the reasons for any decision to be given to suppliers, and the absence of an automatic mechanism to suspend procurement activities after the filing of a complaint, are major points of concern. Hopefully the implementing provisions will address these issues.

LEGAL LIABILITIES

Regarding supplier offences, the issuing of warnings, orders to correct behaviour and the administration of fines are methods of ensuring compliance with GPL regulations (Article 77). Further, suppliers may be barred from future procurement activities for a period of one to three years, and in serious cases their business licence may be revoked. The procurement may also be invalidated. These measures can be taken regardless of the civil and criminal liabilities of suppliers and their respective representatives.

Intermediary agencies risk the loss of their licence to conduct procurement businesses in the event of offences.

Offences of procuring entities and procurement agencies may result in the institution's civil liability and the respective official's civil liability, as well as administrative and criminal punishment.

Though "curbing corruption" has been removed from the objectives of the law, it is a positive development that accepting (as well as offering) bribes is included in the catalogue of offences entailing these measures.

CONCLUSION

The drafting process that the GPL went through is quite typical of the lawmaking process in the PRC. While the drafts prepared by the FEC drafting commission with the assistance of international and Chinese experts were relatively clear in wording and addressed many critical issues that allowed them to generally provide for feasible solutions, the law finally promulgated lacks many of these qualities. This is mainly because the intention of the drafters was to leave points crucial to the application and effectiveness of the legislation for clarification by implementing provisions and interpretations that can be changed much more easily than the law itself. Still, on the positive side, much of the expertise originally used in the drafting process will hopefully have an impact on the implementing provisions and interpretations, so that feasible solutions to the various points requiring clarification may be reached. Together with such expected implementing provisions, the GPL and the Bidding Law can form the legal basis for the large public procurement projects that China will undertake in the coming years.

The authors work for the GTZ Advisory Service to the Legal Reform in China. This organization, on behalf of the German Federal Ministry of Economic Cooperation and Development, promotes four projects with the FEC of the NPC, the Legislative Affairs Commission of the Standing Committee of the NPC, the Ministry of Foreign Trade and Economic Cooperation and the Ministry of Labour and Social Security. For more information, see its website at http://www.gtz-commercial-laws.org.cn.

Endnotes

1 See Yu An, "Government Procurement and its Legislation in China", China Law, April 2001, pp. 71-75.

2 Promulgated August 30 1999 and effective January 1 2000.

3 See "Comments on Chapter 6 Draft-GPL", at http://www.gtz-commercial-laws.org.cn, Conclusions of the Sino-German Symposium on Public Procurement, July 2001.

4 See Immanuel Gebhardt and Kerstin Olbrich, "Foreign Trade Law in China," Journal of World Trade, 36(1), February 2002.

5 Article 6, Government Procurement Administration Tentative Provisions (zhengfu caigai guanli zanxing banfa).

6 PRC, Small and Medium-sized Enterprise Promotion Law (中华人民共和国中小企业促进法), promulgated June 29 2002.

7 See Tarrant Mahony, "Winning Bids: The New Bidding Law", China Law & Practice, 13(8), October 1999, pp. 31-33.

8 PRC, Administrative Review Law (中华人民共和国行政复议法) (promulgated April 29 1999) and PRC, Administrative Litigation Law (promulgated April 4 1989 and effective October 1 1990).