Taiwan's Government Procurement - Ready to Open the Market?

Taiwan's Current Government Procurement Regulatory Framework

Background

Before 1999, Taiwan had no laws regulating government procurement, nor did it have an agency to administer such purchasing. The only guidelines for government purchasing were administrative directives issued in 1950, the Working Rules for Matters related to Construction, Maintenance and Purchasing Activities by Government Authorities and the Important Points for the Executive Yuan and its Agencies with respect to the Tender Procedures for their Maintenance and Construction Projects. Based on these directives, each purchasing agency formulated its own purchasing by-laws, resulting in 28 sets of guidelines, to regulate matters regarding their purchasing activities.

To prepare for its entry into the World Trade Organization, Taiwan started to draft a government procurement law in 1992. However, for political reasons and due to the urgency of the proposed high-speed railway project, a law regulating BOT infrastructure in the transportation field, the Statute for Encouragement of Private Sector Participation in Transportation Infrastructure (the Transportation Statute) was enacted, prior to a government procurement law in 1994. It was not until four years later that a law regulating government procurement activities, the Government Procurement Law (中华人民共和国政府采购法) (the GPL), was promulgated. When the GPL took effect in May 1999, all the by-laws formulated by individual government agencies were abolished and the Public Construction Commission (PCC) was established under the Executive Yuan to administer the GPL and all matters related to public construction work and government purchasing.

The Law sets out the mechanisms for all government purchasing works in Taiwan. Of particular interest to foreign contractors is a regulation enacted to implement the GPL provisions with respect to matters related to foreign bidders, the Rules Governing the Treatment of Foreign Bidders with respect to Procurement Projects not Regulated by Treaties of which Taiwan is a Party (the Rules). The Rules were implemented in 1999 soon after the promulgation of the GPL to incorporate the WTO Agreement on Rules of Origin into Taiwan's procurement regulatory framework. The Rules set out how the Taiwan government treats foreign bidders in a government procurement scenario and provide a definition of "foreign bidders". Certain restrictions apply where foreign bidders are concerned in a project. Such restrictions would be waived if the foreign bidders so concerned were considered as bidders from GPA countries. If a foreign bidder were considered as such, then the purchasing agency would need to treat them in accordance with the terms and conditions of the GPA. The Rules first define "foreign bidder" as any individual without ROC nationality or legal entities, organizations and associations incorporated and registered under foreign laws. Bidders from non-GPA countries would be excluded from all procurement projects that are not within the jurisdiction of the GPA. However, if a bidder incorporated and registered in a country that is a GPA member country provides materials or labour (for the project) from a non-GPA member, then such a bidder may also be considered a non-GPA bidder. The Rules define the nationality of the materials and labour as the country of origin of the materials and the individual labourers. Further, where materials and labour are from difference sources, their country of origin would be the country that supplies the highest percentage of labour and materials. For example, if 51% of the labour and materials provided by a bidder incorporated and registered in the US comes from Australia (a non-GPA country) and 49% from the US (GPA), then this bidder would be deemed to be from a non-GPA country.

According to the PCC, the Rules are enforced by prescribing limitations on the use of materials or labour from non-GPA countries in the tender document. If a contractor is later found to be violating the terms of the tender document by using materials or labour over the limit prescribed by the tender document, the contract can be rescinded and the bond forfeited.

The Transportation Infrastructure Statute

Under a BOT arrangement, a private sector group builds a public-use project, operates the facility for a fixed period of time, and then transfers it to the government. The Taiwan government has been criticized on numerous occasions for the troubled course of the BOT projects that have been put up for bid so far. To a large extent the problems can be attributed to the rapid shift from a system of purchasing directives based on patronage to an integrated approach that encourages private sector participation in large-scale revenue-generating projects. After 50 years of fragmented and idiosyncratic management, the impact of the new approach cannot be understated; Taiwan lacked the experience to be able to hit the ground running. The difficulties were further compounded by the ambiguities and inconsistencies of the BOT regulatory regime. The Transportation Statute enacted in 1994 was intended to be a temporary measure, enabling the High-Speed Rail project to proceed before a comprehensive BOT law could be adopted.

Because the Statute covers only transportation infrastructure projects, a more comprehensive law governing BOT projects was needed. In February 2000, Taiwan enacted the Law for Promotion of Private Participation in Public Infrastructure Projects, commonly known as the BOT Law. We can now examine this law and describe the implications for foreign contractors.

The BOT Law

The BOT Law largely follows the principles of the Transportation Statute, and applies them to all large-scale build-operate-transfer projects, including:

• · metropolitan mass rapid transit systems, railways, freeways and highways;
• · recreational facilities with an investment per project of over US$10 million by the government sector or over US$20 million by the private sector;
• · power plants and power transmission/distribution systems with an investment over US$66 million; and
• · electricity supply, telecommunications, water supply, natural gas supply and sewers with underground pipelines over two kilometres in length.

To attract private sector investment, the BOT Law allows the government to offer financial and tax incentives, including a five-year tax holiday, "reasonable" discounts on land, housing and contract taxes, up to a 20% tax credit on expenses for R&D and equipment used for a BOT project, exemption from import duties on equipment for project use, and government assistance in obtaining bank loans and acquiring public and private land for project use. The BOT Law also provides that "for matters not specified in the relevant concession agreements, the provisions of the BOT Law that are more favourable to the private institution concerned may apply". Based on the plain language of the law, this should mean that the private institution concerned should be able to take advantage of provisions in the BOT Law to help them interpret ambiguous terms and conditions of their concession agreement or to regulate their responsibility and right with respect to the project if they are not addressed adequately by the concession agreement.

In response to criticism that the government was slow to initiate public sector projects, the BOT Law allows contractors to initiate and submit their own infrastructure project proposals and apply with the relevant authority for approval. This "unsolicited proposal" provision has attracted a great deal of attention and interest among foreign contractors. Although the Transportation Statute provided a similar provision, there were no implementing regulations until March 2002 when the Guidelines for Evaluation of Unsolicited Proposals by the Arranging Authority (the Guidelines) were enacted. The government expects this new public-private partnership approach to attract foreign expertise and capital and reduce infrastructure-planning costs.

Under the Guidelines, a company may bring a preliminary plan to the authority for approval. Once the plan is approved, the company then bears the expenses and risks of drafting the proposal, but earns the exclusive right to negotiate with the government sponsor in formulating that proposal, which will be opened to competitive bidding, as is typical in a BOT approach. The company may be awarded the right to match a lower competitive bid or receive favourable bidding terms. The company may also negotiate a price for its intellectual property right before the government authority publishes the approved plan and opens the tender to the public. A confidential agreement can be signed between the parties to ensure that the government authority does not disclose any information related to the proposal to a third party. This process is generally viewed as favourable to foreign contractors, as it is not subject to the Government Procurement Law, which has been criticized for imposing high levels of liability in many instances and allowing only a short bid preparation period for foreign contractors.

Implications for Foreign Contractors under the BOT Law and the Government Procurement Law

On a practical level specifically related to foreign contractors, BOT projects are open to all foreign bidders as the BOT Law does not place any ceiling on foreign ownership of qualified bidders, nor has the government announced any restrictions on foreign ownership in a project company. The authority in charge of the project has the discretion to re-set the foreign ownership restriction for projects that are subject to such restrictions under other laws. Foreign contractors may also form a BOT partnership with the government under the "unsolicited proposal" approach.¹ In fact, the government has recently announced that it will target foreign contractors to bid for large infrastructure projects. The PCC has announced its commitment to make all BOT-related information accessible to foreign bidders. It is preparing English translations of all procedural rules, and implementing regulations related to BOT Law, it will create a procurement information website for market information, product classifications, and a database of construction materials and equipment prices. A special BOT Promotion Taskforce has been created by the Executive Yuan to promote BOT projects. Further, the PCC is committed to working closely with the Ministry of Economic Affairs and the Ministry of Foreign Affairs to publicize proposed BOT projects in Taiwan overseas. Recently it was reported that the PCC is proposing to change the BOT Law to allow town and municipal councils to privatize their public infrastructure projects by way of BOT or operate-transfer (OT) schemes. Once the proposed amendment is passed, contractors of BOT projects awarded by municipal councils would be able to enjoy five-year tax holidays, various tax exemptions and low interest loans under the BOT Law.

Other developments have also taken place on the government procurement front that are welcomed by foreign contractors. The GPL was amended in February 2002 to include certain changes that would enable foreign contractors to participate in procurement projects with more flexibility. The principles of protecting the public interest, fairness and reasonableness apply to the entire procurement process, whereas the old law applied them only to the execution of procurement contracts. For all tendering procedures, an agency shall prescribe a reasonable time limit for submission of tender. The previous14-day time period between the date of publishing a notice or of an invitation to tender and the deadline for submission of bids was replaced by a requirement that a reasonable time limit be set. A bid protest or complaint can be filed with PCC's Complaint and Review Board only if it arises out of the invitation to tender, the evaluation of a tender, or the award of a contract. Disputes related to contract performance and the inspection of projects, previously allowed under the jurisdiction of the PCC, now must be resolved via arbitration or civil procedures. The PCC or an independent arbitrator can handle arbitration. Where a contractor files an application for arbitration, the purchasing agency must agree. A PCC review decision is treated as an administrative petition and carries the force of an administrative court decision.

Can Contractors Use PRC Suppliers/Subcontractors for Taiwan Projects?

Under the PCC's proposed draft Guidelines for Agencies to Allow PRC Suppliers in Procurement, a contractor may not pledge any portion of procurement to a subcontractor of PRC nationality. Further, where a tender document specifically prohibits PRC subcontractors, subcontracting a portion of the procurement to a PRC supplier would not be permitted. However, a purchasing agency would be required to accept goods or labour of PRC origin if they are lawfully imported into Taiwan. Based on the official view, whether PRC investors are allowed depends on the requirements of each project, as the laws do not explicitly and absolutely prohibit participation by PRC nationals. Further, once the PRC becomes a signatory to the GPA, the terms of the GPA would compel the Taiwan government to allow PRC bidders to receive national treatment in a project approved under the GPL. If PRC investors are otherwise refused participation by other laws for a specific project, it appears that the GPA national treatment provision would not apply. Another scenario is where a concession is awarded to a foreign contractor, which is later taken over by a PRC company; how will the Taiwan government respond in this type of situation? Taiwan has enacted the Law Governing the Relationship between People between the Straits to regulate the activities of PRC companies and individuals in Taiwan. Under this Law, companies with PRC shareholding of more than 20% are prohibited from carrying on business in Taiwan. It is thus obvious that a greater compatibility between laws is required to ensure consistency in the regulatory environment governing government procurement.

The Future

Taiwan enjoys a significant and growing construction and government procurement market, which is estimated at US$3 billion per year. Among the larger publicly subsidized projects in process, a 345-kilometre high-speed rail system and a 101-storey Taipei office tower are rapidly advancing toward completion, and several large shopping centres are also underway. Despite enactment of the Government Procurement Law in 1999 and the scheduled Government Procurement Agreement in March 2003, a major WTO-related international treaty, it will doubtless take some time to work out the implementing regulations and put them in place. Until then, foreign contractors are likely to encounter many of the difficulties that the new laws are intended to remedy.

While Taiwan has been moving ahead with its ambitious development programmes, its construction and procurement practices have been criticized for not being up to the standards of other advanced markets. Bidding qualifications often favour local over foreign experience. Deadlines can be short, and procedures can be unclear. Terms and conditions often are vague and inconsistent, may appear to allocate all risks to suppliers, and may fail to cap consequential damages. In response to such criticism, Taiwan has made significant changes to its procurement-related legislation, which aims to provide a level playing field for foreign contractors. It is therefore particularly important for foreign bidders to keep up to date on the latest regulatory changes and be familiar with unwritten local practices.

On the other hand, foreign investors require predictability, consistency and unambiguous language before making a business decision related to Taiwan. If the Taiwan government is serious about increasing the participation of reputable international firms and upgrading the quality of infrastructure projects, provision of tender documents in English, clear interpretation of relevant laws and regulations, specifically defined model contracts, fair and equitable commercial terms and knowledgeable government decision makers will all be needed to facilitate the procurement process. These remain the challenges that Taiwan faces after joining the GPA.

Endnote

1 So far, two foreign multinational companies have had their preliminary plans approved for BOT projects.

By Angela Wu, Yangming Partners Taipei