As India gets on way to make significant changes to her government contracting frameworks, it may be worthwhile to survey international practices on two important aspects of domestic preferences in public procurement, namely: (a) the participation of foreign bidders in domestic public procurement markets; and (b) the treatment of non-government actors such as state-owned enterprises (SOEs) - or PSUs as we know them in India - under national government procurement laws.
With regard to the first aspect, the general principle, internationally, is to allow foreign bidder participation only to the extent obligated under a country’s treaty or bilateral trade pacts, or to progress global procurements only to the extent that domestic capacities are unavailable. France, for instance, has a law requiring public contracts to be split, and global procurements can be pursued only if contract splitting is not possible for the benefit of domestic suppliers. Canada - a founding member-state of the WTO’s plurilateral Agreement on Government Procurement (GPA)—saw an interesting ruling by its Supreme Court in 2009, when foreign bidders were denied the right to challenge public procurement decisions, even as Canada’s procurement system allowed them limited participation under its multilateral/ bilateral trade obligations. The US Federal procurement system similarly creates a “walled garden”, allowing foreign bidder participation only from countries which have bilateral/ multilateral trade pacts with the US on government procurement, and such participation is further limited only to certain contract-types and above specified value-thresholds agreed under international commitments of the United States.
Other than de jure methods of limiting foreign bidders’ participation, most GPA Member-States also employ a host of de facto mechanisms to discourage such participation. The US, for instance, has had a long-standing “Buy American” Act, imposing minimum domestic content requirements, as also mandatory “set-asides” and “unbundling” policy requirements that have the side-effect of limiting foreign participants, while enhancing the involvement of small businesses. Faced with the recent economic recession, the EU had reduced the minimum mandatory time limits for notification of public tenders and increased the maximum thresholds for restricted (limited) tendering, with the result that foreign bidders effectively had less time and opportunities within which to file meaningful bids. Adopting a different strategy, the US mandated, as an essential component of Federal stimulus funding projects, that all steel and cement to be used in public works would have to be manufactured within the United States.
While some practitioners see these international movements as “protectionist”, it could be a rather simplistic phrase to describe the philosophy underlying such domestic preferences in public procurement; and the rationale underlying such preferences is deeply embedded in sound economic logic: unlike free choices expressed by consumers in commercial marketplaces, public funds spent on government contracts do not amount to “voluntary” expenditures by a country’s citizens. As a result, almost every country steers its public spending on procurement contracts towards domestic manufacturers and suppliers of services.
The logic in strictly regulating access of foreign bidders is particularly compelling for countries that are yet to become members of the GPA. If such a country, say Country “X”, were to enact a law that unconditionally provides for national treatment of foreign bidders, it could end up jeopardising its own domestic industry for the simple reason that while bidders from Country “X” would have little/ no access to procurement markets in other countries, bidders from all other countries would have complete access to the procurement marketplace in Country “X” as a result of the enactment. The incentive for GPA member-states, or for any other country for that matter, to negotiate international agreements with Country “X” for granting its bidders reciprocal market access would be virtually eliminated in the process.
On the second aspect, namely, the imposition of non-commercial public policy objectives on procurement decisions of SOEs, most countries follow two broad sets of strategies. Some countries, such as China, keep most of their state enterprises as far away as possible from the normal legal requirements of transparency and competition. Others, such as Mexico and Brazil, recognising the important roles played by their pubic sector in fostering national economic growth, usually formulate separate procurement regulations for important PSUs. Important examples of this second approach are the Petroleos Mexicanos (Pemex) law of Mexico and the Pertobras law of Brazil for their oil PSUs, and the Utilities Directive of the EU that covers entities such as electricity and water supply providers.
The core policy objective in exempting PSUs from the application of normal procurement laws is to provide them with a level-playing field with other actors in commercial marketplaces; and the importance of this concept becomes even more significant in the context of a developing country SOE, operating within limited budgets, when competing with foreign bidders whose R&D costs may be covered by large developmental, cost-reimbursement contracts awarded by their respective national governments.
In summary, formulating smart policies on public procurement requires a careful consideration of both the tactical and strategic aspects of public procurement in the context of prevailing international practices; and the achievement of important socio-economic objectives of the Government may therefore necessarily require the adoption of a reciprocal approach while implementing the reforms process.
(Part-I of a series on public procurement laws)
The author holds an LLM with Highest Honours, having specialised in Government Procurement Law. In 2009, he established www.BuyLawsIndia.com—a website dedicated to fostering state-of-the-art research in this area. Views expressed are personal.
