Government Procurement: The real aim of the majors

The WTO Conference agreed to establish a new working group to study "transparency in government procurement practices" and developments for "an appropriate agreement." Whilst the study, and the agreement, only covers transparency (and not the practices themselves), the major countries pushing this issue have made clear their ultimate goal: to fully integrate the lucrative multi-billion dollar government procurement market into the WTO rules and system. If they get their way, governments in future will not be allowed to give preference to local companies to supply goods and services or to carry out development projects.

by Martin Khor

PENANG: A large part of an average developing country's income is made up of the spending of its federal government, on the purchase of goods, payment for all kinds of services, and a variety of projects, from the building of schools and roads to billion-dollar mega-dams and industrial complexes.

Add also the expenditure of state and municipal governments, statutory bodies and state-run enterprises, and the total amount of money spent by the public sector becomes enormous; for many countries, larger even than their total imports or exports.

So far, governments have been able to pretty much decide for themselves how this money is to be spent, the system of procuring goods and services, and the tendering, scrutiny of applications and award of projects, subject of course to each country's laws and procedures.

The system of government procurement has been taken for granted as very much a matter of national prerogative, often challenged in some countries by Parliaments, opposition parties or public interest groups, but seldom or never questioned as an issue that lies within the sovereign right of a country to determine.

This situation is about to change, for the World Trade Organization will soon create a working group to examine how its member governments procure goods and services, and develop elements towards a WTO agreement.

The decision to start the group was taken at the WTO Ministerial Conference in Singapore in December 1996. It will initially study only "transparency" in government procurement practices, and evolve an agreement on this limited theme.

But the prime mover of this initiative, the United States, has made it clear that in its scenario, this is only a first step towards a full-scale opening up of the "market" for government procurement for foreign companies.

With the support of the European Union, the US plans that an "interim" agreement on transparency emerging from this working group will eventually be upgraded into a full-blown agreement on government procurement practices.

This would give "national treatment" rights to foreign companies (to have the same chance as locals to bid for and win public-sector contracts), and "most-favoured-nation treatment" rights to all WTO countries (to be treated in a non-discriminatory way in the procurement awards).

The game-plan of the US and EU on the government procurement issue was candidly presented to WTO members at its so-called heads of delegations (HOD) process in Geneva in preparation for the first Ministerial Conference.

The US administration had in fact initially brought the issue up using the term "corruption". When the then US Trade Representative, Mickey Kantor, raised the issue as one interfering with market forces and distorting the market, the WTO Director-General Renato Ruggiero promptly agreed to push it in the WTO.

The deputy US trade representative, Jeffrey Lang, proclaimed "corruption" as the "single greatest non-tariff barrier". He made it clear at a WTO General Council meeting in December 1995 that corruption in business and contracts was a priority issue for the US to introduce at the Singapore Conference.

By bringing up the issue as being aimed at "corruption", the US sought to exploit widespread moral indignation at the growing number of cases of development projects involving public corruption. But the US gave only a narrow interpretation to the term and soon moved away from this - since a wider connotation would bring into question many of the practices in the US itself, including the way US corporations and lobby groups contribute funds to election campaigns or to elected officials to gain leverage for their interests.

Perhaps because of the negative response that the term "corruption" inspired among developing countries which protested against yet another "non-trade" issue being linked to WTO as a possible trade conditionality, the discussion on the same issue at the WTO preparatory process switched to "transparency, openness and due process" of government procurement practices.

Working group on government procurement

In the draft Declaration crafted by Ruggiero for the heads of delegations process, government procurement was included as one of the new issues for the WTO's future work programme.

Despite the objections of several delegations of developing countries in Geneva, Ruggiero not only brought the issue to Singapore but strengthened the text. The draft Declaration, presented by him and discussed by Geneva diplomats, as of 20 November, had Ministers agree to "establish a group to develop an interim agreement on government procurement in order to improve transparency and due process in government procurement procedures."

In his 29 November letter to the Conference Chairman, Singapore Trade Minister Yeo Cheow Tong, Ruggiero had changed this to: "Establish a group to conduct a study and develop a multilateral agreement on principles related to transparency of government procurement practices, with reference to domestic rules on bidding, announcement of procurement opportunities and provisions for independent review, to apply on a non-discriminatory basis."

The Director-General noted that "some Members cannot join a working consensus to begin work on this item. Others are willing to do so if some alterations are made to the text."

As with other new issues (labour, investment and competition), this issue was negotiated in an informal group of 30 countries. On the first day of the Conference itself, some developing countries that had earlier resisted all new issues expressed willingness for a working group on procurement to be established.

Malaysia's International Trade and Industry Minister Rafidah Aziz told a press conference on the first day of the Conference that Malaysia agreed to a group to study and to encourage transparency in government procurement, and had formulated changes to the US proposed text.

She said that in the event of disciplines in future, the national policies of WTO members must be considered. Rafidah added the WTO had to "take into account individual countriesþ interests and policies in this matter." She said that many countries had agreed with Malaysia on this position.

At another press conference the same day, Indian Commerce Secretary Tejendra Khanna, addressing the issue of transparency in government procurement, said that "as a government that's completely transparent and where there is legal redress, we support this principle." He added that on the issue of market access in procurement, however, it must be recognized that this had to be done gradually, for instance international bidding for procurement needs.

The final Declaration text on this issue states that the Ministers agree to "establish a working group 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 practical terms, this decision carries a heavier commitment than the decisions on the other new issues of investment and competition policy. The working groups for the other two have a mandate only to examine "the relationship between trade and investment" and to study "the interaction between trade and competition policy", with specific caution that the study process does not prejudge whether negotiations (for multilateral disciplines) will be initiated.

On the other hand, the procurement working group is to study transparency of procurement practices and specifically mentions it should develop elements to include in an "appropriate agreement." The implication is that the group has a mandate to proceed to develop an agreement, based on the study. Of course, it can also be argued that the nature of what is "appropriate" depends on the results of the study.

Developing countries appear to have accepted the decision because the working group, and the reference to an agreement, refers only to "transparency" in procurement practices. In other words, the implied commitment is to make procurement practices more transparent (for instance, through greater information flows) but does not include changing or disciplining the practices, such as giving preference to local companies and limited access to foreigners.

US and EU's views on procurement study

However, the post-Conference statements by the US and EU make it very clear that for them the working group is only an interim measure and a means towards their ultimate goal of multilateral rules to ensure full access for their companies to the multi-billion dollar government procurement business in developing countries.

Acting US Trade Representative Charlene Barshefsky said: "The study on procurement is intended to be the first step toward an agreement on transparency practices in government procurement which should serve to reduce the influence of corruption. This initiative will, as we continue to push it, help create an environment where businesses can expect a fair shake in competing for contracts with foreign governments."

EU Commission Vice-President Sir Leon Brittan was equally if not more direct: "We have agreed to a study on transparency in government procurement. Europe is determined to see the proposed study forming the basis of a wider multilateral agreement providing for non-discrimination in government procurement."

Thus, as far as the major countries are concerned, the transparency issue is only a first and tactical measure to draw developing countries, step by step, into the larger area of national treatment for foreign firms to obtain contracts for government procurement and projects.

The developed countries have not attempted to hide this goal. In the heads of delegations process in Geneva over the past nine months, the US and EU papers on the subject made clear they considered government procurement to be a gigantic business which had hitherto remained outside the WTO's ambit and should be brought in through multilateral rules so that their companies could have full access to the developing country markets.

In its first paper in March 1996, the US pointed out: "Procurement markets worldwide account for trillions of dollars in commercial transactions. Large, commercially attractive procurement occur at all levels of government." It cited as examples: municipal government procurement for police, fire departments and local public works; provincial government procurement for health and social security programmes; central government procurement for national telecommunications networks, electrical power grids and transportation systems.

The problem, said the US, is that although governments are the largest purchasers of goods and services in the world, procurement activities are not subject to basic WTO rules on market access and national treatment, except for the plurilateral Government Procurement Agreement (GPA). It viewed the result as an environment in which anti-competitive behaviour can distort the market. It then proposed that "without debating the present WTO rules on procurement, WTO members can create an environment for greater market access opportunity by taking steps to address the lack of transparency, openness and due process that characterises much of procurement worldwide."

The US saw the opportunity to use the Singapore Ministerial Conference to consider "how to develop an agreement that can be fully incorporated into the WTO's single undertaking and include both goods and services."

The US felt that a long term objective for current GPA signatories is to expand the coverage and membership of this Agreement, but this "should not preclude, however, efforts among all WTO members immediately, to address the problems exporters are facing around the globe in their ability to compete for substantial market access opportunities in procurement of goods and services."

It recognized that whilst it was desirable to simply multilateralize the current GPA, this was not possible in the short-term. Nevertheless, the Singapore Ministerial Conference "should give direction to the WTO that will put government procurement on the path to an eventual comprehensive multilateral agreement."

The US then proposed that "recognizing the urgent need to establish a more competitive and predictable bidding environment, a first step could be to achieve an agreement that focuses on transparency, openness and due process, setting the stage for progressive application of national treatment obligations."

It said an interim agreement on this basis "would improve the environment for bidding worldwide and address the real and growing concerns of our exporters immediately."

In a second paper in June, the US said a Singapore Ministerial mandate for negotiating an interim arrangement must be without prejudice to WTO members' positions on membership to the exisiting GPA; and the negotiations should take account of developments in other WTO fora, especially the GATS Rules Group and the Government Procurement Committee.

It proposed the interim arrangement cover both goods and services and in principle, should apply "across the board to all government procurement," recognizing the variety of governmental structures.

US's proposal on elements of an interim agreement

The US then proposed the following elements of an interim agreement:

* It should focus on principles of transparency, openness and due process in government procurement practices. Once in place, they would apply equally among all WTO members on a non- discriminatory basis.

* While it should establish basic procedural guarantees available for all WTO Members, as a first step it would not address existing preferential or discriminatory procurement requirements.

* It should have procedural guarantees that increase information flow on procurement opportunities. Foreign suppliers should have access to information on what entities are procuring in their sector, notification of specific procurement opportunities and guarantees that all suppliers will have access to the same information on an equal basis. It should provide for review mechanisms when disputes arise.

* It should provide new information bases on government procurement practices of WTO Members. Compiling such information "will be key to future efforts to integrate government procurement into the WTO, which is likely to proceed in stages, just as the lowering of tariff barriers has required a series of negotiations."

The paper concludes: "Government procurement accounts for a substantial value of commercial activity in all countries... Literally trillions of dollars annually are spent by governments in procuring goods and services. Transparency, openness and due process are important first steps because they provide vital information to foreign suppliers on the circumstances under which they may bid on contracts."

"They will help to create greater certainty as to the likelihood of winning contracts. Future steps towards full integration will generate increased opportunities for suppliers to compete on an equal basis in government procurement markets worldwide.

" The above conclusion of this paper shows, in a nutshell, the US view of the role of the working group and the interim agreement as part of a strategic plan for a stage-by-stage integration ("staged-integration", in its term) of government procurement practices into the WTO system.

A third paper in July further reiterates that the proposed agreement ("an interim arrangement") is to be "a FIRST STEP in the integration of government procurement into the multilateral system." (Emphasis as in original). It also stresses there should be no exemption or lower standards for developing countries nor LDCs:

"The US and others have proposed commencing integration of procurement into the WTO by focusing first on transparency, openness and due process. These are fundamental principles on which further market liberalization must be built. These principles would apply equally to all WTO members irrespective of their level of development, just as current transparency provisions in the WTO are obligations undertaken by all countries."

Interestingly, the paper also says the principles in an interim arrangement should be flexible enough to accommodate a variety of existing national procurement regimes. This could explain why the additional wording proposed by some developing countries in the Declaration, "taking into account national policies", could be accepted by the US as it had already accomodated this point.

A separate paper by the EC during the Geneva preparatory process equally clearly laid down its aims: "The EC fully supports Ministers taking decisions during their conference in Singapore which lead to define ways and means (including the launch of new negotiations) to reduce or eliminate trade distortive effects of domestic government procurement measures of all WTO members."

"In this regard, the EC welcomes a parallel process of negotiations which would (1) enhance the disciplines and expand the number of countries subscribing to the GPA and (2) develop an interim arrangement on transparency, openness and due process in government procurement practices."

"An interim arrangement should focus on basic principles of transparency, openness and due process in government procurement practices on the understanding that the Community's final objective is to achieve national treatment and MFN effectively for all government procurement in all WTO member countries."

An "interim arrangement"

There can be no doubt, therefore, that where the EC and US are concerned, what was decided on in Singapore was an initial step (an "interim arrangement") on the road to full access and national treatment for their companies to the government procurement business, especially of developing countries.

Developing country delegations should thus be under no illusion that the decision they agreed to in Singapore is of small or limited consequence because it has only committed them to negotiations on transparency and procedures and that the matter will then rest there. What the major countries especially want to see eradicated in developing countries are the types of government procurement policies and practices that currently favour local enterprises and people - practices that the major industrialized countries had followed not too long ago within their countries and which had benefitted some of their giant corporations.

These policies are adopted in most developing countries in order to help build the domestic sector, strengthen domestic linkages and demand and support local entrepreneurs. Since liberalization is proceeding so rapidly in other areas, government expenditure remains one of the few (and probably the most important) sectors of economic activity which can be used as an instrument to boost local business and domestic demand.

This crucial "development dimension" is however lost in the "market access paradigm" adopted by the Northern proponents of fully integrating government procurement in WTO rules and dispute settlement systems.

The EC paper is also illuminating in the types of policies it considers "trade distortive" and which, by implication, should be outlawed in a future multilateral agreement on procurement.

The paper states that "GATT Art III.8 exempts government purchasing of products from multilateral rules, leaving governments free to maintain government procurement measures and practices which are trade distortive...In the absence of clear multilateral rules, billions of dollars worth of trade will continue to be subject to domestic rules and procedures not covered by the WTO framework. It is estimated that public purchasing can represent up to 15% of GDP."

The reasons for this exception, it says, are diverse: "sectoral objectives, sovereignty concerns, desire to control tax contributions." The EC says that the exception is achieved through explicit measures in national policy and legislation, and less explicit measures.

Among the explicit measures mentioned by the EC paper are: "prohibitions to purchase foreign goods and services, "set asides" or price preferences for domestic producers, minimum local content requirements, mandatory offsets and/or technology transfers." The EC says that all of these "distort trade and contradict the overall need to acquire goods and services on the best possible terms."

The less explicit measures or practices which the EC says "also discriminate" include: "excessive recourse to single or selective tendering (eliminating opportunities for foreign suppliers), biasing the setting of technical specifications to favour specific goods or suppliers, providing insufficient notice for foreign suppliers to respond, or simply exercising the procurement decision maker's discretion to choose local."

The EC paper says opening up competition to foreign goods and suppliers and service providers can "help reduce government expenditure, stimulate domestic industry, promote innovation and reduce the incidence of bid-rigging. This approach also eliminates a source of trade distortions."

The EC welcomes and supports all efforts to rectify "this flaw" in the WTO system. "The final objective should be to ensure that effective national treatment and MFN principles apply to all government procurement in all WTO members."

When the Working Group on government procurement convenes, WTO members should be prepared with their position on their overall national policies on government procurement, and not just on transparency.

For, the specific issue of transparency (together with openness and due process) is just a subset of the larger general issue of procurement policies and practices.

And in the gameplan of the majors, stated so candidly in their proposal papers, the study and negotiations for an "interim arrangement" are only a means to the longer-term but certain goal of the final agreement aimed at full integration of government procurement practices in the WTO multilateral disciplines, single undertaking and dispute settlement system.

Having been let loose in Singapore, the genie must be considered and confronted in its many facets in the working group in Geneva. (SUNS3898)

Martin Khor is the Director of Third World Network.The above first appeared in the SUNS of which Chakravarthi Raghavan is the Chief Editor.