Latest Development in PRC Legislation on Government Procurement

On 15 July 2022, the Ministry of Finance of the People's Republic China ("PRC") announced the revised draft of the PRC Government Procurement Law to collect public comments ("Draft GPL"). The currently applicable PRC Government Procurement Law ("GPL") was last revised and promulgated by the Standing Committee of the PRC National People's Congress on 31 August 2014. In 2020, the Ministry of Finance had announced a first draft of the amended GPL for public comments.

The current PRC legislation on government procurement does not differentiate suppliers by the nationality of their investors. Both, domestic-invested and foreign-invested companies have equal rights and obligations when participating in government procurement activities. Such principle is specified in the PRC Foreign Investment Law and its Implementing Regulations, both effective since 1 January 2020. As to foreign suppliers, although existing PRC law does not explicitly prohibit this, in practice it is generally not possible for foreign suppliers to participate in Chinese government procurement projects. Since the end of 2007, China has been negotiating on acceding to WTO Agreement on Government Procurement ("GPA") which is a multilateral agreement on the contracting parties' opening their domestic government procurement market for each other. Besides, China has declared its willingness to, through reforms, strive for meeting the standards of the rules of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (the "CPTPP") and making a high-level commitment to openness in the field of market access that exceeds China's existing contracting practice. Against this background, the Chinese legislator has been planning to modify the GPL for the purpose of, among others, meeting relevant international standards and preparing for market opening for foreign suppliers.

In this article we list some key changes in the Draft GPL compared to the GPL, as well as their impact on foreign investors and foreign-invested companies in the PRC regarding their participation in government procurement activities as a supplier.

1. Key changes

The Draft GPL contains more than 30 amendments of the provisions under the GPL. In this article, we list only those amendments of significant importance for the general principles of government procurement and for suppliers participating in government procurement.

a) Expanded scope of "procurers"

The current definition of "procurers" under the GPL includes government departments, institutions and public organizations at all levels. It does not include "State-owned enterprises". The Draft GPL has now expanded this definition by adding "other procurers" which, according to Article 12 of the Draft GPL, are public welfare State-owned enterprises that engage in public utilities, operate public infrastructure or public service networks for achieving public purposes. The scope of other procurers under the Draft GPL shall be determined by the State Council.

In the future, State-owned enterprises such as State Grid, China Telecom, Sinopec, etc. engaging in public utilities and infrastructure will be subject to the legislation on government procurement, although many State-owned enterprises have already been implementing government procurement rules according to the GPL in the practice.

b) Nationwide consistent "Catalogue" and "Thresholds"

The GPL stipulates that it applies for procurement of items subject to the Catalogues of Centralized Procurement ("Catalogues") or above certain statutory thresholds of the purchase prices ("Thresholds"). I.e. if a certain item is neither covered by the Catalogues nor has it reached any Thresholds, the GPL does not apply. To determine on the Catalogues and the Thresholds, the State Council and the local governments shall be respectively competent depending on whether the central government's or the local governments' budgets will be used for procurement. The different competences of the State Council and the local governments have led to the possible situation that different Catalogues or Thresholds apply for a same item to be procured. The suppliers must, therefore, make sure which administrative level and which location the procuring government belongs to in order to identify the applicable Catalogues and Thresholds.

This will be changed if the Draft GPL is enacted. While it still requires the mechanism of the Catalogues and Threshold to define the applicability of the Draft GPL, the State Council shall be uniformly competent for issuing the Catalogues and Thresholds which shall apply nationwide in the future.

This change will enhance the transparency and efficiency of government procurement procedures. In our view, this change can be regarded as China's implementation of the Regional Comprehensive Economic Partnership (the "RCEP") which China has entered into and which became effective on 1 January 2022. The RCEP requires, among others, that the contracting parties shall be transparent and cooperate with each other so that their laws, regulations and related procedures of government procurement are publicly accessible, and their government procurement systems are better comprehensible for the other contracting parties.

c) Specified "negative" qualification requirements on suppliers

The GPL stipulates that a supplier participating in government procurement activities shall meet the following requirements:

• the supplier has the capacity to assume civil liabilities independently;
• it has a good business reputation and sound financial and accounting system;
• it has the equipment and professional expertise needed for performing contracts;
• it has a good record of paying taxes and making contributions to social security funds in accordance with the law;
• it has committed no major breaches of law in its business operation in the three years prior to its participation in the procurement; and
• it has requirements provided for in laws and administrative regulations.

The Draft GPL has simplified the above requirements stipulated in the GPL and requires that a supplier participating in government procurement activities shall (a) have the capacity to assume civil liabilities independently (i.e. the above item (1)), (b) have the equipment and professional expertise needed for performing contracts (i.e. the above item (3)) and (c) be equipped with corresponding qualifications if so required by laws or regulations for any special activities. The Draft GPL has abandoned the vague requirement of "a good business reputation and sound financial and accounting system" under the GPL (i.e. the above item (2)). This will be helpful to avoid ambiguity,

In addition, however, the Draft GPL stipulates a few "negative" requirements which shall prevent suppliers from participating in government procurement activities. Such negative requirements are:

• the supplier has been declared insolvent;
• it owes debts of taxes or social insurance premiums;
• it is being restricted or prohibited in government procurement activities due to violations of the law; and
• it has been recorded for major violations of the law during its business operation within 3 years before attending the government procurement.

These negative requirements are helpful to set out a clear bottom line to filter out suppliers that are definitely unqualified for participating in government procurement.

d) Domestic products

The Draft GPL stipulates, same as the GPL, that the government shall procure domestic goods, construction projects and services the scope of which shall be defined by the State Council. Such legal definition by the State Council has, however, not yet been announced. The Draft GPL contains a new provision that where products produced within the territory of the PRC meet the prescribed conditions such as the "proportion of added-value", they shall be preferred during the appraisal for government procurement activities. Neither is this new term "proportion of added-value" defined in the Draft GPL or other existing laws or regulations. According to some commentaries, this new provision aims at increasing the support for Chinese domestic industry so that "proportion of added-value" might be understood as the "the localization rate" of products, i.e. products with higher localization rate / local content might be preferred in government procurement process and will have a better chance to win a procurement project.

Existing PRC law does not contain explicit definitions for "domestic goods, construction projects and services" or "localization rate". For instance, merely the PRC Administrative Measures on Government Procurement of Imported Products define "imported products" as those products that have entered the territory of the PRC after the procedures of declaration and clearance at Chinese customs and are produced outside the customs and territory of the PRC. Thus, further implementing laws and regulations will need to be awaited to legally define the terms "domestic goods, construction projects and services" and "proportion of added-value" under the Draft GPL.

e) National security

A brand-new topic under the Draft GPL is "maintenance of national security". The Draft GPL stipulates that government procurement shall implement national security requirements, and implement laws and regulations on product standards, supplier qualification conditions, intellectual property rights, information release, data management, and other such provisions that are in relation to national security. For procurement projects involving national secrets, only specific eligible suppliers shall be invited to participate in the relevant competition. The Draft GPL further stipulates that the State establishes a security review system for government procurement and carries out security reviews of government procurement activities that may affect national security.

In the past years, China has been striving to enhance its legislation for national security. Various laws and regulations have been promulgated to address this topic from different angles, e.g. the National Security Law, the Foreign Investment Law, the Export Control Law, the Data Security Law, etc. Now, the Draft GPL has also included this topic so that governmental procurers and their supervisory bodies will be obliged to review procurement projects from a national security perspective.

f) Additional legal consequences on suppliers

Apart from those existing legal consequences under the GPL, the Draft GPL has added the following cases where a supplier shall be ordered to make corrections, their illegal gains be confiscated or, in severe cases, they may be imposed with a fine between RMB 30,000 and 100,000, be included into the list of serious untrustworthiness in government procurement and must not participate in government procurement activities within one year:

• If the supplier abandons a winning bid, a concluded transaction or entering the shortlist without justified reasons;
• If the supplier refuses to sign a government procurement contract or framework agreement within the statutory or agreed time limit after it has won a bid, concluded a transaction or entered the shortlist;
• If the supplier subcontracts the project after it has won a bid, concluded a transaction or entered the shortlist.

The GPL does not stipulate legal consequences for the above violations by suppliers, but punishes such and similar violations by procurers and procurement agencies. Thus, the Draft GPL has equally required suppliers to honor procurement contracts, and imposed punishments on violation cases.

2. Impact on foreign-invested suppliers

As mentioned above, domestic-invested and foreign-invested companies have equal rights and obligations under PRC law when participating in government procurement activities. Article 16 of the Foreign Investment Law stipulates that the State shall guarantee that foreign-invested enterprises can participate in government procurement activities through fair competition according to the law. Products produced and services provided by foreign-invested enterprises within the territory of the PRC shall be treated equally in government procurement activities. Article 15 of the Implementing Regulations of the Foreign Investment Law further stipulate that no government or relevant department thereunder may obstruct or restrict any foreign-invested enterprise from freely accessing the government procurement market of the relevant region or industry. No procurer or procurement agency engaging in government procurement may implement differential or discriminatory treatment of foreign-invested enterprises in terms of government procurement information publication, supplier condition determination as well as qualification review and bid evaluation criteria, etc., or restrict any supplier by setting unreasonable conditions in terms of ownership form, organizational form, shareholding structure, nationality of investors, product or service brands, etc., or treat any product produced or services provided by a foreign-invested enterprise within the PRC differently from those produced or provided by domestically-invested enterprises.

The GPL does not touch upon such principle of equal treatment. The newly introduced national security review system for government procurement should in our view not be understood as a specific restrictive measure for foreign-invested suppliers. Both domestic- and foreign-invested suppliers are equally governed by all PRC laws and regulations on national security. And the Foreign Investment Law which stipulates security review on foreign investment does not impose any specific or additional restrictive measures on foreign-invested companies.

Therefore, if the Draft GPL is enacted, foreign-invested suppliers will continue to enjoy the same rights and assume the same obligations as domestic-invested suppliers when participating in government procurement activities.

3. Impact on foreign suppliers

Existing PRC law on government procurement does not explicitly prohibit foreign suppliers from participating in any PRC government procurement activities. However, in practice, it is in general not possible for foreign suppliers to participate in any PRC government procurement activities for the following reasons.

a) From a legal perspective, there are restrictive PRC laws and regulations that indirectly exclude foreign suppliers from providing certain goods, construction projects or services. For instance, both the GPL and the Draft GPL require that only Chinese domestic goods, construction projects and services shall be procured unless they cannot be obtained or cannot be obtained at reasonable commercial conditions within the PRC. This principle already makes most foreign suppliers unqualified or less competitive to participate in government procurement. In particular, in the area of construction projects, no foreign enterprises, their Chinese branches or other economic organizations can obtain a relevant construction qualification certificate which is one of the statutory requirements under PRC law for general contractors and subcontractors of construction projects.

b) From the perspective of application formalities for procurement projects, suppliers shall have a "Business License" (in Chinese: 营业执照) issued by the competent Market Supervision Administration with a Uniform Social Credit Code (in Chinese: 统一社会信用代码) in order to register themselves on the respective official websites for government procurement. Since foreign enterprises do not have a Business License or a Unified Social Credit Code, they are practically excluded from joining in any government procurement activities in China.

c) From the international perspective, China has so far not entered into any international commitments to open its domestic government procurement market for foreign suppliers, except that China has been negotiating for acceding to the GPA since 2007 and applied for acceding to the CPTPP on 16 September 2021.

The Draft GPL contains a new provision – Article 118 – that the PRC shall, in terms of government procurement, grant other contracting parties and participants with the most-favored-nation treatment and national treatment according to the respective international treaties and agreements. This new provision reflects the intention of the Chinese government to open its domestic government procurement market for foreign suppliers, provided that China accedes to a respective internal treaty or agreement.

4. Outlook

According to the legislative work schedule of the PRC Ministry of Finance for 2022, the amendment of the GPL shall be completed, and the amended draft GPL be submitted to the PRC State Council within 2022. Therefore, the promulgation of the amended GPL may not be expected before the first half of 2023 according to experience.

Whether, how soon and to which extent China will be ready to open its government procurement market for foreign suppliers, will depend on a variety of factors including recovery and development of its domestic economy, global economy and trade, foreign relations and policies, etc.

We will continue to follow up on the amendment of the GPL and will provide an update once it is enacted.