IPI-European Companies & Public Procurement in China
Please note that this is a courtesy translation of the Italian language article originally published in the Panorama Magazine Issue at: https://www.panorama.it/economia/imprese-europee-appalti-pubblici-cina
Introduction
On June 9th, the EU Parliament gave its final approval to the new International Procurement Instrument (IPI), which intends to encourage the opening up of global procurement markets by introducing measures limiting non-EU companies access to the open EU public procurement market if their corresponding governments do not offer similar access to public tenders to EU companies seeking business.
Within this context, how are European companies faring in the Chinese marketplace when it comes to government procurement projects? Is the IPI a necessary tool in order to wield a more open and fair investment environment?
Background
The ultimate end goal of the IPI is to open up protected markets and to end any discrimination against EU companies in third countries. The EU Commission has the power to determine whether and to what extent companies from a third country will be subject to an IPI measure, depending on the extent of the trade barriers.
Scope of IPI
The EU public procurement market is one of the largest and most accessible in the world. However, many of the EU's major trading partners apply restrictive practices in their markets that discriminate against EU businesses. The EU has opened its own public procurement market for many goods and services from third countries, as closed procurement markets undermine competition and transparency and increase the costs of public goods and services for taxpayers.
The scope of IPI will be limited to contracts above a certain threshold, namely, tenders worth at least €15 million for works and concessions (e.g., road or bridge construction) and €5 million for goods and services. Suppliers from least developed countries or more vulnerable developing countries will not be affected by IPI.
IPI Measures
If investment barriers exist in the public procurement market of a third country from which a bid originates, IPI measures can take the form of a price penalty or adjustments in the way tenders from the country concerned are assessed, or by excluding certain tenders from the country concerned, depending on certain criteria.
Such measures are of course a last resort, prior to adopting such action, the EU will firstly help to address the root of the problem in initiating investigations in cases of alleged restrictions for EU companies in third country procurement markets and engage in consultations with the country concerned on the opening of its procurement market. Finally, the EU may restrict access to the EU procurement market for foreign companies if they come from a country which continues to apply restrictions to EU companies.
Public Procurement in China
The Chinese Government has committed to and has achieved notable results in establishing a government procurement system that provides equal and fair treatment for foreign investors in recent years, most notably in 2020’s Foreign Investment Law and its Implementing Regulations adopting the principle of granting national treatment in all major investment areas, in practice, however, foreign investors still encounter unequal treatment compared to their domestic competitors in public procurement. 21% of respondents of the European Chamber’s Business Confidence Survey 2022 have outlined that public procurement is indeed an area in which they encounter differentiated treatment in the marketplace as well as being one of the top 5 areas of unequal treatment in China. The imposition of unfair and unreasonable bidding requirements restrict market competition is a major hurdle encountered by European companies in the marketplace.
Some local governments still adopt terms or conditions that could be considered to exclude or restrict competition in their bidding documents, (e.g.) national or regional experience. Additionally, awards, commendations and performance reviews are mostly exclusive to public institutions, which constitutes another invisible barrier for non-public institutions. The above-mentioned factors have resulted in foreign invested companies receiving low scores in bidding activities, leaving them severely disadvantaged in and practically excluded from market competition.
Public Procurement Experience of European Companies in China
(N.B.) Removed portion as per Adam’s suggestion, we don’t have the relevant data to further outline the position of the other 70% of respondents wishes in the market and therefore can’t stress the point further)
Foreign-invested companies face many constraints in this industry due to market access restrictions and regulatory conflicts, including those found within the Government Procurement Law and the Tender and Bidding Law.
Added to that is centralised state procurement – a new public procurement policy in China launched in 2019 for medical devices which has led to a further distortion in the procurement market, paving the way for Chinese firms to take up a larger market share. This procurement policy is gradually squeezing European firms out of the Chinese market. As within the European Chamber’s Business Confidence Survey 2022, discrimination against foreign-invested enterprises in public procurement was outlined to be a top 3 obstacle for companies in the medical devices sector investing in the Chinese marketplace.
Finally, small and medium manufacturers in Europe are already struggling to break into the Chinese market, with the abovementioned uneven procurement processes making it all the more difficult.
Conclusion
The EU has long advocated for the end of protectionist measures on international public procurement markets, with the official adoption of the IPI, it certainly looks like a step in the right direction for both the EU economy as well as European businesses abroad entering into international public procurement markets.
Within the Chinese marketplace in particular, the European Chamber in China seeks to ensure the fair and equal in government procurement activities by establishing a fair, transparent, impartial and efficient government procurement management system, with reasonable conditions for government service bidding projects to provide a fair platform for non-public institutions.
After the official adoption of the IPI by the EU Council, the effect of European companies’ access to projects globally will likely enter into a new dawn, with European innovation and trade more competitive globally. However, in order for the IPI to have a meaningful impact for European companies in China, we’ll have to firstly assess to what extent the abovementioned unequal treatment is remedied. With that being said, Chinese companies engaging in public procurement in the European market, will certainly have some notable changes to adapt to once the IPI is fully in force.
All in all, the IPI acts as a useful instrument for free and fair competition and remedying protectionist practices with core policies and rules. Tenders from countries adopting restrictive policies, will now be assessed with more scrutiny, with penalties and exclusionary measures acting as a worst-case scenario for the EU. In addition, existing EU commitments, including the WTO Government Procurement Agreement and any bilateral trade agreements, will remain unaffected by this initiative
The goal is to be able to engage in consultations for the opening of procurement markets globally, for the long-term development of the global market with high-quality goods and services.
The IPI has already passed through the EU parliament and the Council and the instrument will be active after 60 days as it has already been published on the Official Journal of the EU.
