Policy space vs. policy lock-in: public procurement in the CARIFORUM EPA

4 September 2008

The CARIFORUM EPA initialled in December 2007 regulates several behind-the-border areas, including public procurement. The provisions of the agreement recognise that transparent competitive tendering is important for economic development and the special economic situation of the CARIFORUM countries. While these special circumstances are not defined, the text points to the CARIFORUM members' entitlement to Special and Differential Treatment (S&D).

These dual objectives present particular reform challenges for government purchasing because it is a fertile environment for vested political, industrial and bureaucratic interests; all essential - but instinctively hostile - to reform. Thus, reform of public purchasing, either internally or externally, is difficult. Yet, state activities in developing countries tend to cover sectors as wide as education, commerce, health, infrastructure and defence. The price and quality of state purchases significantly effect economic development and social welfare.

This assessment of the public procurement provisions in the CARIFORUM EPA is therefore based on the conviction that preferential procurement policies are only justifiable if: (i) they effectively meet explicit and sustainable development policies; (ii) the benefits of the preferential policy outweigh its costs; (iii) there is no reasonably available alternative measure with lower social costs; and (iv) that the preferential policy is implemented no longer than necessary to attain the development goals. As such, this analysis is more concerned with the need to create ‘policy lock-in' rather than ‘policy space'.

The CARIFORUM EPA public procurement provisions

The scope of the public procurement provisions in the CARIFORUM EPA is relatively narrow, only obliging the parties to ensure that government procurement activities are transparent. There are no substantive provisions regulating how a government determines the eligibility requirement for public procurement contracts. The provisions do not seek to limit discrimination against or towards domestic or foreign bidders. Rather, they are concerned with preserving policy space and decision making flexibility at the national level. This outcome is in stark contrast to the WTO's plurilateral Agreement on Government Procurement (GPA), which includes guarantees of national treatment and non-discrimination and to which the European Community is a party. The general exceptions to the EPA public procurement obligations are also broad when compared with those in the WTO GPA.

Nevertheless, the CARIFORUM EPA text states that parties will ‘endeavour' to apply non-discrimination principles, indicating that the negotiators agreed that non-discrimination could have positive effects. Additionally, the EPA commits signatories to avoid discrimination against foreign companies that have a commercial presence in a CARIFORUM state and as such qualify as a domestic company for public procurement bids.

The transparency provisions obligate the parties to publish and disseminate any relevant law, information, decision or modification regarding procurement in a prompt and effective manner. These conditions are the same as those negotiated for the Caricom Single Market Economy (CSME) public procurement regime and are tied to international standards and best practices. In principle, the CSME regime should already be established by the time the EPA transition periods of up to five years expire. Thus, while it is undeniably onerous for countries to meet the CARIFORUM transparency requirements, most are already obligated to reach them through existing regional arrangements anyway. The EPA provisions complement - but do not go beyond - these existing regional arrangements.

The section of the EPA covering challenges to bids also obliges the parties to provide transparent, timely, impartial and effective procedures, which enable suppliers to challenge domestic procurement measures. However, unlike many Regional Trade Agreements (RTAs), it stops short of setting out measures to correct infringements in the accord or the amount of compensation available to the aggrieved parties. Nevertheless, the ‘bid challenge' procedures are open to injured private parties that participated in bidding for a state contract. Bidders do not first have to go to
their respective governments to initiate formal dispute settlement procedures.

Very few RTAs provide specific dispute settlement systems for discord between parties arising from public procurement. But the general CARIFORUM EPA dispute settlement mechanism  also covers public procurement and includes consultation, mediation and dispute settlement panel procedures. If a CARIFORUM country fails to comply with EPA obligations, the European Community is entitled to retaliate - but only against the non-compliant country itself. 

Not uncommonly, the CARIFORUM EPA does not establish specific institutional machinery for public procurement. However, the CARIFORUM-European Community Trade and Development Committee must review the operation of this Chapter every three years. This allows for a built-in agenda to be established and for new procurement provisions of mutual interest to be negotiated.

Public procurement and development

Given the adverse consequences of inefficient public procurement regimes on development, it is important that new initiatives are taken to improve government spending. Trade agreements can be a useful platform for such commitments as they can side-step the many domestic vested interests that lobby within the negotiation processes. Trade agreements can boost national institutions, industrial policy processes and procedures. These are often lacking at the domestic level where a lack of transparency potentially veils persistent corrupt and unbalanced practices.

Concepts such as ‘value-for-money' are now becoming common currency with policymakers desiring to stretch
more from insufficient budgets. Recent research on improving the transparency of state procurement processes suggests that transparency tends to reduce the average size of firms bidding for state contracts. This is of particular interest to those policymakers trying to use procurement to promote industrial policy and to protect their small nascent firms.

There is often a presumption that provisions to improve transparency in the EPAs automatically increases imports and are therefore condemned as back-door tactics for developed countries to increase their market access to developing countries. However, the impact of increased imports shows mixed results, because more domestic firms also bid for state contracts and some will win them.

Improvements in transparency can discourage bribes or payments to state officials and also result in a shift in state spending, eliminating previous policies based on non-economic or non-welfare criteria, such as corruption and favouritism. Generally, increasing transparency can improve many economic and social conditions. The extra cost of resources needed to publish all the relevant information should be weighed against an acknowledgement of these potential gains.

Overall, existing research suggests that procurement provisions in trade agreements, which result in attracting a greater number of bidders for government contracts, will drive down the average price paid. Measures to improve both transparency and access to national procurement markets will increase the number of bidders for state contracts. Small and medium sized enterprises appear to be particularly open to improvements in the transparency of national procurement regimes.

Policy lock-in vs. policy space

The CARIFORUM EPA is unique in having a public procurement chapter that excludes market access commitments. Furthermore, the public procurement thresholds are not only the highest in existing bilateral trade agreements but are also limited to Central Government procurement only, which is less than the European Community's coverage. The EPA does not establish a regional public procurement regime beyond transparency requirements: the use of ‘best endeavour' language for non-discrimination is as strong as the provisions get.

As such, the negotiators have preserved domestic ‘policy space' to determine purchasing policies as they see fit. The provisions only remove discrimination against the subsidiaries of foreign firms who have established a commercial presence in the country of a member to the agreement. The EPA public procurement agreement therefore does relatively little to open market access for the European Community when compared to either the WTO's GPA or other trade agreements.

Any serious attempt to use a trade agreement to strengthen existing reform efforts in the area of government purchasing needs to go beyond this. Removing arbitrary preferences in public procurement requires much more than improvements in the transparency of processes and effective rights of redress for private and state sector participants.

Special and Differential Treatment has been written into the EPA public procurement chapter. This includes giving due and effective attention to building and strengthening national capacities in state purchasing through both technical assistance and realistically sequenced implementation periods. Capacity building activities that have been identified at national and regional levels include a financing proposal for approximately US$10 million in support. These activities should be used constructively to allay concerns about the capacity of local enterprises to withstand competition from European firms for state contracts. They can also be improved by obliging the parties to eliminate discrimination against the developing country signatories to the agreement.  In this way, S&DT can be used to promote the EPA's ability to lock-in policies that have the long-term objective of reforming public procurement, rather than to preserve ‘policy space' and typically the status quo.

Conclusions

This assessment suggests that policymakers and EPA negotiators in developing countries must highlight the positive consequences for development of successful procurement reform and ignore the mercantilist instincts that underpin most industrial policy. Protecting local industry through public procurement has costs for welfare and competition.

The CARIFORUM EPA public procurement provisions preserve policy space and sidestep an opportunity to lock-in comprehensive reform, leading to more variety and choice for state purchasers and ultimately better ‘value-for-money'. It is therefore hoped that cooperation, technical assistance and the review mechanisms are used not only to implement these existing provisions properly, but to progressively strengthen them.

 

1 This article is based on a report written by Kamala Dawar, University of Amsterdam Law School and Simon J. Evenett, University of St Gallen. It was commissioned by Deutsche Gesellschaft für Technische Zusammenarbeit (GTZ) and the German Federal Ministry for Economic Cooperation and Development, available at www.gtz.de/trade

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