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Grappling with the Regulatory Environment for Chinese Public Procurement

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© 2006 Thomson/West
I
NTERNATIONAL
G
OVERNMENT
C
ONTRACTOR
Information and Analysis on Legal Aspects of International Public Procurement
4-030-872-3
Analysis
¶ 17
Grappling With The Regulatory
Environment For Chinese Public
Procurement
The regulatory environment for public procurement
in China continued to be marked by uncertainty in
2005, creating practical problems for market partici-
pants. However, 2005 also evidenced some govern-
ment efforts to improve the situation.
The problem stems from the existence of China’s
Tender and Bidding Law (1999) (T/B Law), as sepa-
rate from China’s more recent National Government
Procurement Law (2002) (GP Law). Moreover,
within these two legal regimes, various agencies vie
for a regulatory role. All this has created uncertainty
over which institutions ultimately make or enforce
China’s procurement rules. The problem now dwarfs
the expected problems associated with introducing
market-based procurement rules into a traditionally
state-run economy.
The uncertainty in Chinese regulation of public
procurement is compounded by a variety of factors:
(1) vague or misunderstood provisions found in the
T/B Law and the GP Law, and their underlying regu-
lations; (2) the lack of adequate interpretative mecha-
nisms (arguably a regular feature of the Chinese le-
gal system) to clarify the rules and increase overall
understanding of their use and application; (3) in-
adequate training to strengthen compliance with the
new procurement rules; (4) corruption; and (5) in-
consistent messages to the public on the techniques,
purpose and general operation of a modern govern-
ment procurement regime. Being aware of the unique
legal, administrative and policy issues affecting Chi-
nese public procurement is critical to those interested
in selling to government departments and some state-
owned enterprises.
Vol. 3, No. 3 March 2006
This material reprinted from INTERNATIONAL GOVERNMENT CONTRACTOR appears here with the permission
of the publisher, Thomson/West. Further use without the permission of West is prohibited.
Historical Foundation—After more than a decade
of experiments with the use of tender and bidding
in various forms in China, the National People’s Con-
gress passed the national Tender and Bidding Law
on Aug. 30, 1999. The law took effect Jan. 1, 2000,
and applies to any mandatory or optional bidding
activity carried out in the People’s Republic of China.
T/B Law, Article 2. Under the T/B Law, bidding is
required for contracting out any large construction
projects and related equipment and material pur-
chases that (a) affect public interest or common se-
curity (guanxi shehui gonggong liyi, gongzhong anquan
de xiangmu); (b) use state-owned invested funds
(guoyou zijin touzi) or state financing (guojia rongzi);
or (c) use loans from foreign governments or multi-
lateral lending agencies. T/B Law, Article 3. In ad-
dition, many lower-level regulations require public
bidding for a variety of transactions, e.g., transfer of
land rights, award of public concessions or non-
construction purchases by state-owned enterprises; so
the law applies extensively to a host of activities,
many public, others purely commercial. In fact, com-
mercial bidding disputes may end up subject to Chi-
nese administrative law by virtue of the long regula-
tory reach of the T/B Law.
The mandatory application of the T/B Law does
not turn on whether the purchaser is governmental
or private. Instead, coverage is triggered by the pub-
lic character of the purchasing activity—as deter-
mined by the type of funds used or the large pub-
lic impact of the project. Funding sources that
trigger the Tender and Bidding Law—namely state-
owned invested funds (guoyou zijin touzi) or state fi-
nancing (guojia rongzi de xiangmu) are distinguish-
able, with some conceptual difficulty, from money
sourced from governmental budgets, the latter re-
ferred to as “fiscal funds” (caizheng zijin). As dis-
cussed below, the use of fiscal funds for purchases
triggers application of China’s GP Law. Few Chi-
nese citizens would pretend to know where the ex-
penditure of fiscal funds ends and state-owned in-
vestment funds or state financing begins. Similarly,
any distinction separating state-owned investment
funds from state financing—as referenced in the T/
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B Law itself—would largely be considered a distinc-
tion without a difference.
The T/B Law promotes uniform practices for bid-
ding in a variety of transactions, but does not sig-
nificantly alter the environment for procurement
regulation in China—a setting where the oversight
and implementation of public purchasing is carried
out by a host of administrative departments. For ex-
ample, the purchase of imported equipment is largely
supervised by the Ministry of Foreign Trade and Eco-
nomic Cooperation, now merged into the Chinese
Ministry of Commerce. Purchase of medicines and
equipment for public hospitals remains largely the
province of the Ministry of Health and its local coun-
terparts. And procurement of construction, includ-
ing construction by government agencies, is subject
to strong intervention by China’s former State De-
veloping and Planning Commission, now the State
Development and Reform Commission (SDRC), or
China’s Ministry of Construction.
The T/B Law deferred the delegation of overall
regulatory supervision of bidding activities, speaking
of oversight in noncommittal terms. Article 7, ¶¶ 2–
3, obliquely states:
[R]elevant Administrative Supervision Depart-
ments carry out supervision of bidding activi-
ties according to law and investigate and
handle any illegalities in bidding activities ac-
cording to law. The administrative supervision
over bidding activities and the specific divi-
sion of responsibilities among the relevant ad-
ministrative departments will be determined by
the State Council [the Chinese Executive].
Similarly, at Article 65, the law allows the report-
ing of violations to a not yet designated “relevant ad-
ministrative supervision department.”
Persons familiar with the drafting of the T/B Law
were long aware that the SDRC was a driving force
behind the promulgation of the law. But it was not
until May 2000, with the issuance of the “State
Council Opinion on the Division of Responsibilities
for Administrative Supervision Among the Relevant
Administrative Departments Carrying Out Tender
and Bidding Activities” (Office of the State Council
Document No. 34-2000)(2000 State Council Opin-
ion), that the SDRC’s role was formalized. The 2000
State Council Opinion did not vest complete regu-
latory authority with the SDRC, but instead left
ample supervisory roles over the bidding process for
China’s other interested agencies, and said nothing
of the emerging role of the Finance Departments in
regulating purchases by government agents using fis-
cal funds. The nagging issue of the respective roles
of the Ministry of Finance and SDRC did not ap-
pear forcefully until the drafting process for the GP
Law.
Consequently, although the 2000 State Council
Opinion tasked the SDRC with policy leadership over
bidding activities, it did not designate the SDRC as
the sole source for setting the regulatory framework.
Except for bidding on large-scale construction
projects, ¶ 1 of the 2000 State Council Opinion
identified the SDRC as just one of many agencies
empowered to issue bidding regulations, making the
SDRC a king among autonomous princes. Oversight
of bidding procedures to guard against illegalities
such as disclosure of confidential procurement infor-
mation, collusive bidding practice, or discriminatory
elimination of bids, and resolution of complaints al-
leging such illegalities, are still subject to the author-
ity of the agency closest to the specific bidding ac-
tivity. In distributing regulatory authority, the State
Council Opinion identified the departments of trade
and industry, water, transportation, railroads, avia-
tion and information technology as potentially exer-
cising regulatory roles, depending on the type of
project at issue (2000 State Council Opinion, ¶ 3).
For construction projects, the primary focus of
the T/B Law, the 2000 State Council Opinion per-
petuated a regulatory role for China’s Ministry of
Construction (and lower-level construction depart-
ments) over bidding procedures for building construc-
tion and related procurement of wiring, piping and
other materials and equipment (¶ 3). A direct over-
sight role for the SDRC was retained only for “large
scale construction projects” (¶ 5). The circumstances
under which construction graduates from small-scale
to large-scale, and shifts regulatory supremacy from
the construction department to the SDRC is not
specified. The SDRC issued its “Stipulations on the
Scope and Size Standards for Tender of Construction
Projects” (May 1, 2000), which details the types of
construction projects subject to mandatory bidding
requirements, but this regulation is no help in de-
termining the boundary between the respective su-
pervisory roles of the SDRC and Ministry of Con-
struction over Chinese construction bidding.
Impact on Market Participants—The 2000
State Council Opinion did not vertically distribute
regulatory power over tender and bidding, but di-
¶ 17
Vol. 3, No. 3 / March 2006
3
vided regulation along functional lines, where the
potential for overlapping regulation was great and
where jurisdictional boundaries remained ill-
defined. For agencies involved, it served their tra-
ditional penchant for self-regulation and reaffirmed
the notion that no Chinese agency (except the State
Council) had the power to tell another agency how
to behave. For market participants, however, it cre-
ated a costly regulatory environment, with substan-
tial risk of violating conflicting regulations.
Take, for example, the establishment of qualifi-
cation standards for “Tender and Bidding Agencies,”
which are private, state-owned or quasi-governmen-
tal entities authorized to carry out bidding for a host
of project owners. T/B Law, Articles 12–14; and GP
Law, Article 19. See also Measures for Qualification
Recognition for Tender Agencies in Construction
Projects, Ministry of Construction Document No.
79, June 30, 2000; Measures for Qualification Rec-
ognition for Agencies in Government Procurement,
Ministry of Finance Document No. 31, Dec. 28,
2005). The 2000 State Council Opinion, at ¶ 5, en-
trusts the qualification of these tendering agents to
various government departments, depending on the
types of projects that the tender agent might handle.
The practical effect of the Opinion on these bidding
agencies (if they want to adequately protect them-
selves) is to require them to meet the qualification
requirements of many government departments or,
at minimum, to ensure that before they handle bid-
ding for a particular project, they have adequately
complied with all the requirements of the agency
“most interested” in the particular procurement. De-
termining the “most interested” agency for a particu-
lar project, however, may not always be clear, and
many agencies, depending on the circumstances,
could be equally “interested” in a particular procure-
ment.
The case Hebei YanZhao Eng’g and Constr. Man-
agement Co. v. The State Development and Reform
Commission of Hebei Province (Intermediate People’s
Court of Shijiazhaung Municipality, First Level
Admin. Div. Dec. No. 00011 (2005)) demonstrates
the dilemma. There, plaintiff Hebei Yanzhao, a ten-
der and bidding agency, appealed a fine imposed
by the provincial SDRC in Hebei Province. The lo-
cal SDRC imposed the fine after determining that
Hebei Yanzhao, when serving as a tender and bid-
ding agency for the purchase of boiler equipment
for Yanshan University, failed to advertise the bid-
ding in the proper media. Hebei Yanzhao, a con-
struction company handling a construction-related
purchase of boiler equipment, submitted for publi-
cation its solicitation for bids to the local
QinHuangDao Municipality Exchange Center for
Construction. Ultimately, however, the advertise-
ment was not placed in all the required media, as
mandated by the provincial SDRC, and therefore
the local SDRC fined Hebei Yanzhao.
The Court’s limited analysis struggled with the
uncertainty engendered by the 2000 State Council
Opinion, which gave the SDRC responsibility for ten-
der and bidding policy—including the designation
of the proper medium for project advertising—but
left day-to-day enforcement of bidding rules to the
agency with the greatest connection with the project
(in this case, arguably, the local construction depart-
ment). The Court also grappled with a local regula-
tion, the “Hebei Provincial Measures for the Imple-
mentation of the ‘Tender and Bidding Law of the
People’s Republic of China,” which also ambiguously
divided regulatory authority over bidding activities.
Hebei Provincial Measures, Article 4. The Court ul-
timately upheld the fine on the dubious basis that,
although local laws and regulations did not clearly
identify the agency with the power to assess admin-
istrative fines for violating bidding rules, the local
rules also did not clearly exclude the local SDRC from
possessing that inherent power. Hebei Yanzhao Opin-
ion (on file with author). Consequently, Hebei
Yanzhao became a victim of the unpredictability
stemming from the 2000 State Council Opinion.
Establishing An Administrative Coordination
Mechanism—The Hebei Yanzhao case illustrates that
uncertainty in the Chinese regulatory environment
is not an abstract dilemma of interest only to politi-
cal scientists, but a practical problem for participants
in the Chinese public purchasing market. Fortu-
nately, the State Council has recognized that the
problems plaguing China’s tender and bidding sys-
tem cry out for solutions. On July 12, 2004, the State
Council issued its “Certain Opinions About Further-
ing The Standardization of Tender and Bidding Ac-
tivities” (State Council Issuance No. 56 [2004])
(Opinions on Standardization). The Opinions on
Standardization highlight the positive influence of the
development of China’s bidding market system, and
note that the system has become an important part
of economic life in China. The Opinions decry a host
of problems that “can no longer be ignored,” such
¶ 17
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as parties avoiding mandatory bidding requirements,
monopolistic practices, sham bidding procedures, lo-
cal protectionism, collusive bidding, fraudulent con-
tract awards, corruption and the failure of government
agencies to handle complaints properly.
Paragraph 7 of the Opinions, “Implementing Man-
agement According to Law and Improving The Ten-
der and Bidding Administrative Supervision System,”
directly addresses the systemic administrative problem
in the current bidding system. Unfortunately, ¶ 7
identifies problems but does little to correct them. A
direct, not contextual, translation of ¶ 7 is provided
below to give the flavor of the message sent by the cen-
tral government:
The relevant administrative supervision de-
partments should each carry out their respec-
tive functions, closely coordinate, strengthen
management, and reform and improve admin-
istrative supervision work over tender and bid-
ding, in strict accordance with the Tender and
Bidding Law and the division of responsibili-
ties stipulated by the State Council.
The SDRC will strengthen its coordination
and guidance toward tender and bidding work;
strengthen supervision and investigation in con-
struction tendering and bidding within the con-
struction process for large-scale construction
projects, and strengthen supervision and en-
forcement of tender and bidding activities in
industrial projects. The Water and Irrigation,
Transportation, Railroads, Aviation, Informa-
tion Industries, Construction and Commerce
departments, shall according to relevant laws
and regulations, strengthen supervision and en-
forcement over illegal activities such as dis-
crimination and elimination of bids, collusive
bidding, collusive tendering, disclosure of base
prices, and disclosure of confidential informa-
tion in tender and bidding processes in their
corresponding areas, increase the investigation
and handling of assignments and illegal sub-
contracting of contracts. As to activities such
as complete assignment of project awards, par-
tial assignment of contract awards, illegal
[change of project scope], the successive sub-
contracting of key work, and the co-opting/
piggybacking on qualified or highly qualified
units and their names to bid, as well as the
borrowing of other units qualification certifi-
cates, the relevant administrative departments
¶ 17
need to assess fines, confiscate illegal gains,
order suspensions and corrective action and
other penalties, and if the circumstances are
serious, cancellation of operation licenses by
the Industry and Commerce administrative
management agencies. Concurrently, as for the
entities receiving project assignments and il-
legal subcontracts, they should be timely ac-
counted for and reversed.
The relevant administrative supervision
departments must not violate law and regula-
tions for such administrative approval mat-
ters, such as establishing project approvals,
examinations and authorizations, and regis-
trations involving the tender and bidding. All
previous approvals that are illegal should be
similarly cancelled. There should be an ac-
celeration of functional transformation and a
change from the administrative tendency to
emphasize approvals and neglect subsequent
oversight, as to strengthen supervision and
enforcement over the entire tender and bid-
ding process. As for tender activities carried
out for matters not approved, there should
be timely assessment of penalties by the ap-
proval departments. There must be the estab-
lishment and improving of just and effective
system(s) for handling complaints, and the
timely acceptance of complaints and the in-
vestigation of illegal activities. Any govern-
ment department or individual, especially
leading cadres at various levels, must not use
power for personal ends, or employ methods
such as hints, inciting, making calls, passing
notes, assigning or arbitrarily giving orders
as to interfere or manipulate specific tender
and bidding activities. The various levels of
administrative supervisory departments should
strengthen their supervision of enforcement
activities for tender and bidding and sternly
investigate and handle corruption or malprac-
tice in tender and bidding activities. The
People’s Governments at various levels should,
according to the requirements of the Admin-
istrative Licensing Law, standardize the work
of the supervision departments in tender and
bidding activities, strengthen the formation
of investigative teams for supervisory manage-
ment in tender and bidding, and raise the
level of administration according to law.
Vol. 3, No. 3 / March 2006
5
The above passage helps explain the problems
troubling the Chinese bidding system, but fails to
clarify the uncertainty on who ultimately sets and
enforces the rules for public bidding. The repeated
references to poorly identified “relevant depart-
ments” for approvals, implementations, supervision,
etc. perpetuates the uncertainty and allows agen-
cies to claim they have been invited by the State
Council to regulate bidding activities. A corre-
sponding absence of jurisdictional boundaries makes
it hard to determine agencies’ respective oversight
authority. Paragraph 7 of the Opinions on Standard-
ization admonishes agencies to act according to the
T/B Law and the Division of Responsibilities Stipu-
lated by the State Council, namely the 2000 State
Council Opinion. But, as explained above, this “di-
vision of responsibilities” suffers from inconsisten-
cies and ambiguities that are exacerbated by the
2004 Opinions on Standardization. Moreover, ¶ 7
encourages roles for other agencies, such as the De-
partments of Industry and Commerce (for the can-
cellation of business licenses) and the Departments
of Supervision (for the investigation of corruption
and malpractice) inviting them to join the regula-
tory “free for all.”
On a more positive note, the SDRC is more force-
fully asserting its lead role in supervising bidding ac-
tivities. In July 2004, it issued “Measures for Han-
dling Complaints Regarding Tender and Bidding
Activities on Construction Projects,” setting procedures
and standards for handling complaints. Unfortunately
the regulation perpetuates the traditionally diffuse over-
sight by allowing agencies to set up their own bid pro-
test mechanism or use the regime being established
at the SDRC. On Sept. 11, 2004, the Ministry of Fi-
nance enacted its separate “Measures for Handling Sup-
plier Complaints in Government Procurement,” again
highlighting the tension between China’s “tender and
bidding system” and its “government procurement”
system. Moreover, in response to the concerns raised
by the State Council in the 2004 Opinions on Stan-
dardization, the SDRC issued its “Temporary Mea-
sures on the Inter-Departmental Coordination System
for Tender and Bidding Activities” (SDRC Document
No. 1282, Sept. 1, 2005) (Coordination Measures).
The Inter-Departmental Coordination System repre-
sents an honest attempt to make sense of the chaotic
regulatory environment for bidding in China, but it,
too, may fall prey to the pathologies promoting dif-
fuse regulation.
Although the SDRC is the leading agency for the
Inter-Departmental Coordination System, it is an ini-
tiative formed by 11 Chinese government depart-
ments, including the agencies recognized in the 2000
State Council Opinion as possessing some regulatory
responsibility over bidding activities. It also includes
the Finance Departments and Supervision Depart-
ments (Coordination Measures, Article 3). The Inter-
Departmental Coordination System is intended to
promote uniform promulgation and enforcement of
rules governing tender and bidding, with the goal of
timely and effectively solving the “prominent contra-
dictions” and problems in the administration of ten-
der and bidding activities. (Coordination Measures,
Article 2). The Inter-Departmental Coordination Sys-
tem identifies a number of goals, to be served by co-
operation in the following areas: (1) formation of regu-
lations; (2) carrying out of research; (3) establishing
links between agencies on the administration of ten-
der and bidding activities; and (4) handling of com-
plaints (Coordination Measures, ¶ 4). It establishes,
among other things, a deliberative process grounded
in annual meetings held in July. It encourages agen-
cies to designate personnel who will actively partici-
pate in the consultations and requires those officials
to prepare adequately to contribute to the consulta-
tions (Coordination Measures, ¶¶ 6 and 8). The for-
mat for this dialogue is collective discussion, with the
goal of unanimity through consultations. It seeks to
impose some discipline by requiring participants to
request immediate guidance from superiors on any
major issue confronted and, after meetings conclude,
to report quickly to superiors and ensure implemen-
tation in the participant’s home departments (Coor-
dination Measures, ¶¶ 6–7). Overall, the Inter-
Departmental Coordination System attempts to en-
sure that the SDRC and other interested agencies vet
any new rules, initiatives or key cases on the regula-
tion of bidding activities.
The prospects for the success of this new “talk-
ing shop” in strengthening the regulatory framework
for bidding activities are unknown. The establish-
ment of the Inter-Departmental Coordination Sys-
tem by the SDRC is a positive sign, but it relies
too heavily on the unsettling “distribution of re-
sponsibility” system originating in the 2000 State
Council Opinion. It is a relatively soft challenge
to this diffuse, horizontal regulatory structure. As
the coordination efforts get underway, one hopes
the SDRC will increasingly use the new Inter-
¶ 17
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Departmental Coordination System to assert greater
control.
Dividing the Rest of the Regulatory Pie—The
Inter-Departmental Coordination System expressly
excludes tender and bidding activities for govern-
ment procurement of supplies and services, as well
as tender and bidding for quotas for the export of
products and overseas foreign economic cooperation
and foreign assistance projects. Thus, the Inter-
Departmental Coordination System fails to unify
China’s public procurement regulation and may ac-
tually reflect the SDRC’s attempt to strengthen the
regulatory divide between China’s broad-based ten-
der and bidding system (manifested largely in the
public construction system) and the narrower con-
text of purchasing by government departments un-
der China’s 2002 GP Law.
The GP Law applies to purchases of goods, con-
struction, and services by government organs (zhengfu
jiguan), as well as social institutions (shiye danwei) and
public organizations (tuanti zuzhi) that use fiscal
funds (caizhengxing zijin). In contrast to the T/B
Law—application of which depends solely on the
type of purchasing activity and the character of the
money used—the GP Law emphasizes equally the
character of the purchaser. Oversight for application
of the GP Law rests firmly with China’s Ministry of
Finance and lower-level Finance Departments (al-
though such oversight is not necessarily exclusive) (GP
Law, Article 13). This contrasts with the absence of
an express agency for oversight under the T/B Law
and the 2000 State Council Opinion, which autho-
rizes multiple agencies to operate within the regula-
tory fray for bidding activities.
During the drafting of the GP Law, the awkward
relationship between the two purchasing regimes
played out to an incomplete conclusion. Officials
from the SDRC argued that construction should not
come within the definition of government procure-
ment, and, therefore, the law should cover only pur-
chases of goods and services using fiscal funds. That
strategy conflicted with the emerging global harmo-
nization of government procurement law, which uni-
formly includes purchases of goods, construction and
services in government procurement systems. Hence,
construction remained within the definition of gov-
ernment procurement (GP Law, Article 2, ¶ 2).
This, however, left the dilemma of how to regulate
(or who would regulate) construction by government-
related entitles using fiscal funds. Article 4 of the GP
Law represents a compromise: “For the government
procurement of construction and engineering that is
carried out through tendering and bidding, the Ten-
der and Bidding Law should be used.” When the GP
Law was issued in 2002, it was unclear whether pub-
lic construction using fiscal funds was subject to the
T/B Law for procedural purposes only, thus leaving
substantive oversight with the Finance Departments,
or whether oversight of public construction reverted
entirely in favor of the SDRC and the fragmented regu-
latory framework under the T/B Law.
To date, the Ministry of Finance and local fi-
nance departments, in theory, maintain that the GP
Law envisions their supervision of public construc-
tion. But, in reality, this role is nominal or nonex-
istent, and the Ministry of Finance has retreated from
this role, as evidenced by its issuance of a separate
Tender and Bidding Regulation, applying only to
government procurement of goods and services. The
Ministry of Finance has its own supplier-complaint
regulation, which should also cover protests related
to construction procurement. But the Finance De-
partments will, for the immediate future, primarily
handle protests related to the procurement of goods
and services.
The involvement of the Ministry of Construction
and local construction departments in nearly all con-
ventional construction overshadows a potential over-
sight role for the finance departments. A protester on
a bidding for public construction using fiscal funds
might be wise to file protests with both the relevant
finance departments and the relevant construction
departments to avoid the jurisdictional pitfalls asso-
ciated with the tension between China’s T/B Law and
GP Law.
Impaired Regulation of Government Procure-
ment—The Ministry of Finance’s supervision of gov-
ernment purchasing follows logically from its respon-
sibility for managing and protecting the public fisc.
However, this clashes with China’s socialist traditions
that dictate a prominent role for the planning agency,
e.g., the SDRC’s predecessor. The presence of two
conflicting purchasing regimes is a by-product of
China’s transition to a market economy. Moreover,
there seems to be a deliberate effort to ensure two
separate regulatory regimes, with the SDRC avoid-
ing any connection between it and the government
procurement system, and using propaganda and
training programs designed to solidify the notion that
tender and bidding is a distinct system. This public
¶ 17
Vol. 3, No. 3 / March 2006
7
education campaign has created a misunderstanding
that the tender and bidding system for construction
is distinct from government procurement.
Other factors impair the Ministry of Finance’s
mission under the 2002 GP Law of overseeing pub-
lic purchases of construction, as well as goods and
services. First, most finance departments cannot
match the resources and expertise of the SDRC and
Ministry of Construction, which arise from their tra-
ditional role in overseeing infrastructure development
and construction. Second, the Office for Government
Procurement is relegated to a third-level office within
the Ministry of Finance, making it even more diffi-
cult for this office to make demands on other agen-
cies. Finally, there is a troubling unwillingness by the
Finance Departments to assert their new regulatory
authority, especially on sensitive procurement issues.
Trends suggest that, rather than the Ministry of Fi-
nance moving towards regulation of construction bid-
ding, the SDRC is increasing its oversight of govern-
ment procurement of goods and services. The SDRC
recently co-issued with the Ministry of Finance gov-
ernment procurement regulations on establishing
product specifications for both energy-efficient prod-
ucts and wireless technologies.
Two cases demonstrate the apparent reluctance
of China’s Finance Departments to assert their re-
sponsibility over government procurement: the
Beijing-Microsoft case from 2004 and the pending
complaint of Modern Wo’Er Trade Co. Ltd., now
sitting in the Chinese court system. The Beijing-
Microsoft case involved the purchase of Microsoft
operating software for use by municipal government
departments in Beijing. The Beijing city government
awarded the contract to Microsoft on an undeclared
sole-source basis, without any competition. This
award followed similar awards to Microsoft by the
Shanghai and Tianjin municipalities, but, unlike the
earlier awards, the Beijing purchase prompted objec-
tions by local software producers questioning the city
government’s failure to comply with Article 10 of the
GP Law, which requires domestic preferences for lo-
cal producers (essentially a Buy China provision).
Local producers spearheaded the outcry and had
strong support from China’s Ministry of Information
Industries. The case also received intense scrutiny by
the Chinese media. It was a hopeful time for China’s
nascent government procurement system, as it ap-
peared that the local producers would file formal pro-
tests forcing the government to make important
choices on the overarching policy of open compe-
tition in government procurement versus the sub-
sidiary policies, sole-source purchasing rules and
domestic-preference rules (as an exception to full
competition). Another interesting intellectual prop-
erty policy also lurks in the emerging debate—how
to correct prior illegal use of pirated Microsoft
products.
The Microsoft matter presented an important op-
portunity for the local finance department in Beijing
to assert its leadership role under the GP Law. It was
well positioned to make the necessary policy choices
and establish itself as the true arbiter of China’s gov-
ernment procurement rules. But it failed to seize the
moment. Instead, the contract was simply cancelled
by higher levels in Beijing’s municipal administra-
tion, the fanfare went quiet, and the case was resolved
largely behind the scenes. The debate over domestic
preferences in government software purchases contin-
ues in the software industry and international trade
associations, but has receded as a larger public issue.
The pending case of Modern Wo’Er similarly dem-
onstrates the reluctance of the Ministry of Finance
to forcefully supervise government procurement. The
case also raises questions on the relationship of the
SDRC and the Ministry of Finance in China’s over-
all public purchasing system.
Modern Wo’Er involves the National Medical
Treatment and Cure System procurement managed
jointly by China’s SDRC and Ministry of Health.
These purchasing agencies entrusted the procurement
procedures to a tender and bidding agency. Modern
Wo’Er submitted a timely bid, but the award went
to another supplier whose price was higher than that
of all other offerors. Modern Wo’Er asserted that its
bid met the solicitation requirements and that the
award to a supplier with the highest price violated
China’s equivalent of a best value rule for purchases.
As China’s GP Law requires, Modern Wo’Er first
submitted an inquiry with the purchasing agencies.
Both the SDRC and the Ministry of Health failed
to respond. The tender and bidding agency handling
the procurement submitted a response, but Wo’Er
viewed it as inadequate.
Pursuant to the procedures in the GP Law (Ar-
ticles 51–58), Modern Wo’Er filed a complaint with
the Ministry of Finance, which also failed to respond
substantively. Instead, it referred the matter to the
SDRC and the Ministry of Health for resolution.
Modern Wo’Er then had no choice but to file a com-
¶ 17
International Government Contractor
®
8
plaint in the Beijing Intermediate People’s Court, al-
leging that the Ministry of Finance failed to carry out
its administrative duty and should be compelled to
act on the complaint. As the case proceeded, the Min-
istry of Finance continued to avoid exercising its
power, holding that this project was within the ju-
risdiction of the SDRC and the Ministry of Health.
This led to reports in the Chinese press that the Min-
istry of Finance was “kicking the ball,” in other words,
“passing the buck.” See Legal Daily, Evening Edi-
tion, May 20, 2005. The remaining question is will
the Court in Beijing also pass the buck, or will it or-
der the Ministry of Finance to rule on Modern
Wo’Er’s complaint? Once again, an interested mar-
ket participant sits sidelined while the administra-
tive agents jostle.
Conclusion—The uneasy arrangement between
China’s government procurement system, under the
tentative leadership of the Ministry of Finance, and
its broader tender and bidding system (or some
might say, broader public procurement system), un-
der the titular leadership of the SDRC and its Inter-
Agency Coordination System, remains a regular fea-
ture of the Chinese purchasing regime, to the dismay
of market participants. But this is just one manifes-
tation of a fundamental problem running through the
core of China’s public administration structure. Cor-
rection of this problem requires the commitment of
China’s political leadership as much as the technical
skills of procurement professionals.
Commentators have urged the Chinese State
Council to create a new independent agency to regu-
late all public-purchasing activities, whether such ac-
tivities operate under the T/B Law or the GP Law.
Creation of yet another administrator for Chinese
public purchasing might, however, simply add an-
other competing agency that vies for regulatory share
with the SDRC, Ministry of Finance and other agen-
cies.
Perhaps some diffusion (and, yes, some confusion)
in the regulatory structure is necessary and can be
offset by creating a review panel above all the cur-
rent agencies (and current chaos) to hear appeals from
protests under the SDRC and Ministry of Finance
complaint measures. This approach avoids the near
impossible task of dismantling the present system and
would be less threatening to vested regulatory inter-
ests. It would also create a source for interpretation
of all procurement rules and promote uniformity in
procurement practices over time. Of course, such a
strategy will depend on existing interested agencies
respecting and complying with the rulings of any new
appeal board, and the willingness of the appeal board
to bravely rule on violations of China’s procurement
laws and varied procurement regulations.
This analysis was written for INTERNATIONAL GOVERN-
MENT CONTRACTOR by Daniel J. Mitterhoff. Professor
Mitterhoff is co-director of the Research Center for
Government Procurement and Public Construction
at the Central University of Finance and Economics
in Beijing (CUFE). He teaches comparative govern-
ment procurement law at CUFE and Beijing Univer-
sity Law School.
¶ 17
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