Public procurement in China: overview

A Q&A guide to public procurement law in the China.

The country-specific Q&A gives a high level overview of applicable legislation, scope of rules, procurement procedures and enforcement, recent trends and proposals for reform. In particular, it examines entities and contracts covered, concessions, privatisations and PPPs, contract award criteria, alternative bids, and changes to an existing contract.

To compare answers across multiple jurisdictions visit the Public Procurement Country Q&A tool and EU Public Procurement Country Q&A tool.

This Q&A is part of the multi-jurisdictional guide to public procurement. For a full list of jurisdictional Public Procurement Q&As visit www.practicallaw.com/publicprocurement-guide.

Scott Silverman, Baker & McKenzie LLP (Beijing)
Contents

Legislative framework

1. What is the principal legislation that regulates public procurement? What regulatory authorities are responsible for public procurement enforcement?

Regulatory framework

The primary law regulating government procurement in China is the Government Procurement Law of the People's Republic of China (GPL), which was promulgated in 2002 and implemented on 1 January 2003. The Chinese government issued a consultation draft of the GPL Implementation Rules, but it remains uncertain when the final draft of the GPL Implementing Rules will be issued (see Question 18).

In addition to the GPL, the government also introduced the Tendering and Bidding Law of the People's Republic of China (Bidding Law), promulgated on 30 August 1999, effective from 1 January 2000 and the Implementing Rules of the Bidding Law, promulgated on 20 December 2011, effective from 1 February 2012.

The Ministry of Finance published the Measures for the Administration of Tenders and Invitations to Bid in Government Procurement of Goods and Services on 11 August 2004.

Several Ministries jointly published the Measures for Electronic Bidding on 4 February 2013, which took effect from 1 May 2013.

Local governments in most provinces, municipalities and autonomous regions have issued local administrative rules for implementation of the GPL and the Bidding Law in their local jurisdictions.

During the World Trade Organization (WTO) accession negotiation, China promised that its GPL will comply with the basic spirit of the WTO Agreement on Government Procurement (GPA) and will refer to the UNCITRAL Model Law on Procurement of Goods, Construction and Services. China has now submitted its third offer to accede to the WTO GPA.

Regulatory authorities

The primary governmental authority in charge of public procurement in China is the Ministry of Finance. Several other ministerial authorities have the authority to regulate and oversee government procurement matters in their relevant sectors, including the:

  • National Development and Reform Commission.

  • Ministry of Science and Technology.

  • Ministry of Commerce.

  • Ministry of Communications.

  • Ministry of Housing and Urban-Rural Development.

  • Ministry of Water Resources.

In addition to these national authorities, local governmental authorities have the authority to supervise and administrate the local government procurement activities.

 
2. What are the overriding principles of the legislation listed in Question 1?

Chinese government procurement legislation promotes the principles of:

  • Openness.

  • Transparency.

  • Fair competition.

  • Impartiality.

  • Honesty.

 

Regulation of specific industries

3. Are any industries subject to specific regulation?

Chinese government legislative rules apply to contracts for procuring goods, services or construction projects in all industries, if either:

  • The procurement contracts fall within the scope of the centralised procurement catalogue issued by the central or local governmental authorities (see Question 6, Contracts covered).

  • The contract value exceeds the thresholds prescribed by the authorities (see Question 7, Thresholds).

The centralised procurement catalogue is normally updated on a yearly basis. Government procurement applies to all industry sectors, ranging from IT, manufacturing, healthcare, to energy efficiency.

 

Recent trends

4. What are the recent trends in the public procurement sector?

Since 2006, it is national government policy to promote Chinese innovation, with an intention to reduce dependence on foreign technology. In line with this policy, the National Development and Reform Commission, the Ministry of Finance and the Ministry of Science and Technology have jointly issued several circulars to link Chinese innovation to government procurement. Under the circulars, preference is given to companies which:

  • Own intellectual property in China.

  • Possess registered trade marks in China.

  • Own a licence to use intellectual property in China.

This policy of linking government procurement to local or Chinese innovation has raised substantial concerns among international companies, who viewed the policy as preventing international companies from accessing the Chinese market. In June 2011, the Chinese government suspended three key rules on government procurement, to de-link government procurement from indigenous innovation. This move has been applauded by foreign firms, for allowing them better access to the domestic market and creating a more even playing field for Chinese and foreign companies.

The Chinese government has also encouraged small and medium-sized enterprises (SMEs) to take part in government procurement. The Ministry of Finance and the Ministry of Industry and Information Technology jointly issued the Interim Measures on Promoting SMEs in Government Procurement in 2011 (Interim Measures) under which individuals or entities cannot, by any means, prevent or restrict SMEs from participating in government procurement activities in their specific industries and jurisdictions. Departments responsible for budgeting for government procurement must reserve at least 30% of the total annual budget for procurement from SMEs. Chinese government encourages large businesses to team up with SMEs. Larger businesses can enjoy a price adjustment of between 2% to 3%, if they form a consortium with SMEs to undertake at least 30% of the total work. To prevent abuse of SME status, the Interim Measures also require all participating SMEs to issue a letter of undertaking to confirm SME status. Any company that abuses its SME status will have administrative or legal actions taken against it by the authorities.

Since 2007, it has been policy to make government procurement greener. The Ministry of Finance and the General Administration of Environmental Protection jointly issued several rules to define the scope, products and procedures for green government procurement. So far, there have been 14 catalogues issued for certified environmental-friendly products. Governmental agencies at all levels must give preference to certified environmental-friendly products in carrying out government procurement.

 

Scope of rules

Entities covered

5. Which entities must comply with the procurement rules? Are there any exemptions?

Entities covered

Governmental departments, institutions and public organisations at all levels are subject to government procurement rules when they conduct procurement activities with fiscal funds. Companies (either state-owned or private-owned) are not covered by government procurement rules, because their procurements are normally not financed by fiscal funds. But they may be subject to the Bidding Law, if they invest in or develop construction projects in energy, mining, infrastructure and public utilities which bear on public safety and public concerns.

Exemptions

Chinese state-owned and private enterprises are not covered by government procurement rules.

 

Contracts covered

6. What contracts do procurement rules cover? Are there any exemptions?

Contracts covered

The GPL applies to contracts for procuring goods, services and construction projects, if the procurement contracts fall within the scope of the centralised procurement catalogue issued by the central or local governmental authorities or if the value of such procurement contracts exceeds the thresholds prescribed by the authorities (see Question 3). The procurement catalogues set forth the type and value of the specific goods, services or construction projects subject to government procurement and the catalogues are prepared and issued according to different industry and product lines, for example:

  • Computer and software.

  • Office furniture.

  • Vehicles.

  • Medical and healthcare.

  • Education.

If the goods, services or construction projects to be procured fall within the scope of the catalogues, then the procuring entity must follow the procedures and requirements under the GPL.

Exemptions

Military and emergency procurement contracts are not subject to government procurement rules. In addition, if the procurement is funded by loans from international organisations or foreign governments, the parties can choose exemption from government procurement rules.

 
7. Are there specific thresholds to determine if a contract is subject to the public procurement regime? Are there any aggregation/anti-avoidance rules?

Thresholds

The Ministry of Finance sets and promulgates the thresholds for procurements using the central budget. The provincial governments set and promulgate the thresholds for procurements using the local budget. Central and local governments have issued various procurement catalogues which are classified into different industries and product lines and the thresholds vary accordingly (see Question 6, Contracts covered).

Aggregation/anti-avoidance rules

No entity or individual can, by any means, deny or restrict free access to government procurement markets. Information on procurement opportunities must be released to the public in a timely manner through the public media designated by the authorities supervising the particular procurement.

Parties involved in government procurement cannot collude with each other to the detriment of the interests of the state, the public or third parties. Where the parties adopt a public tender or bid by invitations procedure (see Question 12) to conduct the procurement, the relevant procedures as set out in the procurement rules must be strictly followed. The parties cannot break up the procurement into small pieces or take other measures to circumvent the procurement rules.

 

Concessions

8. Does the procurement regime apply to concession contracts? If not, how is the award of concession contracts regulated?

A public concession generally refers to the legal scheme under which a non-governmental investor (either state-owned or private) is granted the right to invest, construct and operate a public infrastructure or utility project for a certain period of time. Under public concessions, public infrastructure projects are generally financed by the investors, as opposed to the government, therefore, procurement rules do not apply to concession contracts.

However, given the public interest attached to infrastructure or utility projects, concession contracts are generally awarded through a public tendering process in accordance with the bidding rules.

 

Privatisations and PPPs

9. Are privatisations and PPPs subject to the procurement regime? If not, what are the relevant legal rules?

Privatisations

Privatisations are generally not subject to the government procurement regime, but are governed by separate rules on the transfer of state-owned assets. The transfer of state-owned assets is generally subject to a public tender, auction or listing procedure at the designated state-owned asset exchange centre. In most cases, prior consent from the State-owned Assets Supervision and Administration Commission or its local counterpart is required.

PPPs

There is no established PPP legal scheme, although there are several rules and regulations governing build-operate-transfer (BOT) projects. Generally, government procurement rules do not apply to PPP or BOT projects, although these types of project are subject to Chinese bidding rules.

 

Shared services and "in-house" arrangements

10. Do shared services projects and "in-house" arrangements trigger the application of the public procurement requirements? Are there any exemptions?

Chinese procurement rules are silent on shared services projects. However, Chinese authorities tend to interpret the application of government procurement rules strictly. This means that if part of the shared service is financed by fiscal funds, it is arguable that the government scheme applies to the shared services project.

 

Procurement procedures

11. What procedures do regulated entities use when carrying out procurements? Can regulated entities freely choose between the procedures? When is it appropriate to use each procedure?

Available procedures

Under the GPL, the following methods are acceptable for government procurement contracts, depending on the specific situation:

  • Public tender.

  • Bid by invitation.

  • Competitive negotiation.

  • Sole source procurement.

  • Price inquiry.

  • Other procuring methods as determined by the governmental authority in charge of the procurement.

Freedom of choice

The authorities can choose one of the above six methods for government procurement, provided that the relevant conditions are satisfied (see Question 12). In practice, public tender and bid by invitation are the most widely used.

Suitability

There are certain scenarios which qualify for each choice of procedure (see Question 12 (Key features sections)).

 

Key features

12. What are the key features of each procedure? What are the applicable time limits?

Public tender

Key features. If the procuring entity adopts public tender for government procurement, the procedures and timelines in the Bidding Law with respect to pre-qualification, the issuance of the request for proposals (RFPs), bid preparation and submission, bid evaluation and the bid award to the successful bidder must be complied with. The procuring entity must issue the advertisement of contracts in the media designated by the National Development and Reform Commission to target unspecified potential bidders. The procuring entity can conduct a pre-qualification process to shortlist the qualified bidders. The pre-qualification documents and RFPs must be accessible and available to the public for at least five days. If less than three bidders pass the pre-qualification process or if less than three bidders submit bids, then the procuring entity must re-conduct the pre-qualification or bidding process.

The procuring entity can request that bidders provide a bid bond, to be submitted together with the bidding documents. The amount of the bid bond cannot exceed 2% of the estimated project value. The submitted bids are appraised by a bid evaluation committee, which consists of experts randomly selected from the relevant industrial experts database. The bid evaluation committee reviews the bids according to the bid evaluation methodology and criteria expressly set out in the RFPs. Except for the bid clarifications communicated to all participating bidders, the procuring entity cannot disclose any additional information to any particular bidders, nor can it negotiate the bids with the bidders.

Time limits. Generally, the procuring entity must give bidders at least 20 days to prepare and submit the bid. If the procuring entity needs to make amendments or give clarifications to the RFPs, the procuring entity must publicise an amendment or clarification notice in the media designated by the government at least three days prior to the deadline submission for pre-qualification documents, or at least 15 days prior to the bid submission deadline.

Bid by invitation

Key features. The procuring entity can conduct the government procurement using bid by invitation, if either (GPL):

  • The goods or services to be procured are of a special nature and can only be procured from limited suppliers.

  • The procurement cost would be too high if the procurement was conducted using a public tender.

Under a bid by invitation, the procuring entity must send the RFP to at least three bidders who are selected at random from qualified bidders.

Time limits. This is the same as for a public bid (see above, Public tender: Time limits).

Competitive negotiation

Key features. The competitive negotiation method can be adopted if either:

  • No qualified bidders can be found after a bidding process.

  • Due to technical complexities, it is impossible to determine the specifications or detailed requirements for the goods, services or projects to be procured.

  • The time requirement of the procuring entity cannot be met if a bidding process is adopted.

  • It is impossible to determine the total value of the procurement.

The procuring entity forms a negotiation team, consisting of representatives of the procuring entity and external experts in the relevant industry sectors. The negotiation team prepares the relevant contractual documentation and issues invitations to at least three qualified bidders for negotiation. The negotiation team negotiates with each bidder on a one-to-one basis. After the one-to-one negotiations, each of the invited bidders submits the final proposal within the prescribed period and the procuring entity will consider all different factors including non-procurement requirements, quality of goods and services, and price, to determine the winning supplier.

Time limits. There is no fixed time limit for the process.

Sole source procurement

Key features. If one of the following situations applies, the procuring entity may procure goods or services from a single source:

  • The goods or services can only be procured from one single supplier.

  • Procurement from other suppliers is impossible due to the occurrence of an unforeseeable emergency.

  • It is necessary to continue to purchase from the original supplier in order to ensure consistency or compatibility of ancillary services with the original procurement item, and the total purchase funds do not exceed 10% of the procurement amount in the original contract.

Sole source procurements must be carried out in accordance with the principles of ensuring that the government obtains a reasonable price and the goods and/or services are of a good quality.

Time limits. There is no fixed time limit for the process.

Price inquiry

Key features. The procuring entity can choose the price inquiry option for government procurement if the goods or services being procured are sufficient in supply and subject to little price fluctuation.

If the price inquiry method is adopted, the procuring entity must form an inquiry team, consisting of the representatives from the procuring entity and external experts. The inquiry team determines the potential suppliers and seeks quotes from at least three qualified bidders. Quotes given by bidders must be final and no further changes can be made. The inquiry team decides the winning bidder by taking into account various standards such as quality, price, service and other requirements.

Time limits. There is no fixed time limit for the process.

 

Technical specifications

13. Are there any requirements concerning technical specifications of tenders?

Under the GPL and the Bidding Law, the procuring entity can include certain technical standards or criteria required for the bidders. For example, the procuring entity may request the bidders to meet certain technical requirements including:

  • Technical skills.

  • Professional qualifications.

  • Past performance record.

  • Financial viability.

  • Track record of legal compliance.

The procuring entity cannot impose unreasonable conditions to discriminate against potential bidders or suppliers.

 

Alternative bids

14. Are there specific rules in relation to alternative bids?

The GPL is silent on alternative bids. However, under the Bidding Law, an alternative bid is generally deemed as a bid which does not respond to the bid call document and is therefore subject to the risk of being disqualified.

 

Contract award criteria

15. What are the requirements relating to contract award criteria?

Award criteria

The award criteria must be set out in the RFPs and neither the procuring entity nor the bid evaluation committee may adopt any other award criteria, unless otherwise expressly allowed in the RFPs (see Question 12). In China, there are two widely used methods for awarding the procurement contracts:

  • Lowest price evaluation.

  • Comprehensive evaluation.

The lowest price evaluation generally applies to procurement for goods or services adopting generic technology or specifications. Where the goods or services to be procured are technically complicated or subject to special specifications or standards, it is more proper to award the contract using a comprehensive evaluation.

After accepting the bid

Once the successful bidder has been selected, the procuring entity must enter into the procurement contract within 30 days after the issuance of the award notice. The procurement contract, which must be in writing, must be governed by the laws of the PRC. Within seven working days of signing, the parties must file a copy of the procurement contract with the relevant governmental authority.

Subject to the procuring entity's consent, the winning bidder can subcontract certain work components to its subcontractors. The winning bidder is responsible to the procurement entity for the items procured, and the sub-contractor is responsible to the to the procurement party for the sub-contracted work.

 

Changes to an existing contract

16. Does an extension or amendment of an existing contract require a new procurement procedure?

Extension of contract

A procuring entity can purchase additional goods, projects or services from the original suppliers or contractors under the same terms and conditions by entering into a supplementary contract, provided that the additional procurement of the goods, projects or services does not exceed 10% of the original procurement amount (GPL).

Amendment of contract

After the government procurement is signed, no party can unilaterally amend or terminate the contract. However, if the implementation of the government procurement contract will damage the interests of the state or the public, then the parties can revise or terminate the contract as appropriate and the party in default must assume liability and compensate the other party for any loss or damage suffered.

 

Enforcement

17. Who can bring a claim for non-compliance with procurement legislation? What are the available review procedures? Are there any associated statutes of limitation?

Right to bring a claim

A bidder can bring a claim against the procuring entity by submitting written documents if it thinks that its rights or benefits have been infringed due to (GPL):

  • The terms of the RFP.

  • The procuring process.

  • The result of the bid award.

Under the GPL, only unsuccessful bidders have the right to bring claims by submitting supporting documents. The government authorities can make investigations if they are aware of any non-compliance or irregularity . The Implementing Rules of the Bidding Law have extended the right of claim to "other parties concerned", in addition to unsuccessful bidders. The Implementing Rules do not give a definition of third parties concerned, but a general understanding is that this could be broad enough to include non-governmental organisations (NGOs).

Enforcement procedures

The claim must be lodged within seven working days after the supplier knew or should have known of the alleged infringement. On receiving the written claim from the aggrieved party, the procuring entity must provide a written response to the aggrieved party as well as all other suppliers involved. If the procuring entity fails to provide a response within the prescribed time period or if the aggrieved party is not satisfied with the response, the aggrieved party can lodge a complaint with the relevant governmental authority. The governmental authority must give a decision within 30 working days from the receipt of the complaint.

If the aggrieved party is not satisfied with the administrative decision given by the governmental authority, it can petition for an administrative review or initiate an administrative lawsuit in the courts. To do so, the aggrieved party must submit the application for administrative review within 60 days (unless the time limit for application is more than 60 days, as prescribed by law). Generally, the higher-level authority completes the review and gives its decision within 60 days, although this can be extended by 30 days for complicated matters.

If the aggrieved party is not satisfied with the review decision or if the higher-level authority fails to give its decision within the prescribed period of time, then an appeal can be made to the people's court to initiate an administrative lawsuit. The legal proceedings normally take three months, unless special or complicated circumstances justify a longer trial period.

During any appeal period, the government procurement supervision authority may request a suspension of up to 30 days of the procurement, taking into account the specifics of the scenario.

Statutes of limitation

See above, Enforcement procedures. The parties may be time-barred from bringing legal action if they fail to comply with the time requirements under the Judicial Interpretations of the Administrative Procedural Law. In general, the time limit for initiating an administrative legal action is two years, calculating from the date on which the claimant knew or should have known of his right of administrative claim. However, the claimant will be completely time-barred if he fails to start the legal action within five years after he knew or should have known of his right of administrative claim.

 

Reform

18. Are there any proposals for reform of the procurement legislation? If so, when are they likely to be implemented?

There has been a public outcry from suppliers, contractors, governmental agencies, practitioners and scholars about issues such as lack of cost efficiency and transparency arising from government procurement activities. The draft Implementing Rules of the GPL have been circulated to the general public for comments and the promulgation of the Implementing Rules of the Bidding Law is likely to increase pressure to finalise the Implementing Rules of the GPL. Even though there is no fixed time limit, it is anticipated that it will not be long before the final version of the Implementing Rules of the GPL will be promulgated.

 

Contributor profile

Scott Silverman

Baker & McKenzie LLP (Beijing)

T +86 10 6535 3969
F +86 10 6505 2309
E scott.silverman@bakermckenzie.com
W www.bakermckenzie.com

Professional qualifications. California, US, 2001

Areas of practice. China-related corporate and commercial matters; merger and acquisitions; regulatory; cross-border advice.

Recent transactions

  • Advising a worldwide leader in orthopaedic products on its US$49 million acquisition of a Chinese medical device manufacturer.
  • Acting for a leading provider of geophysical technology, services, and solutions for the global oil and gas industry in its joint venture with China's largest oil and gas producer to engage in the R&D of advanced geophysical equipment and technology.
  • Acting for a NYSE listed manufacturer of medium and heavy trucks in the negotiation and establishment of a 50/50, RMB3 billion joint venture with a leading Chinese truck manufacturer to manufacture medium-duty and heavy-duty trucks and components.
  • Represented a Chinese state-owned oil company in its US$3.1 billion acquisition of a 50% interest in an entity operating oil and gas exploration and production assets in South America.

{ "siteName" : "PLC", "objType" : "PLC_Doc_C", "objID" : "1247692919077", "objName" : "Public Procurement in China_overview", "userID" : "2", "objUrl" : "http://us.practicallaw.com/cs/Satellite/us/resource/4-521-9911?null", "pageType" : "Resource", "academicUserID" : "", "contentAccessed" : "true", "analyticsPermCookie" : "25e8a493e:15b10628bd6:3de8", "analyticsSessionCookie" : "25e8a493e:15b10628bd6:3de9", "statisticSensorPath" : "http://analytics.practicallaw.com/sensor/statistic" }