By: Paul Emanuelli
This article is an excerpt from The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.
In its December 2018 report entitled Public Procurement in the Belt and Road Initiative, the World Bank Group raised concerns over how China’s Belt and Road initiative risks undermining the norms of open competition for government procurement projects due to a lack of transparency and due to unfair preference practices. The report called on integrating those projects into the global system of open competitive government procurement by seeing China join the World Trade Organization’s procurement regime:
China’s “Belt and Road Initiative” (BRI) includes major infrastructure investment projects – roads, ports, railways – that aim to improve connectivity along a number of transport corridors spanning 71 countries. In this paper we find that notwithstanding the large scale of the initiative, relatively little systematic data exists on the practices being followed by the different, primarily Chinese, entities that finance BRI-related contracts and how firms are being selected to execute projects. The limited available data however indicate that Chinese companies account for the majority of BRI-procurement, even in light of their high share of total infrastructure projects in developing countries. We discuss the limited publicly available evidence on the procurement of BRI projects and specific dimensions of the institutional features pertaining to public procurement regimes of BRI countries, including China, both as embedded in domestic regulations and in international agreements that countries may be part of. Finally, we discuss the efforts that BRI countries can take -individually or as part of an international agreement- to improve procurement practices for BRI projects.
As the report notes, China’s Belt and Road initiative represents a major investment of resources into global public infrastructure projects funded by Chinese development banks:
The “Belt and Road Initiative” (BRI) was announced by the Chinese government in 2013. The initiative now spans 71 countries including China that jointly account for two-thirds of the world’s population and one third of global GDP (Chin and He, 2016). The BRI includes major infrastructure investment projects – roads, ports, railways – that aim to improve connectivity along a number of transport corridors, as well as measures to promote trade and investment that will utilize this infrastructure. The latter include trade and transport agreements with China, trade promotion programs, economic and trade cooperation zones, projects to enhance production capacity in partner countries as well as cultural exchange and business-visa facilitation programs. To date, the major financers of BRI projects have been Chinese policy banks (e.g., China Development Bank, the Export Import Bank of China), the major state-owned commercial banks, and the Silk Road Fund (set up in 2014 with an initial total capital of $40bn) (Chan, 2017).
The report found a significant lack of transparency in the resulting contract award decisions, and raised concerns that Chinese firms are being awarded a disproportionate share of those infrastructure projects:
The limited available data indicate that Chinese companies account for the majority of BRI-procurement, even in light of their high share of total infrastructure projects in developing countries. Chinese firms have become very competitive globally. This is reflected, for example, in the fact that of all procurement contracts awarded by the World Bank to Chinese firms, over 70 percent are for projects outside China. As of 2013, Chinese companies accounted for 42 percent of the total dollar amount of civil works contracts funded by the World Bank in the Africa region (Zhang and Gutman, 2015). Multilateral development banks in Eurasia report that Chinese companies account for somewhat less than one-third of projects (Hillman, 2018). In the case of BRI projects, the share of Chinese firms seems substantially higher. Data compiled by the Center for Strategic and International Studies (CSIS) for a limited sample of BRI projects for which this can be determined suggest that more than 60 percent of Chinese-funded BRI projects are allocated to Chinese companies.
Information and data on BRI procurement practices and procedures is sparse. Little is known about the processes through which firms are selected to execute projects, e.g. the extent to which there is international competitive bidding on BRI projects or, insofar as Chinese-government-funded BRI projects are earmarked for Chinese suppliers, whether there is competition among potential Chinese suppliers. A basic challenge in generating a better picture of what is done under the framework of the BRI is that the program spans a large number of very heterogeneous countries and that different Chinese financing entities are involved that do not necessarily follow identical approaches in awarding contracts.
More specifically, the report found that the rate of award to Chinese firms was increasing over time and that infrastructure funding from Chinese development banks often tied contract awards to the use of Chinese suppliers:
Distribution of BRI projects
Comprehensive and comparable cross-country data permitting analysis of BRI-related procurement do not exist. The limited publicly accessible information suggests that Chinese suppliers/contractors win the majority of BRI projects. Chinese SOEs have invested or participated in at least 1,700 projects in BRI countries since 2014 (Baker McKenzie 2017). According to DBS (2017), Chinese contractors signed contracts in BRI countries in 2016 worth $126 bn. This value was 36% higher than in 2015 and accounted for 52% of total Chinese overseas projects in 2016. In value terms, China Communications Construction Company and China Railway Construction Corporation are among the major contractors.
The CSIS ‘Reconnecting Asia’ project maintains a database of infrastructure and other projects funded by national and multilateral donors. This database has information on both the source of funding and the winning supplier. It includes data on 124 projects that the CSIS classifies as BRI-related with a combined reported cost of $265 billion in current US dollars. The starting date is reported for only 93 of these projects, of which 32 commenced before 2013 (the year in which the BRI was announced by the Chinese government). The source of funding is identified for 44 of these projects, of which 34 were funded by Chinese sources. Twenty-one of those projects were awarded solely to Chinese suppliers. Thus, of the limited sample of Chinese-funded contracts, as reported in the CSIS database, three-fifths (21/34) were allocated to Chinese firms only. In comparison, only three of the ten non-Chinese funded projects in the dataset were awarded exclusively to Chinese suppliers. These data suggest that if the source of funding is Chinese, contractors are more likely to be of Chinese origin. Makocki (2017) also notes that infrastructure financing on BRI projects often is tied to the provision of equipment or services by Chinese suppliers.
While Chinese firms are very competitive and often are lower cost suppliers than non-Chinese firms, their dominance in BRI projects reflects policy as well as a willingness to invest in projects and areas that firms of other nationality may find too risky or challenging. The source of financing has been a major determinant of how BRI projects are allocated to contractors. It has been estimated that about half of a total of $292bn of funding for BRI projects (comprising outstanding loans or equity investment) was provided by the big four state-owned commercial banks. China Development Bank, the Export-Import Bank of China and the Silk Road Fund have provided much of the rest. Funding by these entities involves both explicit and implicit preferences for Chinese suppliers, reflecting the fact that funding often has a concessional or preferential element as well as policy objectives that restrict the financing to Chinese contractors (Zhang and Gutman, 2015).
The report also found that the lack of transparency within China’s procurement system undermined the ability to integrate appropriate open procurement practices and therefore recommended that China be integrated into the World Trade Organization’s public procurement regime as a means of addressing this issue. This would result in the award of projects funded by Chinese development banks being subject to the same procurement rules as other projects in the host jurisdictions funded directly by those governments or by other development banks whose funding is tied to open competition standards:
In this paper, we discuss the limited publicly available evidence on public procurement associated with BRI projects and specific dimensions of the institutional features pertaining to public procurement regimes of BRI countries, including China. Procurement regulation is a national matter.
In principle the regulations and practices of both host countries and the major provider of funding for BRI projects, China, are relevant in assessing what is being done in BRI projects. They are also relevant in determining how BRI-related procurement can conform more closely to international good practices. Doing so is important for borrowing/host countries, as they have a strong interest in ensuring that they obtain the best value for money. It is also important for China and the financial institutions that fund BRI projects, as adoption of international good procurement practice can help ensure the integrity of projects and their financial performance.
Implementing good procurement practices is a challenge for all governments, but especially for countries with weak administrative capacity. Given that the BRI is to a large extent focused on trade-related investments and seeks to expand commercial exchanges among BRI countries and between BRI countries and China, we also discuss whether trade agreements can be instruments to provide a framework for public procurement matters. These offer a mechanism to BRI nations to agree on principles and rules of the game for BRI procurement as well as procurement practice more generally.
The report then highlighted the specific benefits that would be gained by integrating China’s Belt and Road initiative into the World Trade Organization framework, noting that this would tie those projects to a series of global standards aimed at regulating the award of government contracts through transparent open public procurement practices:
Internationally accepted good procurement practices
The basic features of good practices in public procurement are well known. They are embedded in the procurement guidelines used by multilateral development banks, the provisions of the WTO Government Procurement Agreement (GPA) and international model laws developed by UNCITRAL. They include ensuring transparency and encouraging the use of competition in the allocation of contracts through open tendering, measures to promote competition and prevent collusion between bidders, clarity on the evaluation criteria that will be used to determine the winning bid, including the relative weight that will be given to price as opposed to qualitative criteria or technical quality and whether there will be a preference given to (certain types of) domestic firms, providing feedback to bidders why they were not selected and domestic review and complaints mechanisms permitting firms to contest perceived non-compliance by procuring entities with domestic law and procurement regulations.
Large and complex contracts – either those above a certain minimum threshold or requiring specialized technical expertise or skill – should be subject to international competitive bidding (ICB) procedures. National law should specify what the thresholds are. Implementing regulations should specify whether procuring entities may (or must) treat domestic bids more favorably than those from foreign companies or consortia, what such treatment comprises and the criteria that apply.
Transparency is critical both to make firms aware of opportunities – entailing publication of notices, ensuring there is sufficient time to prepare bids, making clear what the performance requirements are. One way of doing is to utilize e-procurement, especially for contracts above a certain minimum threshold. Transparency is also critical to permit firms to contest procurement decisions and assure there is accountability and integrity. Domestic review and bid-protest ‘challenge’ mechanisms are particularly important for accountability of procurement outcomes. Requirements that call for tenders to be published, that bids are opened in public, that procuring entities must award contracts to the lowest bidder who satisfies the technical criteria, and so forth, are much less relevant to firms if there is no effective recourse to situations where entities do not follow the rules. Another good practice relating to transparency is to publish data on both procurement processes and outcomes to allow for ex post analysis. This is a precondition for evaluation of the effects of processes and learning about how they might be improved.
As this report illustrates, the failure to implement the principles of reciprocal non-discrimination that are otherwise entrenched in global public procurement treaties increases the risk that public infrastructure projects will be run on a non-transparent basis and perpetuate unfair preference practices in the award of public infrastructure projects. Major funding initiatives that fail to link contract awards to the global standards of open competitive procurement risk perpetuating a parallel system of public procurement in which the standards of transparency and open competition governed by the rule of law are replaced with non-transparent practices through which contracts are awarded based on the origin of the contractor, rather than based on objective criteria that are aimed at selecting the bid that represents the most effective expenditure of public resources.
