Identifier
Created
Classification
Origin
05TAIPEI1421
2005-03-28 07:56:00
CONFIDENTIAL
American Institute Taiwan, Taipei
Cable title:  

PROCUREMENT STILL A CHALLENGE IN TAIWAN

Tags:  ECON BEXP ETRD TW 
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This record is a partial extract of the original cable. The full text of the original cable is not available.
C O N F I D E N T I A L SECTION 01 OF 03 TAIPEI 001421 

SIPDIS

STATE FOR EAP/RSP/TC AND EB/TPP/BTA, STATE PASS AIT/W AND
USTR, USTR FOR KI AND FREEMAN, USDOC FOR
4431/ITA/MAC/APOPB/MBMORGAN AND
3132/USFCS/OIO/EAP/ABACHER/ADESARRAN AND USDA FOR FAS/ITP,
GENEVA FOR USTR

E.O. 12958: DECL: 03/23/2015
TAGS: ECON BEXP ETRD TW
SUBJECT: PROCUREMENT STILL A CHALLENGE IN TAIWAN

Classified By: AIT DIRECTOR DOUGLAS PAAL FOR REASONS 1.4 (B/D)

C O N F I D E N T I A L SECTION 01 OF 03 TAIPEI 001421

SIPDIS

STATE FOR EAP/RSP/TC AND EB/TPP/BTA, STATE PASS AIT/W AND
USTR, USTR FOR KI AND FREEMAN, USDOC FOR
4431/ITA/MAC/APOPB/MBMORGAN AND
3132/USFCS/OIO/EAP/ABACHER/ADESARRAN AND USDA FOR FAS/ITP,
GENEVA FOR USTR

E.O. 12958: DECL: 03/23/2015
TAGS: ECON BEXP ETRD TW
SUBJECT: PROCUREMENT STILL A CHALLENGE IN TAIWAN

Classified By: AIT DIRECTOR DOUGLAS PAAL FOR REASONS 1.4 (B/D)


1. (U) Summary: The public procurement process in Taiwan
remains a longstanding irritant for US firms. Several recent
cases of US firms running into problems with the procurement
process, including allegations of improper political
influence in the tendering process, indicate that this issue
should be raised at the upcoming trade talks scheduled for
March 30-31. End Summary.

Problems in Public Procurement
--------------


2. (U) Public procurement has been a longstanding irritant
for the US business community in Taiwan. The American
Chamber of Commerce has regularly been, in the words of its
Executive Director, &beating its head against the wall8 on
this issue for well over a decade. In recent months, the
Chamber has dramatically lowered its expectations on this
issue. Observing that the Construction Committee of the
Chamber has all but disbanded and that its most active member
is Germany's Siemens Corporation, the ED said most of the US
construction and engineering industry has left Taiwan (bound
for Mainland China) because the firms believe that they have
little or no chance of winning any contracts on the island
because of non-transparency in the procurement process.
While there was some hope that things would improve with
Taiwan's accession to the WTO in 2002 and its commitment to
join the WTO Agreement on Government Procurement (GPA) and/or
unilaterally abide by the GPA terms and conditions, many of
those expectations have dissipated.


3. (U) Even if the Chamber is currently giving procurement a
low priority, AIT/T believes we should continue to pursue
this issue in an effort to increase the transparency of
public procurement in Taiwan. Any progress we can make in
this area could provide increased business opportunities in
Taiwan for US firms and highlight the need for Taiwan to
adhere to its international trade commitments. In the past
few weeks some significant complaints have arisen about the

procurement process, enabling us to gather some specific
details about current cases of interest to US firms. Taiwan
business circles are often awash in rumor and innuendo about
shady procurement practices, but details are generally hard
to come by and even harder to confirm.

Concerns over Terms, Administration and Appeals
-------------- --


4. (U) Generally speaking, US firms' complaints with
Taiwan's public procurement process fall into three areas:
the terms and conditions (such as unlimited liability),
non-transparent procurement administration and the appeals
process. Contract terms and conditions are often thought to
be egregiously onerous, leading many US firms simply not to
bid on the project at all. U.S. firms often compare &Ts &
Cs8 in Taiwan public tenders unfavorably with those in PRC
tenders. Many RFPs come with an unlimited contingent
liability clause that gives pause to the legal departments of
virtually all US international firms. Several firms have
commented that their legal departments simply reject
submitting a bid based on a review of the RFP documents. One
local example of why unlimited liability has such a chilling
effect: last year during one of the many typhoons that hit
Taiwan, floodwaters reached and flowed through a drainage
culvert being built under the Danshui River for the subway
system. The result was severe flooding in Sanchong city, an
areas that had not been hit by floods for some 26 years. It
is still not clear who is responsible for footing the cleanup
bill and for compensating the tens of thousands Sanchong
residents affected by the flood, but US firms are rightly
wary of entering into any contract that might involve such
open-ended commitments. Procurement administration,
including technical evaluation of proposals, is frequently
criticized as highly non-transparent and unpredictable. U.S.
firms attribute this in part to shortcomings in Taiwan's
Government Procurement Law (GPL),which it follows in lieu of
the WTO GPA. Finally, the appeals process is handled by the
Public Construction Commission (PCC) and is widely criticized
by international bidders as non-transparent. One U.S.
company recently provided details on its case that is under
mediation. In short, the U.S. firm believes that a
government ministry was actively working to rig the mediation
process.


5. (SBU) AIT/T recommends that procurement concerns be
raised during the upcoming trade consultations scheduled for
March 30-31 in Taipei. AIT consultants from USTR and AIT/W
could usefully note concerns on procurement and ask that
Taiwan officials work with AIT/T to see if we can make some
progress in this area.

Stone & Webster
--------------


6. (C) AIT/T met with Stone & Webster on March 21 (as we had
in November 2004) to discuss its concerns about Taiwan
legislators playing a major role in influencing procurement
decisions on the 4th Nuclear Power Plant project. Stone &
Webster is a US engineering firm with the contract to conduct
architectural and engineering work on 4NNP. Under the terms
of its contract Stone & Webster writes specifications and
evaluates bids for various suppliers and subcontractors. In
the meeting and in a letter dated March 21, 2005, Stone &
Webster detailed a history of pressure tactics utilized by
Taiwan Legislative Yuan members (from the DPP) on Taiwan
Power Company (TPC) executives and directly with Stone &
Webster officers to influence contract awards. The history
of pressure tactics, including holding public hearings and
accusing Stone & Webster of violating various sections of
Taiwan's procurement law; TPC officials seeking Stone &
Webster cooperation to direct contracts to certain firms
while refusing to allow minutes of the meetings to be taken;
TPC reprimands for Stone & Webster not &accommodating TPC's
positions;8 and, most recently, threats of physical violence
and police investigations against Stone & Webster employees.
Stone & Webster assured us that it has refused to participate
in any bid-rigging activities despite explicit requests from
lawmakers and TPC officials to do so. Further, it believes
the situation may be resolvable with TPC, but it wanted to
share its concerns with us over the procurement process
should the situation deteriorate any further.

Holtec & Duratek
--------------


7. (SBU) Holtec and Duratek bid on separate tenders from,
again, TPC, to build nuclear waste storage facilities.
Neither firm won the contract they bid on. The likely winner
in both cases will be INER (the Institute of Nuclear Energy
Research) - a Taiwan state-owned entity. There is some
history to these tenders. TPC had issued tenders on the same
projects and received international bids substantially above
TPC's budget for the project. As such the contract was
withdrawn and now reissued for another round of bidding. In
the current scenario, INER has bid on the projects at a price
well below Holtec's and Duratek's. Under the terms of
Taiwan's government procurement law, in the absence of
&qualified8 international bids (i.e., coming in at or lower
than TPC's budgeted amount),INER, with no experience in the
field, gets the contract.


8. (C) The US firms allege that TPC's budget for the
projects is unrealistically low and the entire tendering
process is simply a vehicle to deliver the contract to a
local firm, in this case INER. Many US firms suggest that
the larger goal for Taiwan officials is to help develop
specific technologies indigenously through guiding contracts
to local firms while shutting out foreign competition. These
two firms have both sought assistance from the USDOC Advocacy
Center and at least Duratek has filed an appeal to the PCC.
AIT/T will continue to press the cases for Holtec and
Duratek. Unfortunately, in our experience, the PCC has been
quite reluctant to intervene in procurement decisions absent
a clear violation of the law. Even more unfortunate, PCC
rulings are advisory only. They have no enforcement
mechanism. After filing the appeal, Duratek told us that it
will simply walk away if the PCC does not provide
satisfaction because "it can get much more business in China
than in Taiwan for the same amount of aggravation."

IBM
--------------


9. (C) Robert Huang, head of IBM Taiwan has advised AIT/T of
concerns about Taiwan requirements that government
procurement contracts include provisions that the buyer owns
all the rights to the intellectual property in the product.
Huang says that this provision prevents his company from
bidding on a number of potentially desirable tenders. It
also allows the buyer to make its own modifications and
distribute software as widely as it wants to potential users,
thus eliminating future profits for the software designer.
He views this provision as an effort to, again, steer
contracts to local suppliers and shut out foreign bidders.
Huang has made significant efforts on his own to argue the
merits of this provision with Taiwan officials, including
meeting with the PCC and economic officials.

Comment
--------------


10. (C) There is no shortage of other allegations of
impropriety in contract awards in Taiwan. The cases above
provide a degree of specificity that is generally not
available when claims and counterclaims are made about
influence peddling. The High Speed Rail system (THSR) is a
good example of the rumor mill in operation. THSR is due to
start operation in October this year, yet it is several
billion NT$ short of funds to finish the project and the
general expectation is that it will not meet its start-up
target. One consistent allegation about the project is that
it backtracked on the original contract award to European
firms due to political pressure from the Taiwan Solidarity
Union (TSU),a small pro-independence ally of the ruling
Democratic Progressive Party (DPP),that favored awarding the
contract to Japanese firms. While no one wants to go on the
record on this allegation of political meddling, it is public
knowledge that THSR has paid the European consortium a US$140
million fee for backing out of the original contract.
Similarly, Taiwan paid a heavy financial (as well as
political) price for stopping 4NPP in 2000. These same
excessive costs continue today as Stone & Webster reports
that TPC is racking up large financial costs in its repeated
delays of contract awards for the 4NPP.


11. (C) These costs impose a significant burden on Taiwan's
economic and political institutions. Under the single-party
rule of the KMT in Taiwan, there were regular allegations of
a lack of transparency in procurement processes and business
operations in General. The DPP has billed itself as, and was
initially accepted as, the party of reform willing and able
to root out corruption and inefficiency. In financial
circles, the DPP has proclaimed itself as intent on
financial-sector reform aimed at producing a more open,
market-based financial industry. The DPP implemented on July
1, 2004 the Financial Supervisory Commission to provide a
stronger, unified regulatory system for the financial sector.
We think that it is appropriate to urge Taiwan to implement
these same kinds of commitments to its public procurement
policy. End comment.
PAAL