CHINA - STATE COUNCIL OPINION URGES

UNCLAS SECTION 01 OF 07 BEIJING 001177

SENSITIVE
SIPDIS

STATE FOR EAP/CM FLATT AND EEB/TPP MAGDANZ, TOLLIVER
STATE PASS USTR FOR STRATFORD, MCCARTIN, MAIN, GRIER
DOC FOR KASOFF AND MELCHER (5130),HEIZNEN (6510),
PRUITT (4420),SZYMANSKI (4310)
TREASURY FOR OASIA/DOHNER
GENEVA PASS USTR

E.O. 12958: N/A
TAGS: ECON ETRD EFIN EINV WTRO PGOV CH
SUBJECT: CHINA - STATE COUNCIL OPINION URGES
ENHANCED TRANSPARENCY AND OVERSIGHT IN GOVERNMENT
PROCUREMENT

REFS: A.) 2008 Beijing 1567 B.) 2009 State 015625

(U) This cable is Sensitive But Unclassified.
Please protect accordingly.


1. (SBU) Summary: China's State Council issued a
seven-point "Opinion" April 10 on "Strengthening
Management of Government Procurement" that is a
binding administrative prescription with quasi-legal
force (unofficial translation at Paragraph 7).
Local media portray the new guidelines as targeting
corruption and waste by strengthening the Ministry
of Finance (MOF)'s abilities to enforce and apply
the existing China's Government Procurement Law (GPL)
through all layers of government. However, at least
some foreign companies are concerned over references
in the Opinion to "protecting national and public
interests" through adherence to an array of existing
State policies that favor purchase of domestic
products in government procurement and promote
"indigenous innovation" (Ref A). That said, the
Opinion does not appear to include any obviously
odious new measures, but it does reinforce China's
longstanding policy of using government procurement
expenditures to promote domestic goods and services,
indigenous innovation, and other policy goals. End
Summary.


2. (SBU) While the guidelines in the "Opinion"
(Guobanfa No. 35) do not appear to deviate
significantly from China's existing GP practices,
they are a step towards tighter central government
policy /fiscal control over GP expenditures at all
levels (national through local). Analysis suggests
the key goals are to:

* reduce opportunities for corruption and
strengthen punishment thereof;

* broaden the scope of coverage of China's
existing Government Procurement Law by
including some new areas of procurement
financed with revenues outside the fiscal
budget;

* bring consistency to the previous
checkerboard of local-provincial-national
procurement regulations and processes;

* encourage professionalism, transparency, and
competition between centralized procurement
entities through higher standards and
training;

* continue promoting State policy goals via
government procurement. These goals include:
minimizing purchases of imported goods,
promoting indigenous innovation and energy
efficient or environmentally friendly
products, and (less boldly) supporting small-
to-medium sized enterprises (SMEs);

* increase oversight and supervision of
government procurement in all its phases from
budgeting to bidding to evaluation and award
of contracts; and

* promote a vision for a national E-procurement
system to cover the entire government
procurement process

[Note: China does not consider "public works" to be
government procurement, as these activities are
generally conducted under China's Bidding and
Tendering Law (BTL),under the National Development
and Reform Commission. (Ref A contains a more
detailed explication of the complicated procurement
picture here.) As a result of this unique situation,
China's Government Procurement Law is estimated to

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cover only roughly half of China's actual government
procurement, but opaque practices and budgeting make
it difficult to reach solid conclusions. For
example, Vice Minister of Commerce Jiang Zengwei
said February 9 that China won't implement "buy
China" in its massive RMB 4 trillion stimulus
package launched in November, his statement being
apparently based on China's legislative view that
"public works" are not considered government
procurement (Ref B). End Note].


3. (U) The initial three provisions of the document
aim at increasing transparency, accountability, and
efficiency in the expenditure of government funds.
This is a key theme in China's government
procurement effort to date. The guidelines seek to:
1) promote greater efficiency through increased
central procurement, 2) separate procurement
supervision functions from procurement activities
(including competition in the use of procurement
agents) and 3) ensure closer attention to accurate
budgeting to ensure optimal price and quality in
procurement. Chinese legal experts such as Zhou
Guangquan, a professor from Tsinghua Law School,
acknowledge that the current government procurement
supervision system is problematic and vulnerable to
corruption.


4. (U) The fourth point of the "Opinion" emphasizes
government procurement's role in reinforcing
existing central government policy goals, thus
giving Beijing greater resources "to promote
economic and social development." Furthermore, "Buy
China" language contained in Article 10 of China's
Government Procurement Law is restated in the fourth
provision of the "Opinion": "procurement of
imported products shall be strictly examined; if
domestic products can meet the procurement needs, no
imported products shall be considered."
Encouragement is also given to existing policies
championed by various ministries including
indigenous innovation (MIIT),internal market demand
(MOFCOM),and green procurement and energy savings
(NDRC and others).


5. (U) Final provisions in the guidelines advocate
enhanced transparency, anti-corruption efforts, and
the elimination of wasteful procurement practices --
longstanding cost-saving themes used by the central
government in part to elicit public support for a
centralized procurement effort. (The government has
claimed an overall cost savings of over ten percent
in its GP programs to date.) The guidelines also
call for additional oversight in all areas of the
bidding process, create a national e-procurement
system, and improve professional qualifications and
training for procurement officials.

Comment:

6. (SBU) China introduced regulation of government
procurement and a catalogue of approved products for
purchase on a trial basis in 1996 and the program
has expanded steadily since. However, because China
has not acceded to the WTO Agreement on Government
Procurement, "Buy China" and other domestic
preference provisions in existing government
procurement law and regulations do not run afoul of
their international agreements. While the newly
issued Opinion clearly has a number of aims
including greater transparency and efficiency in
local-to-national government procurement, none of
the policy-related provisions suggest any change
from China's existing policy of using rapidly
growing government procurement to promote domestic
goods and services and "indigenous innovation". End
Comment.


7. (U) An unofficial translation of the full text of
the Notice, "The Opinions on Further Strengthening

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Management of Government Procurement" (Guobanfa No.
35/2009),April 10, 2009, is reproduced below:

Begin Text

Opinions of the General Office of the State Council
about Strengthening Government Procurement
Management

Document No. 35 (2009) issued by the General Office
of the State Council

The People's Governments of all the provinces,
autonomous regions and municipalities directly under
the central government, ministries & commissions and
relevant authorities directly under the State
Council:

Over the years, the Government Procurement Law of
the People's Republic of China (hereinafter referred
to as the Government Procurement Law, or GPL) have
been conscientiously enforced by various government
organs and in various regions, and consistent
efforts have been made to strengthen the
institutional construction and regulate the
procurement activities. These efforts have achieved
remarkable results, and government procurement is
playing an increasingly important role in improving
funds utilization efficiency, protecting national
and public interests, preventing corruption,
supporting energy efficiency and environmental
protection, and promoting indigenous innovation.
However, a very small number of organizations have
been found to evade government procurement
procedures, or fail to follow standardized
procurement procedures. Inadequate operational
mechanisms and ineffective supervision and
punishment have led to low procurement efficiency
and exorbitant prices in some projects, as well as a
number of breaches and corruptions, causing a great
loss of state fiscal funds. To address these
problems effectively, and deepen the reform of
government procurement systems in an overall manner,
the following guidelines are proposed with the
approval of the State Council, for purpose of
further strengthening government procurement
management:


I. Persist in implementing government procurement
for all the items listed to further strengthen and
implement law-based procurement

The finance departments shall, according to
government procurement needs and capabilities of
centralized procurement agencies, improve the
catalogue of products for centralized procurement by
government organs and categorization of products.
Various regions and departments need to increase
efforts to promote the enforcement of government
procurement, expand the application scope of
government procurement, and carry out government
procurement for all the items that are listed in the
catalogue of government procurement products.
Especially, the finance departments need to
strengthen management over the procurement
activities where departments and organizations use
other funds subject to financial management and
loans that will be paid back with fiscal funds.
Strengthen the management over the procurement of
engineering works, and GPL shall apply to government
procurement of engineering works, except those
engineering works for which public bidding activity
is conducted.

Various departments and organizations shall
earnestly follow the procurement procedures and
operation standards specified in government
procurement law and regulations, reasonably
determine procurement needs, timely sign relevant

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contracts, perform the contracts, carry out product
acceptance, and make payment, and shall not
interfere with or influence procurement activities
in any way. For items listed in the centralized
procurement catalogue, procurement can be conducted
by a centralized procurement agency appointed by
relevant purchaser. For items that meet the quota
set for public bidding, other procurement modes
shall not be adopted without the approval of finance
departments. Procurement notice shall be published
publicly according to relevant rules, to ensure an
open and transparent procurement.

II. Persist in separating procurement from
management to further perfect oversight and
operation mechanisms

Strengthen institutional construction through
separating government procurement supervision &
management from procurement implementation, and
further improve the mechanism under which the
finance departments exercise supervision &
management while centralized procurement agencies
carry out procurement procedures independently.

The finance departments shall develop specific
standards and procedure requirements for compilation
of procurement documents, public announcement,
procurement evaluation, contract format and product
acceptance; build a unified expert base and product
information base, to gradually achieve dynamic
management and impose punishment on violations; work
with state secrecy authorities to develop specific
standards, scope and work requirements for
procurement of items that are kept confidential. No
organization can evade or simplify government
procurement procedures on the pretext of keeping
procurement confidential.

Centralized procurement agencies shall conduct
procurement activities in line with the Government
Procurement Law, standardize the operation of
centralized procurement, and implement the
centralized procurement catalogue seriously,
scientifically and effectively. During the
implementation process, centralized procurement
agencies shall not violate relevant regulations to
charge any agent fee or other fees, or assign any
centralized procurement project entrusted by
relevant purchasers to public procurement agents.
Centralized procurement agencies shall build and
perfect internal supervision and management systems,
define power and responsibilities clearly for
different links of the procurement activities, with
each employee involved assuming only one key
responsibility. Procurement agencies shall pay
attention to strengthening professional capabilities,
optimize centralized procurement implementation
method and internal operation procedures, to achieve
the goals of lower procurement prices compared with
mean market prices, higher procurement efficiency,
and good procurement quality and services.

Competition shall be properly introduced when
selecting agents for implementation of government
centralized procurement. Traditional practices of
selecting agents based on administrative
relationship solely shall be rejected, and
purchasers can select a centralized procurement
agency based on their expertise and capabilities in
the regions where they are located, to encourage
moderate competition in centralized procurement
activities.

III. Persist in implementing budget control to
further boost government procurement efficiency and
quality

Various departments and organizations shall,

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according to provisions of the Government
Procurement Law and budget management requirements
of the finance departments, put all the government
procurement projects under department budget, and
base the preparation of procurement plans on
government procurement budgets, to ensure
procurement plans are implemented according to items
and amount of government procurement budgets.

Effective measures shall be taken to strengthen
coordination among oversight authorities, purchasers
and procurement agencies, to continuously increase
procurement efficiency through improving management
capabilities and operation quality. The finance
departments shall improve management method,
heighten examination efficiency, reorganize and
optimize the procurement system, develop
standardized procurement procedures, build
government procurement price supervision mechanisms
and procurement results public disclosure systems
under various procurement modes, to establish
effective supervision and control over procurement
activities and procurement results. Centralized
procurement agencies need to improve their
professional skills and operation capabilities, and
through optimizing organizational structure for
procurement, set price parameters and evaluation
standards scientifically, perfect evaluation
procedures, shorten the duration of the procurement
process, establish a mechanism ensuring government
procurement prices keep abreast of market prices, to
secure best procurement prices and quality.

IV. Persist in adherence to government procurement
policies to better serve economic and social
development

Government procurement shall serve to facilitate
achieving the state objectives of economic and
social development. Strengthening the functions of
government procurement policies is an objective
requirement of building a scientific procurement
system. Various regions and departments shall,
aiming to make government procurement policies
function better, support macro-economic control,
carry out such economic policies as expanding
domestic demands and adjusting economic structure,
earnestly fulfill government procurement policies
concerning energy efficiency, indigenous innovation
and examination of imported products; shall further
expand the scope of implementing government
procurement policies, and consider developing new
government procurement policies encouraging the
growth of small and medium-sized enterprises. More
measures shall be taken to ensure mandatory
procurement of energy efficient products and
priority procurement of environment-friendly
products; in case products to be procured fall with
categories of energy efficiency and indigenous
innovation products, the list (catalogue) of energy
efficient products and indigenous innovation
products for government procurement published by the
Ministry of Finance together with relevant
departments must be followed. The procurement of
imported products shall be strictly reviewed; if
domestic products can meet the procurement needs, no
imported products shall be considered. The finance
departments shall strengthen supervision over
compliance with policies, and follow up the
enforcement of policies, establish procurement
effect evaluation system, to ensure relevant
policies and regulations serve purpose.


V. Persist in punishing violations according to law,
to ensure strict enforcement of laws and regulations

The finance, supervision, audit and anti-corruption
departments at various levels shall tighten
supervision and management over government

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procurement activities, carry out enforcement
inspections, investigate legal responsibilities of
violations of law, make violations public in proper
ways, and give sanctions according to law in case of
serious offences.

A dynamic supervision system shall be set up to
timely identify procurement organizations evasion
of government procurement procedures or violation of
other government procurement rules, and violating
organizations and their employees shall be
investigated for their responsibilities. Improve
punishment rules for evaluation experts, and in case
where experts breach government procurement
regulations, evaluation procedures and standards,
and perform their duties in an unsatisfactory manner
or purposely influence the bid evaluation results,
relevant experts shall be punished seriously.
Accelerate the construction of a suppliers credit
system, and in case suppliers are found to collude
with each other in submitting quotations or have
fraudulent conducts, such violation shall be handled
according to law and made public. Take measures to
accelerate the construction of the assessment system
and misconduct announcement system covering
purchasers, evaluation experts, suppliers,
centralized procurement agencies and public
procurement agencies, and introduce the public
appraisal and social supervision mechanism. Conduct
a strict assessment for centralized procurement
agencies, and the assessment results shall be
reported to the People's Government at the same
level. Strengthen follow-up oversight to track
reform of centralized procurement agencies, and any
illegal behavior or violation of centralized
procurement agencies shall be strictly punished
according to law.

VI. Persist in carrying out institution- building,
to further promote electronic government procurement

Furthering IT application [informatization] in
government procurement activities is an important
part of deepening the reform of government
procurement system, and a means of exercising
scientific and intensive management of government
procurement. Various regions shall make vigorous
efforts to accelerate IT application in government
procurement procedures, and take advantage of modern
electronic information technology to enhance the
coordination of various links of the government
procurement activities from management to operation
& implementation. The finance departments shall
effectively provide overall guidance for the IT
application work, work out a scientific plan for
electronic government procurement system development
and construction, and build a nationwide unified
electronic government procurement management and
trade platform featuring robust management functions,
open and transparent trade, unified and standardized
operation procedures, and network security and
reliability, to gradually achieve the government
procurement trade information sharing and full
electronic operation procedures. Attention shall be
paid to making overall arrangement for increasing
widespread application of information systems, and
development of implementation plan featuring gradual
and formulation of coordinated information system
application plans.

VII. Persist in personnel assessment and training to
build a qualified government procurement personnel
contingent

Various regions and departments shall continue to
give professional education, legal compliance
education and skills training to government
procurement specialists, aiming to increase their
awareness of law-based administration and law-based

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procurement, and establish a systematic education
and training system. The finance departments shall
work with departments concerned to establish a
certified qualification system for government
procurement specialists, under which procurement
specialists from purchasers, centralized procurement
agencies and public procurement agencies as well as
evaluation experts shall receive certified
qualification certificates and professional
assessment, so as to accelerate the construction of
a contingent of career procurement specialists.
Centralized procurement agencies shall develop
internal duty standards and assessment measures for
various jobs, form a robust mechanism for selecting
the superior and eliminating the inferior, so as to
consistently improve the professional excellence of
centralized procurement agencies. Various regions
and departments shall, according to new requirements
for improving government procurement systems in the
current context, further strengthen awareness of
importance of deepening government procurement
system reform, take robust measures to strengthen
government procurement management, and strengthen
leadership over implementation of government
procurement activities, focus on addressing main
problems existing in government procurement
management through coordination, and promote the
healthy development of the government procurement
work.

General Office of the State Council
April 10, 2009

End Text


PICCUTA