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 BEIJING 00001177 002 OF 007 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 BEIJING 00001177 003 OF 007 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 BEIJING 00001177 004 OF 007 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, BEIJING 00001177 005 OF 007 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 BEIJING 00001177 006 OF 007 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 BEIJING 00001177 007 OF 007 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