CHAPTER 12:
GOVERNMENT PROCUREMENT

We support the greatest possible degree of tariff reduction or elimination; ... and the highest possible degree of fairness and transparency in procurement and other administrative processes. In our view such measures will create huge opportunities for us and for other Canadian companies. We compete and win against the best on all projects around the world ... For that business, clear and consistent global rules, fair treatment, and efficient administrative practices are critical components of business. [Robert Weese, 31:1635]

Many governments intentionally isolate their procurement practices from the competitive forces of international trade, despite its potential for offering taxpayers the best value for money. As a result, taxpayers must bear the higher costs associated with procurement transacted in a non-competitive market (i.e. preference margins, selective tendering, etc.). Governments actively pursue a preference for domestic procurement presumably because its social benefits are perceived to exceed its social costs. Developing countries apparently see little hope of obtaining export contracts to supply foreign governments, but see concrete advantages in giving preferential treatment to their domestic producers, thereby fostering economic development.

Government Procurement Agreements

Trade liberalization in government procurement was largely ignored until 1979, when the first Government Procurement Agreement (GPA) was signed under the Tokyo Round of the General Agreement on Tariffs and Trade (GATT). Although the scope of public sector procurement was significantly broadened under the Uruguay Round, few additional countries acceded to the GPA, by which, since it is a plurilateral agreement, not all World Trade Organization (WTO) members are bound. In the Western Hemisphere, only Canada and the United States have signed the GPA. Argentina, Chile and Colombia have observer status, and Panama is in the process of negotiating accession.

Elsewhere in the Western Hemisphere, trade liberalization in government procurement is also covered under the North American Free Trade Ageement (NAFTA), the Group-of-Three Treaty (Mexico, Colombia and Venezuela) and bilateral agreements between Mexico and Bolivia and Mexico and Costa Rica. Thus, of the 34 countries that are contemplating a Free Trade Area of the Americas (FTAA), only seven - Bolivia, Canada, Colombia, Costa Rica, Mexico, the United States and Venezuela - have signed trade agreements pertaining to government procurement.

According to an analysis conducted by the Inter-American Development Bank, government procurement agreements in the Western Hemisphere have similar basic principles and structures, but vary with respect to coverage, thresholds and other specific provisions. All contain provisions requiring signatories to treat products and services of other signatories in a non-discriminatory fashion (i.e. no less favourably than domestic output and producers).

All contain provisions governing rules of origin, tendering procedures, and monitoring and enforcement mechanisms, including bid challenge procedures. Probably their greatest variations are with respect to the entities and the level of procurement covered. Though all of the agreements cover goods, services and construction services, signatories are permitted to exclude specific entities from coverage. The GPA covers national and sub-national entities, while the other agreements specific to countries in the Western Hemisphere apply strictly to national entities.1 Canada has offered to extend GPA coverage to provincial governments, subject to provincial approval, if other signatories, notably the United States, would curtail their use of set-aside exceptions. Neither has happened. Provincial governments have not given their approval and the United States continues to resist eliminating exceptions for small business set-asides. Consequently, Canada does not have access to the procurement markets of sub-national entities in other GPA signatory countries.

Of all government procurement agreements in the Western Hemisphere, the NAFTA has contract thresholds that provide suppliers in Canada, Mexico and the United States with the greatest degree of access to national government procurement markets. In terms of Canada and the United States, the agreement covers government procurement contracts for goods worth at least US$25,000. In all other cases, the agreement pertains to government procurement contracts for goods and non-construction services worth at least US$50,000. The minimum threshold applicable to government enterprises is US$250,000. In terms of construction services, the agreement covers federal government and federal enterprise contracts worth at least US$6.5 million and $8 million, respectively. Eventually, NAFTA-like thresholds will also apply to Bolivia and Costa Rica under their bilateral agreements with Mexico.2

The Group-of-Three Treaty covers procurement contracts worth US$50,000 for federal entities and US$250,000 for government enterprises. In reality, however, market access is constrained by the existence of "reservations," which, in 1996, applied to 45% of federal procurement in all three signatory countries. These reservations are supposed to be reduced every two years until the year 2004, after which, a reservation of 5% on total annual purchases will exist indefinitely and may be assigned to any of the federal entities or government enterprises listed in the Annexes to the Agreement.

Although it is the broadest in scope, the GPA has contract thresholds providing access to national government procurement markets that is more limited than anywhere else in the Western Hemisphere. The GPA covers public purchases of goods and services valued at SDR130,0003 (US$172,700) or more at the federal level and SDR200,000 (US$265,800) or more at the sub-national level. In terms of national government enterprises, Canada's threshold is SDR355,000 (US$471,700). Irrespective of the public entity, the agreement applies to construction services worth SDR5,000,000 (US$6,645,000) or more.

While the overall size of the market for national government procurement in the Western Hemisphere is not easily calculated, national government purchases are believed to amount, on average, to roughly 10% of a country's gross domestic product (GDP).4 In 1997, aggregate GDP in the Western Hemisphere was estimated to be approximately US$10.7 trillion. This implies that national government procurement in this part of the world totalled an estimated US$1.1 trillion in 1997. When this is added to the purchases of sub-national governments and enterprises, which in Canada's case greatly exceed those of federal entities, the significance of government procurement in the Western Hemisphere grows markedly. A significant amount of this market, however, is typically excluded under formal agreements, as indicated above.5 Moreover, from a Canadian perspective, suppliers already have access to the lion's share of national government procurement in the Western Hemisphere via the NAFTA, which is thought to cover more than 80% of national government procurement in the Western Hemisphere. If Brazil and Argentina were included, this would rise to about 95%.6

Since a large share of the market for national government procurement in the Western Hemisphere already enjoys freer trade, the greatest scope for expanding trade liberalization in this area, at least from a Canadian perspective, appears to depend on an expansion of coverage to sub-national levels of government. This is somewhat unlikely, however, because of the unwillingness of the United States to curtail small business offsets, a lack of interest among Canadian provincial governments, and the reluctance of most Latin American countries to sign the GPA.

Government Procurement and the FTAA

Very little attention was paid to the issue of government procurement during Committee hearings. Even though an agreement in this area may not be anticipated, the Committee believes that Canadian negotiators must nevertheless be prepared. As noted in the Committee's Report on the WTO, municipal governments have not been involved in government procurement negotiations, even though their impact is felt at the local level. At the very least, the federal government should consult other levels of government prior to negotiations. One witness also expressed the view that Canada should play a lead role in promoting greater transparency of government procurement.

The transparency agenda relates to better governance; to fairer and more open processes and to less corruption; to a business environment that is transparent, where business is done with a high degree of integrity and where a legal system that gives confidence that the rules will be enforced consistently. [Robert Weese, 31:1645]

In view of the limited commitment among non-NAFTA countries in the Western Hemisphere to liberalize their government procurement markets, the Committee believes that Canada should adopt a flexible approach to this issue. The Committee therefore recommends:

24. That the Government of Canada's position regarding government procurement and the Free Trade Area of the Americas be similar to that adopted in the Government Procurement Agreement. A Free Trade Area of the Americas agreement on government procurement should be plurilateral and cover the broadest possible range of goods and services (including construction). In addition, a Free Trade Area of the Americas agreement on government procurement should provide for periodic review to have it broadened and strengthened.

---

1 The bilateral agreements between Mexico and Bolivia and Mexico and Costa Rica may be extended to include sub-national governments on a voluntary and reciprocal basis.

2 These agreements call for a reduction in contract value thresholds for goods and services to NAFTA levels by the year 2000.

3 SDRs (Special Drawing Rights) were converted to U.S. dollars using a daily average of U.S. currency units (1.329) per SDR for the first half of July 1999.

4 Of course, this percentage varies from country to country and is thought to be higher in developing economies (see Sam Laird, Transition Economies, Business and the WTO, World Trade Organization, TPRD-98-03, May 1998, p. 1).

5 For instance, according to a briefing note prepared by the Department of Foreign Affairs and International Trade pertaining to the GPA and future WTO negotiations, the GPA is estimated to cover in excess of $250 billion of public procurement expenditures, an amount that is well below 10% of aggregate GDP in signatory countries.

6 According to Brazil's 1996 Trade Policy Review, it has no intention, at least in the near term, of signing the GPA (see WT/TPR/S/21, March 1996, p. 102).