Government Procurement in the EU-India FTA: Dangers for India
Dear friends and colleagues,
Please find below a journal article by TWN’s New Delhi based researcher Ranja Sengupta, entitled ‘Government Procurement in the EU-India FTA: Dangers for India’, published recently by the influential Economic & Political Weekly.
Sengupta considers the challenges facing the government in New Delhi as it faces pressure from the European Union, via the proposed EU-India free trade agreement, to open up its lucrative government procurement (GP) sector (estimated at around US$156 billion, or around 12-14% of the nation’s gross domestic product), even while it studies the benefits and prospects for Indian companies to access public procurement in Europe.
The stakes are indeed high for India, Sengupta points out, as sectors as diverse as railways, energy and telecommunications to construction and health, hitherto reserved for domestic constituencies and used to address economic and social inequalities and to promote domestic growth and development, are slated to be up for grabs by EU (and India’s other trade partners') firms.
In addition to provisions such as prescribing minimum local content, price preference and other preferential measures, preferential treatment had also previously been given to Indian micro, small and medium enterprises (MSMEs) and khadi and village enterprises (KVEs) such as the waiving of tender fees, awarding contracts to other than the lowest bidder, and 5-15% price preference for small-scale industries (SSIs). Reservations had also been given to MSMEs and KVEs, public sector undertakings, women’s groups, scheduled castes, scheduled tribes and other minority groups.
But while India is being asked to give market access to the EU, the latter’s own procurement, though technically open, is in effect inaccessible to most other countries, Sengupta finds. Only a very small proportion of the EU GP market can effectively be accessed by non-EU suppliers. According to one study, even if the EU markets were open to India, India’s likely gain would be around only US$10-12 million.
Recent developments in India have seen many MSMEs becoming ineligible for procurement bids, and a proposed public procurement bill is aimed at ensuring transparency, accountability, probity, fair and equitable treatment and to promote competition, efficiency, economy, integrity and public confidence in the public procurement process.
But aside from the conflict between the provisions of the future law and the likely provisions of the FTA in the pipeline between EU and India, the dangers are stark given the latter will lock in India’s commitments on GP and severely compromise policy space.
Notwithstanding the current lack of transparency in the Indian system, corruption and “big gaps in the implementation of a development-friendly GP policy,” Sengupta concludes, these issues can be addressed domestically. After all, she says, India can always invite international bids when it needs, as it does currently, without shackling itself to binding agreements to do so.
With best wishes,
Procurement in the EU-India FTA: Dangers for India
In the proposed free trade agreement with India, the European Union is demanding access to India's government procurement market for contracts above a certain cut-off value. This is a controversial demand since it will give EU companies the right to bid for all government purchase contracts.
The negotiations of a bilateral trade and investment agreement (BTIA) between India and the European Union (EU) are revealing escalating aspirations on both sides for an ambitious coverage. As both sides hope to conclude the agreement by the end of this year, the latest information is that the EU is demanding access to India’s government procurement market, a market which India has not committed to open under any of its current free trade agreements (FTAs) or at the World Trade Organisation (WTO). Are Indian manufacturers and service providers ready to compete with their European counterparts in this very lucrative market, which also serves as an effective social and development policy tool? What will Indian companies get in return in the European market and will India gain on balance? And how does this compare with India’s domestic laws regarding government procurement?
Government procurement (GP) or public procurement refers to purchases by government department/agencies of goods and supplies, services and construction and public works. In developing countries, the GP market represents roughly 15-30% of the total market and is lucrative for developed country companies. In India, estimates vary but the United Nations Conference on Trade and Development, India1 (UNCTAD India 2007) estimate puts it at 13.9% of gross domestic product (GDP) in 2007, while more recent estimates show this market is worth about $156 billion, about 12% of GDP.2 A basic estimate shows the Indian market to be worth Rs 8,00,255 crore or $142.9 billion.3
The EU wants access to India’s government procurement market for contracts above a certain cut-off (called the threshold) value. This seems to be a core mandate for the EU negotiators in most of its FTAs. This is not just about transparency in the process but about market access, and therefore, giving EU companies the right to bid for all government purchase contracts. The government cannot, in general, give special treatment to Indian companies and this opening up can technically include all central and state government purchases and that by public sector undertakings (PSUs). India will apparently get reciprocal access, but the literature points towards significant barriers.
Why Is the GP Market So Important?
Developing country governments use procurement to address economic and social inequalities and to promote domestic growth and development by giving domestic constituencies certain assured markets. Brazil, South Africa, Malaysia, for example, have extensively used GP as a development tool. Even developed countries such as the United States (US), Canada and Australia (among others) have used several GP-ญrelated measures. Countries can use offsets (prescribing minimum local content), price preference and other preferential measures.
The Indian government, for example, gives preferential treatment to micro, small and medium enterprises (MSMEs) and khadi and village enterprises (KVEs) (e g, waiving of tender fees, awarding contracts to other than the lowest bidder, 5-15% price preference for small-scale industries (SSIs). It also gives reservation for MSMEs including KVEs); PSUs (e g, 10% purchase preference; women’s groups; scheduled castes and scheduled tribes and other minority groups.
The WTO has a voluntary agreement, the Government Procurement Agreement (GPA), but this has only 41 members (including 27 EU countries) and 22 observer countries of which India is one. This means that member countries are not obligated to open up this market on a mandatory basis. Members, especially developing countries, can choose which sectors they commit on as well as threshold levels for contracts. Government procurement became one of the “Singapore Issues” at the WTO ministerial conference held at Singapore in 1996 when the EU earmarked it for coverage by all WTO member-countries.
Because public procurement is seen as a sensitive policy area, India has not included a public procurement chapter in any of its FTAs, except with Japan. Even then it has agreed only to transparency and information sharing and not to market access as such. Most developing countries, respecting this sensitivity, do not ask this of each other. GP is a more common feature of North-South or North-North FTAs.
The secrecy around the negotiations makes it impossible to establish and verify the exact status, but from various sources, it seems that India was initially not willing to give access to the GP market. But the EU has been consistently asking for market access and this is a core mandate of the European Commission (EC) in all its FTA negotiations. There seems to have been some understanding as of December 2010 between the two sides that neither side will be asked to change their law for now and India’s domestic procurement legislation may go forward on its own proญbably dictated by domestic discussions on corruption.
According to the latest information, the EU has apparently narrowed demands to purchases by the central government (including railways) and PSUs valued at €19.29 billion according to one EC estimate. Inclusion of state government contracts may need legal changes so may not be included now, but can be included at a later stage.
According to a recent newspaper article “New Delhi has said that its commitment on government procurement will not go beyond the existing domestic provisions that allow foreign companies to bid for procurements by ministries and departments for self-consumption”.4 This seems to imply that the Indian government has agreed to open up central government purchases. It is likely that the current policy will be legally locked in through the FTA and a rollback will not be possible very easily. However, according to a highly placed representative of the EC, they are discussing both central government and PSU purchases, and the question is not of “whether” the GP will be opened or not, but of “coverage”, i e, how much to open. The government is also quoted to be saying that “sourcing by the Indian Railways and the National Highways Authority of India will also remain restricted territories for EU companies”, but given that the railways is a major area of interest for the EU, whether India succeeds in keeping these out still remains to be seen.
Implications and Concerns
Apart from the significant administrative costs of changing procurement mechanisms to comply with FTA requirements, there are significant policy implications of this move. This also has implications for India’s domestic legislation which is discussed later.
(1) Broad Coverage and Domestic ญIndustry: The coverage may include departments/services like railways, energy, telecommunications, construction, health (e g, medical equipment, listed medicine procurement by and from PSUs) just to name a few. It will include sensitive sectors and also areas with huge potential for ensuring a large market to domestic industry and businesses providing a boost for their growth. Domestic suppliers are also more likely to source domestic inputs, often from MSMEs, have greater domestic linkages, and provide domestic jobs, all of which India badly needs. India invites global tenders even now for some of such projects, but has no legal obligation to do so. Legally allowing such market access will have an impact on the future growth of India’s manufacturing and service sectors and on their linkages with the Indian economy.
(2) Access in EU Market: Interestingly, while India is being asked to give market access to the EU, the latter’s own procurement, though already technically open to many countries, is virtually inaccessible. Even EU member countries find it difficult to access other members’ GP markets. An assessment of EU’s GP market by Abhijit Das, based on EU’s notifications to the WTO, shows that of the ค2088 billion market only ค309 billion is above the threshold and of this only 3.5-4.2% (2007) is accessible to non-EU suppliers.5 Of this the US takes the largest chunk. Results from another unpublished study by Jadavpur University (JU) developed in collaboration with the Centre for WTO Studies, New Delhi (2011)6 show that only 0.008%7 of the United Kingdom and 0.02% Germany’s GP markets were open to non-EU sources in 2008 and 2009, respectively.8 This is despite the fact that the EU is technically open to all other GPA member countries, most of which are competitive developed countries unlike India. If these countries could not get access into the EU market, whether Indian producers can manage to do so is a moot point. The JU Study (2011) estimates that even if the EU markets were open to India (under an FTA or the GPA), India’s likely gain would be around $10-12 million.
One can argue that if the EU gives such little real access to its GP market even after having joined the GPA or given a commitment in other FTAs, cannot ญ India do the same? Here comes again the issue of standards and other barriers. Most developed countries, including the EU, set very high standards which ญ Indian producers may not be able to meet, whereas European producers will easily comply with the Indian standard requirements. The EU GP process is also riddled with effective barriers such as language, information asymmetry and several other problems. For example, only 18.2% of tenders are actually published in the EU official journal. Therefore, the inaccessibility for Indian producers is unlikely to change under the FTA.
(3) Preferential Treatment for Disญadvantaged Segments: India may not be able to give preferential treatment to any special Indian category such as ญIndian MSMEs, KVEs, women’s group, etc, provided the contracts are above threshold limit. India may ask for certain exemptions, say for MSMEs, but how much they can actually get will depend on complex dynamics of the negotiations spanning several chapters and several issues may need to be considered. There is a question whether allowing preferential treatment (exemptions) for MSMEs may mean extending such preferential treatment to European MSMEs which are much bigger and more competitive compared to Indian MSMEs. In addition, if India wants exemptions for MSMEs, EU may want similar exemptions for their MSMEs, and the size of the market for ญIndian suppliers may shrink even further.
Restrictions on such tools will have a huge impact on the government’s ability to help these groups advance by giving them a certain assured market and governments have protected this tool in the past. In South Africa, protecting the government’s Black Economic Empowerment (BEE) programme that gives certain preferential treatment to small entreญprenญeurs from communities that faced racial discrimination earlier was seen as one of the major reasons behind the breakdown of the United States-Southern ญAfrican Customs Union (USA-SACU) FTA talks in 2006.9
As mentioned under (1) even if India did manage to get some exemption for MSMEs, the loss of contracts for domestic industry as a whole will adversely affect Indian MSMEs as they usually supply smaller parts to bigger suppliers for government contracts.
(4) Offsets: Under the GPA framework, developing countries can “negotiate conditions for the use of offsets, such as requirements for the incorporation of domestic content” under special and differential treatment. Offsets refer to measures to encourage local development by imposing conditions related to domestic content, licensing of technology, investment requirements, etc.10 These can be used for qualification to participate in the procurement process though not in the award of contracts. Under bilateral or regional agreements, offsets are not necessarily included and may have to be fought hard for.
(5) India’s Other FTAs and GP: This will have implications for other FTAs as well. If India gives market access in GP to the EU, it will have to give the same access to its current FTA partner Japan as India has agreed to non-discrimination on the GP chapter in the India-Japan Comprehensive Economic Partnership Agreement (IJCEPA).11 According to Article 111, Chapter 10, IJCEPA, India cannot give a worse treatment to Japanese goods, services and suppliers compared to that based in any other country. According to Articles 114 and 113, if India gives “advantageous treatment” (including opening the GP market) to other FTA partners or joins the GPA, it must negoญtiate with Japan to give the same treatment to ญthat country. So India will effectively be opening up its GP market not only to the EU, but to Japan and to all future FTA partners as well as they will most likely ask for access on a non-discrimination basis.
If India agrees to EU’s demands, it means its ability to say no to the GPA will become much weaker and will significantly undermine India’s bargaining position. Once India joins the GPA and agrees to give market access, its GP market can be accessed by a huge number of foreign countries. India’s government purchases will then have to refer to interญnational standards which are likely to be out of reach for many Indian producers.
The Public Procurement Bill
The new Public Procurement Bill 2012 (Bill No 58, Lok Sabha)12 has been already introduced in the Lok Sabha with the objective to regulate public procurement with the objectives of ensuring transparency, accountability and probity in the procurement process, fair and equitable treatment of bidders, promoting competition, enhancing efficiency and economy, maintaining integrity and public confidence in the public procurement process and for matters connected therewith or incidental thereto (p 1).
But how does it compare with FTA ญobligations? Even though India is not required to “change its law”, the question is if there are conflicts between India’s domestic law as shaped by the 2012 Bill and the FTA provisions, which will ญprevail? The answer to this is simple. The bilateral commitment will be legally binding upon India. If India does not abide by it, it can be taken to task by the EU according to the provisions of the agreement.
From a quick glance, there seems to be potential areas of conflict. Article 11.2 of the bill allows the government to “provide for mandatory procurement of any subject matter of procurement from any category of bidders, or purchase preference in procurement from any category of bidders on any of the following grounds, namely: (a) the promotion of domestic industry; (b) socio-economic policy of the central government; (c) any other consideration in public interest in furtherance of a duly notified policy of the central government.
Option (a) seems to be in direct conflict with likely legal commitments in the FTA which will make this impossible. Option (b) is usually used for promotion of MSMEs, village enterprises and weaker socio-economic groups, but again these options may be highly limited in the FTA. At the minimum, concessions and exemptions have to be negotiated and specifically mentioned in the agreement, and will otherwise not be applicable. Option (c) will again need to be specifically included in the agreement but may again have to be proved according to the rules set by the FTA, thus, undermining the provisions of the legislation. In addition, it is not clear how a 2012 ญOrder to reserve 20% of procurement for MSMEs will work under the FTA framework.
There are also lacunae in the bill which can further aggravate the problems of the FTA. For example, as discussed, the FTA may make it more difficult for small players to access the GP market. In practice, several states and the central government have been increasing the minimum turnover limits for applicants, thus, making many MSMEs non-eligible. But the bill does not mention or provide directions on turnover limits of applying companies, leaving departments to form their own guidelines.
Even when there is no conflict between the provisions of the bill (future law) and the likely FTA provisions, the latter will lock in the provisions of the law. This means that even if future legislation was needed and/or attempted to change the provisions of the law, this may become impossible under the terms of the FTA. Therefore, the pending procurement legislation may become meaningless if India makes legal commitments on GP since FTA commitments will be binding. Such legal commitments under the FTA will severely compromise India’s policy space as it cannot roll back the provisions at will.
Based on an overall analysis, if India gives market access in GP, it will give up its control over a key development policy tool, a tool that the Public Procurement Bill also attempts to protect. India need not agree to anything more than transparency under the GP chapter in this FTA. Even though the Indian system currently lacks transparency, is plagued by corruption and there are big gaps in the implementation of a development-friendly GP policy, India can address these issues domestically and retain the flexibility and importance of this policy tool. It is important again to emphasise that India can always invite global bids on a need basis as it does currently without making legal commitments to do so. India should not be giving up development-sensitive policy tools for very dubious gains in return.
Ranja Sengupta (firstname.lastname@example.org) works with Third World Network and is based in New Delhi.
1 UNCTAD India (2007), Impact on India of Bilateral Agreement on Government Procurement between India-US and India-EU, unpublished report prepared for Ministry of Commerce, Government of India, New Delhi.
2 Abhijit Das (2012), “Public Procurement: Indian Perspective”, presentation made at workshop on “EU-India FTA: For Whom?”, New Delhi, 8-9 February.
3 Madhukar Sinha (2012), “Public Procurement in the International Context: Government Procurement at the WTO and Regional Trade Agreements”, presentation made at workshop on “Public Procurement Legislation in India: National and International Perspective”, organised by the Centre for WTO Studies, IIFT, 4 June, New Delhi.
4 The Economic Times, 2 April 2012.
5 See Note 2.
6 Jadavpur University, in collaboration with the Centre for WTO Studies (2011), “Size of US and EU Public Procurement Markets Accessible to Non-Nationals”, presentation based on unpublished paper, made at workshop on “Public Procurement Legislation in India: National and International Perspective”, organised by the Centre for WTO Studies, IIFT, 4 June 2012, New Delhi.
7 This was 0.12% in 2008.
8 Even the US GP market is virtually closed to outsiders with 7.09% of the market being catered to by outsiders in 2009 (JU 2011, see Note 6). This is relevant as an India-US FTA seems apparently on the cards with a GP chapter being almost a certainty.
9 Danielle Langton (2005), “United States-Southern African Customs Union (SACU) Free Trade Agreement Negotiations: Background and Potential Issues”, Congressional Research Service, The Library of Congress, CRS Report for Congress, 3 January.
10 See Note 3.
India-Japan Comprehensive Economic Partญnerญship Agreement
(IJCEPA) (2010), available at http://commerce.nic.in/trade/IJCEPA_Basic_Agreement.pdf