On 15 July 2022, the Ministry of Finance solicited public opinions on the revised Government Procurement Law of the People’s Republic of China (Draft for comments) (hereinafter referred to as “the Draft”). The call-for-comment period will end on 14 August 2022. In essential, as the scale of government procurement continues to expand, the revision of the law is to further amplify positive impacts of government procurement behaviors on guiding industrial development.

The following content is a summary of key points in the Draft:

  1. Expanding the scope of application. Compared with the version in force, the Draft expands the application scope through enriching the definition of “governmental procurement” in Article 2. Specifically, the new definition for governmental procurement adds a new purpose: “to support government activities and public services”. In this regard, the procurement activities of state-owned enterprises for public welfare will be subject to the procurement law if the Draft comes into force. Such state-owned enterprises especially refer to the those engaged in public utilities, public infrastructure operation, or public service networks for the purpose of providing public services. The scope of those state-owned enterprises for public welfare will be decided by the State Council.
  2. Supporting domestic industry. The Draft requires government procurement to prioritize domestically produced goods as well as engineering projects and services unless they are unavailable at a reasonable commercial condition in China. At the same time, domestic products can enjoy preferential treatment if they meet specified conditions such as added value ratio. The domestic goods mentioned in the Draft also include goods manufactured in China by foreign-invested enterprises. As to the imported goods, on the other hand, the Draft tends to constrict their requirement.
  3. Splitting procurement of the information and communication related projects. Art. 38 of the Draft stipulates that the purchaser shall divide and separately purchase information communication related projects, g., separately purchasing its information infrastructure, application system, security protection, and other subsystems. In other words, the construction project of a public hospital’s Supply-Processing-Distribution (SPD) platform cannot be contracted to only one enterprise in the future. Instead, it shall be contracted to several enterprises.
  4. Abolishing the Local Centralised Purchasing Catalogue. Government procurement is currently adopting a combination approach that involves centralized procurement by the central government and decentralized procurement at local levels. As a result, the autonomy of local governments leads to an increasingly higher minimum procurement quota which defines the scope of the application of Government Procurement Law. Hence, as the minimum quota becomes higher, projects procurement that does not meet the minimum quota requirement fall out of the scope from the current Government Procurement Law. In order to solve this issue, the Draft deletes those provisions. As a replacement, the State Council, instead of local governments, will resume the responsibility of compiling the catalogue and formulating the minimum quota.
  5. Supporting technological innovation. The Draft explicitly stresses its support towards technological innovation. For instance, in Art. 25 of Supporting Technological Innovation, government procurement is required to support the application of sci-tech innovation, guide the market, promote the deep integration of industry, academics, research and application, and promote the R&D and application of innovative products. Another instance is a newly added procurement method called “Innovation Procurementin Chapter 5, which encourages the innovation of the market and be applied to major R&D projects. Namely, the budget of procurement will also be spent on R&D in order to support innovation and share corresponding risks with the private sectors. Meanwhile, to ensure the implementation of those policies, Art. 28 specifies mandatory or preferential measures such as formulating procurement standards, reserving procurement shares, giving preferences in procurement evaluation, etc.
  6. Easing restrictions on the number of vendors. In the past, many projects, especially some special medical equipment procurement projects, had to be rebid because the number of vendors were less than three. The Draft makes a change. Under circumstances where bidding vendors or qualified vendors are less than two, procurement activities may continue as long as procurement documents and procedures do not contain unreasonable terms and comply with requirements.
  7. Shifting toward a new approach for project evaluation. There are three evaluation methods for government procurement: the “lowest price” method, the “comprehensive scoring” method and the newly added “optimal quality” method. Among them, the optimal quality method favors quality over low prices. The optimal quality method can be applied to the procurement of projects subject to government pricing or with special quality requirements, such as the procurement of precision instrument. As for the lowest price method, the Draft specifies its narrow scope of application. Specifically, that method can only be applied in the procurement of small and uncomplicated projects (goods or services). What’s also noteworthy is that the Draft requires competitive negotiation to adopt the comprehensive scoring method, replacing the “lowest price” method. It’s a substantial change when compared with the current Government Procurement Law in which the lowest evaluation price method is favored.

Those changes will greatly impact the industrial market. On one hand, imported goods will face greater market access obstacles because of government’s pro-domestic attitudes reflected in the Draft. On the other hand, removal of unreasonable parts in the bidding systems will contribute to a fairer competition environment in the market. In this regard, companies operating within the China will benefit from this revision. Specifically, for foreign-invested factories in China, their strengths in innovation will further assist them in gaining favors from the new regulatory policies encouraging innovation.