Deng Xiaoping, Mao Zedong successor, said this about the path China must follow to modernize: “Feeling the stones when crossing the river.”
Note: I’m delegating my column this week to Xiyu Hu, Brookfield Academy and University of Wisconsin-Madison graduate and one of my former interns during my tenure at Milwaukee’s Historic Third Ward Association. He recently experienced firsthand the tendering process while working for the Chinese Ministry of Railroads for a year. He is an example of a Chinese student who has returned to China to look for opportunities.
This has two interpretations. One is about the need for gradual reform from a central planned to an open market economy. The second could be a warning to foreign businesses to proceed cautiously when entering the Chinese market.
Success in both cases depends on avoiding or overcoming the many potential and existing problems which lie in wait.
One area that continues to befuddle foreign companies is the tendering process in China.
Before diving in the process of tendering on China, it is important to know that before the open-door policy, tendering in construction projects was utterly unheard of. The value of construction was calculated based on official pricing manuals. Since both sides were financed by the state, neither cared much about the eventual cost.
The Ministry of Construction (MOC) first introduced the idea of tendering in 1979 via the document “Recommendation on Contracting Capital Construction Projects.”
The Shenzhen municipal government was the first to adopt the Recommendation for large construction projects in the early ’80s. Other cities followed Shenzhen in adopting the Recommendations but the guidelines were often more honored in their breech than observance.
- In 1996, the government started requiring that purchases be administered at the municipal or provincial level.
- In August of 1999, the NPC adopted a formal Tender law, which came into effect Jan 1, 2000.
- In June 2002, the NPC adopted a Government Procurement law which became effective Jan 1, 2003.
In between and since there were and have been numerous measures which clarify or add interpretations promulgated by various ministries, provinces and major cities, specifically Beijing.
Prior to 1994, when the MOC issued a decree “Temporary Provisions for Foreign Contractors to be Qualified for undertaking Construction Projects in China,” foreign contractors had to be approved on a project by project basis, which was difficult at best.
The basic premise of all Chinese laws was that domestic suppliers will be favored over foreign ones. Although not surprising for an emerging country trying to build internal industrial and production capacity, as China’s economy grows it has become a friction point. The “Buy China” bias has come increasingly under attack by American and European chambers and trade groups, and the focus of multi and bilateral trade talks.
For example, the WTO was able to get China to ratify a number of international trade measures, but not one that would lift protectionist measures for government procurement.
The talks began in 2001 and broke down in 2008, although there are ongoing attempts to revive them. To be fair, we also implement “Buy America” programs, like the recent requirement that the government can buy only American solar panels. More recently, China dropped three “indigenous innovation” requirements in response to bilateral pressure.
Meanwhile, the trade wars are heating up between our tire industry and China’s chicken and car parts tariffs. It looks like it will get worse before it gets better.
Back to procurement
Initially, because they lacked experience estimating and basic accounting systems, contractors would underbid in a rush to secure business. The Chinese government’s response was to enact additional laws though the Ministry of Construction to protect bidders from unfair tender practices and establish tendering offices to enforce them. For example, all tenders that fell outside +3 percent or –5 percent of the approved pre-tender estimate would be declared void by the tender office. As China’s economy has become more experienced and sophisticated, these requirements have been abolished, but tendering in China is still very different from its Western counterparts.
The Tender and Government Procurement Laws promulgated in August 1999 and June 2002 are the main national laws governing tendering and procurement but as mentioned there are a host of laws enacted by various ministries. Note that in Article 3 of the Tender Laws it stipulates that the laws apply to the following types of work:
- Large-scale infrastructure or public utility projects relating to the public interest of society or public security.
- Projects wholly or partly using state-owned capital or state finances.
- Projects using loan or aid funds provided by international organizations or foreign governments.
Understand that this means that the laws can be applied to virtually every transaction in China and depending on the municipality or province you are in it may. As said before, local rules differ dramatically and need to be thoroughly understood if you expect to survive and thrive.
The Tender Law lays out the rules and procedures for the tender process and the penalties for non compliance. Apart from the financial and disciplinary penalties, it should be noted that approval from the tendering office is a pre-requisite for issuance of a construction work permit. A useful thing to know if you think you can prove the process was violated.
Another major difference is that tenders must be carried out by a certified tendering agent. Tendering Agents are a professional body comprised mainly of licensed engineers. The Tender Agent is responsible for preparing the bid and scoring process. Tenders are done either on an open or invited basis depending on the local interpretation of the rules. As an aside the national laws clearly state a preference for open bidding. Private projects generally use invited tenders. Articles 34 to 45 of the Tender Law specify how the tenders received should be handled and assessed.
Tended bids should be opened publicly in a venue with representations from all tenders. The tenders are then assessed by a tender evaluation committee comprised of representatives of the tender inviting party and independent experts selected by the tendering office. The evaluation committee must have an odd number of no fewer than five members, of whom at least two-thirds must be independent experts. All assessments must be carried out in strict confidence. For large public projects, it is not uncommon for assessments to be done over two or three days in a locked camp. The evaluation committee will recommend an award and lodge the notification with the tendering office. The winning tender should be notified within 15 days.
Problems and solutions
The requirements of the Tender Law are not popular with developers in China, either foreign or local. The law gives disproportionate influence to the tendering agent and their independent experts. The evaluation method does not suit large-scale complicated projects, which would normally need analysis by the whole consultant team before any recommendations can be made. In private projects, it also deprives the developer of its personal preference. To overcome these problems you need to prepare carefully, understand the process and use the rules to your benefit. Most importantly get to know the people in the tendering office you intend to use. Find out from them how they handle things, what waivers can be applied for and how to make your bidding process work smoothly. Tendering in China involves a lot of preparatory work both in terms of the rules and the people. It’s the same in the U.S. if you intend to do a large project in an unfamiliar city you need to do a lot of research and leg work if you want things to go smoothly.