China's Public Procurement Regime — Comparative and Theoretic Insights
| Author | Stefan Weishaar |
| Published date | 01 December 2010 |
| Date | 01 December 2010 |
| DOI | http://doi.org/10.1177/1023263X1001700404 |
| Subject Matter | Article |
406 17 MJ 4 (2010)
CHINA’S PUBLIC PROCUREMENT REGIME
COMPARATIVE AND THEORETIC INSIGHTS
S W*1
ABSTRACT
Bid rig ging conspiracies have long been recog nized as s ignicantly inating publi c
expenditures. Anecdotal e vidence suggesti ng bid rig ging oences and a ge neral
dissatisfaction about procurement price s and the contracted quality in China is taken as
an indication of a lack of competition in public procurement tende rs. Because procu ring
entities are unable to monitor industr ial mark ets e ectively, it is submitted that well
designed public procurement reg imes can help to prevent bid rigging conspirac ies.
Since structural market determinants are largely beyond reach of public procurement laws,
auction theory is used to address cartel formation and cartel stability. Applying this theory
to the Chinese public procurement regime id enties concrete actions for proc urement
entities to undermine cartel formation and stability. e insights gained are compared
to the EU public procurement regime in order to examine in how far other l egislators
have cho sen dierent solutions. It is foun d that the Chinese legal regime does facilitate
both the formation and stabiliz ation of bid r igging cartels and that the European public
procurement regime is also su bject to criticism in some respects.
Keywords: auctions theory ; China ; competition law; law and economics; public
procurement;
§1. INTRODUCTION
In times of tig ht public budget constraints and in t he presence of increasing investment
demand, cost eective public procurement becomes ever more important. Multi lateral
organizations, such as the WTO and t he EU for example, are promoting well-struct ured
* Dr. Stefan E. Weishaar, M.Sc., LL .M., is A ssociate Profes sor in Law and Econom ics at the Faculty of
Law of the Rijksu niversiteit Groningen. Til l 28.02.2010 he worked as Assista nt Professor at the Faculty
of Law of Maastri cht University.
China’s Public Procu rement Regime
17 MJ 4 (2010) 407
public procurement systems and compet ition law regimes as being essential to foster
prosperity and to contain bid rigging conspiracies1 which inic t c onsiderable cost s
upon societies. Such cost s to society stem from undue price increases that translate
to un satised needs which could have been fullled.2 While in most countries public
procurement represents between 15% – 20% of GDP3 and bid rigging estimates suggest
that prices are inated by up to 30% ,4 robust dat a on Chi na is not available. While it
is noticeable that Chinese government procurement only accounted for around 1.6%
of GDP in 20055 and t hat the implementation of government procurement regulations
alone is estimated to have a lready reduced costs by about 11%,6 it can still be ex pected
that public procurement prices in Chi na are also inated.
Given the inherent in formation asy mmetry, exact d ata on the occurrence of bid
rigging conspiracie s7 are not available. W hile academic research is limited and vi rtually
absent with regard to the C hinese situation,8 a number of observations ca n nevertheless
be presented. According to the United States Trade Representative, public procurement
prices in t he Japanese construction ma rket are inated by up to 30% due to bid riggi ng
conspiracies.9 In the absence of any sound economic analysis, this nding is of course not
1 In this paper bid rigging is dened as the establ ishment of a price cartel for the purpose of a tender. is
claricat ion is nec essary s ince the Chinese publ ic understa nds bid ri gging as including conspiracies
between bidders and procuring entities. I am indebt ed to Profe ssor Daniel Mitterho for this point.
Comment made during a Gues t Lecture pre senting this research at t he Central Uni versity of Fina nce
and Economics on 14.12.2 006.
2 is is general ly referred to as a ‘dead weight loss’ to society. See S. Ma rtin, Industrial Economics,
Economic Analysi s and Public Policy (2nd edition, P rentice Hall, Engle wood Clis 1994), p. 28.
3 European Com mission, A report on th e functioning of public pro curement market s in the EU: benets
from the ap plication of EU d irectives and ch allenges for th e future (2004), http://ec.europa.eu/internal_
market/public procurement/docs/public-proc-ma rket-nal-report_ en.pdf (last visite d 16.12.2010), p. 5.
4 USTR, Annual Refor m Recommendation s form the Governme nt of the United States to the Government
of Japan under the U.S. – Japan Regulator y Reform and Competition Policy Initiative (20 02), www.mofa.
go.jp/region/n-america /us/economy/report0710.pdf (last v isited 16.12.2010), p. 9.
5 e inform ation was found on the following Chinese Governmenta l website: www.ccgp.gov.cn/ llsj/
cgxx/27177.shtml ( last visited 08.05.2 009). Chinese public procu rement has risen sharply over t he past
years. In 1998 the scale of the government pro curement wa s 3.1 bi llion R MB whi le for 2007 it was
an esti mated 400 billion RM B. In 200 7, the GDP of Ch ina was 24 trillion, and the scal expe nditure
was a pproximation 5 tril lion. us public procurement still accounts for just 1.6% of the GDP and
8% of scal expe nditure and remains much below magnitudes prevailing in OECD countr ies.
See 刘 清 恩， 《 政 府 采 购 文 化 建 设 研 究 （ 上 ） 》， 中国 政 府 采 购 网， 2008年10月24日www.ccgp.gov.
cn/dfcg/ll sj/201009/t20100928_1127203.shtml ( last visited 14.10.2011).
6 Li Xiao, China Establi shed Laws on Go vernment Procurem ent (2002), www.chi na.org.cn/english/
government/49347.htm (last v isited 16.12.2010).
7 It should be not iced that here the term is narrower than what is genera lly understood by the Chi nese
public. It does not include corruption conspirac ies b etween bidders and procuring entitie s but is
limited to c onspiracies bet ween enterprises compe ting for a tender. I a m indebted to Profess or Daniel
Mitterho for this point. Comment made during a Guest Lecture present ing this research at the Central
University of Fina nce and Economics on 14.12.200 6.
8 is author is not aware of any st udies addressing t his point.
9 USTR, Annual Refor m Recommendation s from the Governme nt of the United States to th e Government
of Japan under the U.S . – Japan Regulatory Ref orm and Competition Polic y Initiative (2002), p. 9.
Stefan Weishaar
408 17 MJ 4 (2010)
directly applicable for the Chinese public procurement market for construction projects.
Such analy sis is foreclosed by the absence of relevant data, however. Fur thermore, it is
clear that the construction market can also be very d ierent from p articular markets
for goods and services and therefore this nding may be particular to the construction
sector and to Japan. Due to these methodological caveats this nding is reduced to a
mere observation. Nevert heless, it is noticeable for it gives an indicat ion that the money
lost in bid rigging c onspiracies can be quite substantia l. If one would arbitrarily assume
that bid rigg ings in China a mounted to only 10%, tax payers would have lost 40 bi llion
Yuan in 2007.10
Even though the budgeta ry situation of China is much d ierent than that of most
countries, t he potential savings c an be regarded as constituting an impor tant incentive
for leg islators to consider t his issue. While the size and magnitude of bid rigging in
China is not known, anecdotal evidence does s uggest, however, that there is a general
dissatisfact ion about public procurement pric es and the contracted quality11 and that
bid r igging oences are frequent.12 e widespread recognition of local and regional
protectionism in Chin a may lead to repeated interactions of compa nies which would
support the view t hat bid rigging conspiracies mig ht be more widespread than is
perceived by the general public.13
Even in the abs ence of exact data on bid r igging it is noticeable t hat China has been
addressing such problems by setting up public procurement systems direc ted towards
construction works as ea rly as the 1980s and t horoughly reformed them in the course
of the 1990s . Aer its WTO accession, Chi na promulgated yet another Govern ment
Procurement Law that came i nto force on 1st Janua ry, 2003. is law species that
public procurement i s to be ca rried out in accordance with t he principles of opennes s,
transparency, fair compet ition, impartiality and good fait h. It complements the Bidding
Law (BL), which was adopted in 1999 and deals wit h bidding procedures of construc tion
projects.
is paper employs a law a nd economics met hodology to ex amine whether the
current public procurement laws in China a re designed optimally to prevent bid rigging
conspiracies and t he manner in which auction theoretic insights can be used to suggest
improvements. In those cases where critiques have been voiced from a law and economics
perspective, EU legislation is exa mined to see whether another legislator has adopted
other solutions. Even though car telization is add ressed by competition authorities and
10 Calculat ion based upon information found on the following Chinese Governmenta l website: www.
ccgp.gov.cn/lls j/cgxx/27177.shtml (last visited 08.05. 2009). e size of Chinese public procurement was
estimated at 4 00 billion RMB i n 2007.
11 I am indebted to Professor Da niel Mitterho for thi s point. C omment made du ring a Guest Lect ure
presenting th is research at the Cent ral University of Financ e and Economics on 14.12.200 6.
12 I am indebted to Profess or Liu Benxing for this p oint. Comment made during a Gue st Lecture
presenting th is research at the Cent ral University of Financ e and Economics on 14.12.200 6.
13 I am indebted to Professor Da niel Mitterho for this point. Com ment made du ring a Gu est Lectu re
presenting th is research at the Cent ral University of Financ e and Economics on 14.12.200 6.
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