Examining discriminatory procurement practices in developing countries
| DOI | https://doi.org/10.1108/JOPP-06-03-2006-B002 |
| Date | 01 March 2006 |
| Pages | 218-249 |
| Published date | 01 March 2006 |
| Author | Francis Ssennoga |
| Subject Matter | Public policy & environmental management,Politics,Public adminstration & management,Government,Economics,Public Finance/economics,Texation/public revenue |
JOURNAL OF PUBLIC PROCUREMENT, VOLUME 6, ISSUE 3, 218-249 2006
EXAMINING DISCRIMINATORY PROCUREMENT PRACTICES IN
DEVELOPING COUNTRIES
Francis Ssennoga*
ABSTRACT. Developing countries face a problem of making a decision of
opening up public procurement markets to all suppliers irrespective of their
country of origin. The perceived benefit of opening up procurement markets
(non-discriminatory practices) is that it enhances competitiveness, leading to
efficient public resources utilisation. Governments discriminating against
foreign firms in favour of local suppliers are motivated by the desire to
achieve benefits such as, stimulating infant industries, fostering
underdeveloped regions and creating employment. This paper examines
both arguments and makes recommendations as to how developing
countries could open up procurement markets without losing their social and
economic objectives.
INTRODUCTION
In all countries, governments are significant buyers of goods and
services. Quoting an OECD report, Odhiambo and Kamau (2003)
estimated the value of contestable government procurement the
world over to have been $2,000 billion in 1998. This is equivalent to
7% of the world GDP and 30% of the world merchandise (Odhiambo &
Kamau, 2003). Such a wide market represents high opportunities for
international trade. However while recognising the importance of a
clear procurement process, guided by public tendering, publication of
winning bidder and mechanism for appeal for aggrieved parties,
various countries insert in their law provisions intended to protect
their national “sovereignty.” Such provisions usually take into account
the country’s industrial policy (e.g., protection of the country’s local
-----------------------------
* Francis Ssennoga, MBA, MPhil, is a Ph.D. student, University of Twente,
Netherlands and Lecturer, Kyambogo University, Uganda. His research
interests are in the area of public procurement and global sourcing.
Copyright © 2006 by PrAcademics Press
EXAMINING DISCRIMINATORY PROCUREMENT PRACTICES IN DEVELOPING COUNTRIES 219
industries), social policy (e.g., protecting the role of women or the
physically disabled) or protection of a country’s strategic economic
objectives such as regional integration.
These provisions although deemed desirable, especially for
developing countries, have serious connotations in as far as
promoting free trade is concerned. These discriminatory tendencies
constitute a subtle protectionism to trade (Arrowsmith, Linarelli &
Wallace, 2000).
Discrimination refers to a government’s tendency to favour its
own domestic industry’s supplies and disregard foreign firm supplies.
There are two classical forms of discrimination against foreign
bidders in public procurement; explicit and implicit. Explicit forms of
discrimination can take various forms, two of which are the
“preferential price margin” and “domestic content requirement.”
Under “preferential price margin”, purchasing entities accept bids of
domestic suppliers over foreign suppliers as long as the difference in
price does not exceed a specific margin of preference. The price
preference margin can result from an explicit “buy local policy,” e.g.,
“Buy America Act.” The United States government offered a 6%
preference for domestic suppliers. The preference can be raised to
12% in case of small business and firms in regions of high
unemployment and 50% of military equipment. Explicit domestic
preferences have also been applied in Canada, Australia, New
Zealand and Turkey (Naegelen & Mougeot, 1998). Under the
“domestic content requirement,” government purchases from foreign
sources only if the latter commit to purchase some components from
domestic firms.
Even without provisions in the domestic law, countries usually
have biases that are not formal. This is the implicit form of
discrimination. Outright exclusion is rarely explicit, but it is never the
less one of the most widely used de facto. Formal respect of the
tendering procedures is no guarantee of fair treatment to foreign
firms, as the discrimination behaviour is usually tacit (Trionfetti,
2000). In the European Community, according to Vagstad (1995)
less than 2% of government contracts were awarded to non-national
bidders despite a law that does not allow favouritism towards
domestic suppliers. This figure does not compare well with a 22%
import penetration at the economy level.
220 SSENNOGA
Even without discrimination, developing countries are at a
disadvantage. While developed nations have the capacity to compete
for and be awarded contracts in developing countries, the reverse
may not be true. Potential suppliers in developing countries lack the
capacity to compete favourably in international procurement markets
due mainly to high costs of production arising out of poor production
techniques and lack of expertise. This leads to products from
developing countries to become uncompetitive in terms of quality and
price compared to those from developed nations. The fundamental
questions that this paper wants to address are: would removal of
discriminatory practices in public procurement markets benefit
developing nations given their inadequate capacity to compete
internationally? Secondly, how would developing countries cater for
both their economic and social interests and at the same time open
up their public procurement markets?
GLOBAL EFFORT TOWARDS OPENING UP PUBLIC PROCUREMENT MARKETS
Global effort towards opening up public procurement markets is
not a new phenomenon. The GATT negotiations of 1947 rejected
subjecting government procurement to GATT guidelines. The
arguments were mainly based on “nationalistic” tendencies. The
Tokyo Round of 1979 was not successful either. Only a Code on
government Procurement was achieved with few countries agreeing
to be bound. In the mid-1980s discriminatory public purchasing was
identified as one of the obstacles to the completion of a single
European market (Martin, Hartley & Cox, 1997). The recognition of
discriminatory procurement policies as a protectionist tool led to the
World Trade Organization (WTO) to gather support for a multilateral
agreement intended to eliminate preferential treatment to national
suppliers in procurement deals (Garcia-Alonso & Levine, 2004). The
problem of favouritism or discrimination in public procurement
deserved attention because government is an important part of
modern economies and because favouring domestic suppliers either
explicitly or implicitly is widespread (Vagstad, 1995). It is this
importance that is widely attributed to non-discrimination, which has
led to various countries and regional block to enact laws that explicitly
debar discrimination of foreign suppliers in public procurement
contracts.
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