Opening the public procurement market

Opening the Public Procurement Market
 
(1) Opening the Procurement Market under the WTO Agreement on Government Procurement (GPA)
Like investment and service, government procurement was long regarded as an economic area closed off from multilateral trade rules. The General Agreement on Tariffs and Trade (GATT, 1947) mentions government procurement in Article III with the heading, “Internal Treatment on Taxation and Regulation.” Paragraph 8(a) of this Article states: “The provisions of this Article shall not apply to laws, regulations or requirements governing the procurement by governmental agencies of products purchased for governmental purposes and not with a view to commercial resale or with a view to use in the production of goods for commercial sale.”

By the 1970s, however, there was growing international consensus that the discriminatory and non-transparent practices of government procurement had a trade-limiting effect. The Tokyo Round (1973-1979) under the GATT regime finally culminated in the passage of the Agreement on Government Procurement (GPA). The WTO’s GPA took effect in 1981, two years after the end of the Tokyo Round. The agreement is plurilateral, i.e., only some of the signatories to the GATT agreed to abide by the GPA. There were initially 13 government signatories to the GPA, which applied solely to procurement by central governments.

Government procurement began to emerge as a major international issue in and after the Uruguay Round, leading to a major update of the GPA in 1994. The new GPA gained a much broader scope of application, and now included not only the central government purchase market, but also the purchases of various services (including construction) and goods made by local government organizations and public corporations. The GPA enshrines the basic principles of economic liberalization and free trade, and lays down terms and conditions of internal treatment, non-discrimination, transparency, reciprocity, preferential treatment for developing countries, and international resolution of disputes.

South Korea joined the GPA in 1994, which took effect in Korea in January 1997. Table 5-10 shows the range of Korean market opening under the Agreement.^[1]

The threshold purchases required by the GPA are 130,000 SDRs for a central government, 200,000 SDRs for local government organizations (exceptionally 355,000 SDRs for American and Canadian local government organizations), and 400,000 SDRs for public corporations. The GPA applies to not only goods and commodities, but also to services and construction contracts. In particular, the threshold for construction contracts is 5 million SDRs. The GPA, however, applies only to the services specifically enumerated by the signatories. Signatory governments are required to open procurement purchases in excess of these threshold values to the international market. As these thresholds will remain fixed for the decades to come irrespective of inflation, their real value will only decrease in time. This means that the range of government procurement and purchases subjected to the GPA will broaden in the future.
 
[Table 5-10] Opening the Korean Government Procurement Market
(Unit: 10,000 SDRs)
 

Type	No. of open organizations	Range of openness
		Goods and commodities	Services	Construction
Central government	42	13 (KRW 190 million)	13 (KRW 190 million)	500 (KRW 7.4 billion)
Local government	15	20 (KRW 300 million)	20 (KRW 300 million)	1,500 (KRW 22.2 billion)
Public corporations	19	45 (KRW 670 million)	No concessions	1,500 (KRW 22.2 billion

Note: “SDRs” refer to the Special Drawing Rights defined by the IMF. One SDR is currently equivalent to KRW 1,479.1. The Ministry of Strategy and Finance updates and announces the SDR value every two years.
 
(2) Opening the Procurement Market under Free Trade Agreements (FTAs)
South Korea hesitated for a long time before joining the movement toward free trade agreements (FTAs), fearing the negative impact of exclusive regional trade blocs on offshore economies. The International Economy Policy Coordination Committee, however, began to push for FTAs, starting with Chile, in November 1998. The official negotiations for an FTA with Chile began in December 1999. After six rounds of negotiations in total, the FTA was finally signed on October 24, 2002, and took effect on April 1, 2004, after ratification by the National Assembly. Korea then went on to sign another FTA with Singapore, which went into effect on March 2, 2006. The FTA with the European Free Trade Association (EFTA) followed, and took effect on September 1, 2006.^[2] The Korea-U.S. FTA has been signed and is awaiting ratification by the National Assembly, while the Korean government continues to negotiate FTAs with the European Union, Canada, Japan, and others.
FTAs urge governments around the world to open up their procurement markets. The Korea-Chile FTA, for instance, applies the internal and most-favored nation treatment principles to government procurement by the two countries, and prohibits discriminatory terms and conditions favoring domestic supplies as well as offsetting. The Appendices and Annexes to the GPA define the range of government procurement and purchases to be opened, as well as the specific terms and conditions of government procurement under the Agreement. Under the GPA, South Korea is required to open 42 of its central government organizations, 15 local government organizations, and 21 public corporations to international competition. The Chilean government, on the contrary, decided to exempt its local government organizations from the FTA. The Korea-Chile FTA, moreover, lowered the threshold value for central government organizations to 50,000 SDRs (while maintaining the threshold value of 5 million SDRs for construction). The threshold for Korean local government organizations remains the same as that under the GPA (i.e., 200,000 SDRs for services and commodities, and 15 million SDRs for construction). The Chilean government organizations subjected to the FTA also include metropolitan and regional governments. The threshold values for the public corporations of both countries remain the same as those under the GPA (i.e., 450,000 SDRs for commodities, and 15 million SDRs for construction).
 
(3) Current Range of Concessions
Table 5-11 summarizes the concessions made by the Korean procurement market under the GPA and FTAs. The GPA and FTAs open Korea’s local government organizations to international competition as well. South Korea’s Local Contract Act defines, in Article 5, the range of concessions required of local government organizations in international competitive bidding. Construction projects, or the commodities and services to be procured for local government organizations, are to be publicly announced ahead of international bidding. The following items, however, are not subjected to such concessions:
 

• Commodities and services required for resale or for production of goods for sale;
• Products and services of small and medium businesses that local government organizations are required to purchase pursuant to the Act on the Promotion of Small and Medium Businesses;
• Agricultural, marine, and livestock products that local government organizations are required to purchase pursuant to the Grain Management Act, the Act on the Distribution of Agricultural and Marine Products and the Stabilization of Their Prices, and the Livestock Act;
• Other goods and services set aside by presidential decrees.

 
[Table 5-11] Range of Concessions Made by the Korean Government Procurement Market
(Unit: 10,000 SDRs)
 

Agreement	Organization type	Commodities and goods	Services	Construction
WTO GPA (effective since Jan. 1, 1997)	Central government	13 (KRW 190 million)	13 (KRW 190 million)	500 (KRW 7.4 billion)
	Local government	20 (KRW 300 million)	20 (KRW 300 million)	1,500 (KRW 22.2 billion)
	Public corporations	45 (KRW 670 million)	N/A	1,500 (KRW 22.2 billion)
Second amendment draft on WTO GPA (submitted on April 12, 2007)	Central government	13 (KRW 190 million)	13 (KRW 190 million)	500 (KRW 7.4 billion)
	Local government	20 (KRW 300 million)	20 (KRW 300 million)	1,500 (KRW 22.2 billion)
	Public corporations	40 (KRW 590 million)	40 (KRW 590 million)	1,500 (KRW 22.2 billion)
Korea-Chile FTA (effective since April 1, 2004)	Central government	5 (KRW 70 million)	5 (KRW 70 million)	500 (KRW 7.4 billion)
	Local government	20 (KRW 300 million)	20 (KRW 300 million)	1,500 (KRW 22.2 billion)
	Public corporations	45 (KRW 670 million)	N/A	1,500 (KRW 22.2 billion)
Korea-Singapore FTA (effective since March 2, 2006)	Central government	10 (KRW 150 million)	10 (KRW 150 million)	500 (KRW 7.4 billion)
	Local government	20 (KRW 300 million)	20 (KRW 300 million)	1,500 (KRW 22.2 billion)
	Public corporations	40 (KRW 590 million)	N/A	1,500 (KRW 22.2 billion)

Note: “SDRs” refer to the Special Drawing Rights defined by the IMF. One SDR is currently equivalent to KRW 1,479.1. The Ministry of Strategy and Finance updates and announces the SDR value every two years.