EU-Japan FTA: Examining Procurement Commitments

A July 2017 post outlined the procurement results of the Economic Partnership Agreement (EPA) between the European Union and Japan. Since then, the two parties have finalized their free trade agreement and published the texts. This post examines the EPA’s procurement provisions, which build on commitments that the EU and Japan have undertaken under the WTO Government Procurement Agreement (GPA).

In their trade pact, both Japan and the EU have offered procurement that goes beyond their commitments under the GPA. The EPA also includes procurement rules that go beyond the GPA’s requirements.

Japan’s Commitments: Japan significantly expanded its coverage of sub-central government entities by:

  • Adding Kumamoto-shi, a designated city, to its GPA coverage of all prefectural governments and designated cities.
  • Covering all local independent administrative agencies that are subject to its Local Independent Administrative Agency Act (No.47 of 2003). It lists 87 entities: 51 universities and colleges; 25 hospitals or medical centers; and 11 technical or industrial research centers.
  • Removing a GPA exclusion of procurement related to the production, transport or distribution of electricity by its sub-central government entities.
  • Adding 48 “core cities”, which have a population of approximately 300,000, with certain restrictions. The EPA only applies to procurement that they conduct using opening tendering; excludes construction services; and only obligates the cities to treat EU suppliers no less favorably than locally established suppliers, including access to review procedures where they exist; other obligations do not apply to them. In addition, these cities may establish plans to encourage small and medium enterprises to participate in procurement.

With respect to the third category of entities (other than central and sub-central government entities), Japan added six entities, including the Information Technology Promotion Agency and Pharmaceutical and Medical Devices Agency.

Japan also withdrew its controversial GPA exclusion of procurement of goods and services related to the operational safety of transportation for sub-central entities and five railway-related entities (Hokkaido Railway Company, Japan Freight Railway Company, Japan Railway Construction Transport and Technology Agency, Shikoku Railway Company and Tokyo Metro Co., Ltd). That procurement will be open to EU suppliers one year after the EPA enters into force or on July 6, 2019, whichever is later.

Japan also added 21 categories of services to its GPA coverage for its central government entities, including telecommunications-related services, insurance and pension fund services, supply services, advertising and photography services, and translation and interpretation services. It also added 11 services purchased by its sub-central entities, including beverage-serving services, leasing or rental services and various management consulting services.

EU Commitments: Even though Japan did not offer any new central government entities, the EU will provide it with access to 13 central government entities of member states, which it withholds from Japan under the GPA. The EU reciprocates Japan’s offer of its core cities with coverage of local administrative units with a population between 200,000 and 499,999 inhabitants. Like Japan, it limits the obligations of these entities to general principles (non-discrimination) and their domestic review procedures. Also, to match Japan’s new commitments, the EU offers coverage of hospitals and universities that are governed by public law, and includes an extensive indicative list of the entities covered by its member states.

With Japan’s removal of its operational safety clause, the EU will allow Japanese suppliers to participate in procurement of railway equipment and rolling stock by procuring entities whose procurement is covered by the EU utilities directive and that provide or operate railway networks. The timing of this obligation coincides with Japan’s withdrawal of its operational safety clause: one year after entry into force of the EPA or July 6, 2019, whichever is later.

With respect to services, the EU offers five new categories of services procured by its central government entities, including telecommunications-related services and photographic and packaging services. It also opens seven categories of services procured by its sub-central entities, including management consulting services and two categories of services (hotel and restaurant services and beverage serving services) that are limited to a national treatment regime and to purchases above €750,000 for procurement of central and sub-central entities and €1 million for other entities. The EU also opens the procurement of real estate services for all covered entities.

Procurement Text: The text of EPA’s government procurement chapter adds to the rules provided under the GPA. One of the most extensive additions sets out requirements related to Japan’s business evaluation (Keishin) under its Construction Business Act. In undertaking such evaluations, Japanese authorities must assess, in a non-discriminatory manner and, where appropriate, recognize as equivalent to those in Japan, the supplier’s accomplishments outside Japan, such as the number of technical staff, years in the construction business and sales for completed construction work. The authorities must also take into account various financial indicators of the supplier based on activities outside of Japan, such as the amount of equity capital, cash flows from operating activities and accumulated earnings.

The EPA also addresses the criteria in the GPA for evaluating bids: most advantageous tender and lowest price, where price is the sole criterion. The parties undertake to ensure that their entities “are aware of the respective merits of those criteria”. This is likely intended to encourage Japanese entities to use the most advantageous tender approach, rather than its traditional use of lowest price.

The Agreement also sets out a number of requirements relating to domestic review procedures, in particular, with respect to the impartial administration authority designated by the party pursuant to the GPA. For example, the members of the authority must be “secure from external influence during the term of appointment” and at least one member of the authority must have qualifications equivalent to those necessary for judges or lawyers.

The EPA’s significant procurement commitments illustrate a deepening of the procurement relationship between Japan and the EU.

Jean Heilman Grier

January 17, 2018

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