SOEs Held Accountable to SMEs’ Account Receivables and Unfair Trade Practices in Public Procurement Reform
Posted by Wang, Yi on August 14, 2020
China steps up government procurement reform and issued regulations to govern SOE behaviors and safeguard the “account receivables” of SMEs from SOEs.
1. Executive Summary
On July 15, 2020, China’s State Council releases the Regulation on Payment Protection for Small and Medium-sized Enterprises effective September 1, 2020 (“Pay SME Regulation”). Pay SME Regulation is part of a broader, ongoing government procurement reform to scope in SOEs (state-owned enterprises) in order to open market access opportunities. For the first time, China statutorily reins in SOEs with certain government procurement disciplines. It targets unfair or abusive trade practices at both the contractual level and at the level of oversight of fiscal expenditure.
2. Analysis
Pay SME Regulations rules provide the legal basis to improve the bargaining positions of international suppliers in bids for China’s public infrastructure projects, as well as Belt and Road initiatives projects initiated by China.
Leveling the Playing Fields on SOEs
Its release represents important and latest progress of China-EU trade and investment negotiations in the area of “level playing field disciplines (SOEs, transparency rules for subsidies and rules tackling forced technology transfers),” in parallel with the China-US Phase-1 Trade Agreement.
SOEs as Commercial Entities Subject to Government Procurement Rules
Notably, Pay SME Regulation distinguishes SOEs from government instrumentality, treats SOEs as commercial entities but subject to enhanced transparency, fair trade and accountability rules applicable to procuring government agencies. This is because the current Government Procurement Law (GPL) and GPL’s Implementation Regulation does not cover directly SOE procurement and applies only to fiscal expenditure by government agencies and state-funded institutions.
International SMEs in China
On the supply side, “SMEs in China” cover sizable foreign-invested enterprises (FIEs) and private companies. It takes 100-300 head counts to statutorily become a “small enterprises,” while “micro enterprises” is more akin to Western concept of startups beyond concept stage with less than 10 employees .
On the demand side, SOEs, as “large enterprises”, have gained bargaining powers in both domestic infrastructure projects and Belt and Road Initiative projects, especially post-COVID-19, with respect to the forthcoming “new infrastructures” under the Chinese COVID-19 stimulus programs.
Contract-Level “Musts” to Ensure SMEs’ Account Receivables
Under Pay SME Regulation, procuring entities shall neither require SMEs to accept unreasonable commercial contractual terms (i.e., from payment terms to liabilities for breach), nor breach their contractual payment obligations, based on presumption on the conforming quality and performance of the suppliers. Specifically, regular payment terms must not exceed thirty (30) days from the date of delivery of the goods, services or works, exceptional payment terms shall not exceed sixty (60) days. For projects requiring post-delivery acceptance by inspection, the regulation requires contractual stipulation of “deemed acceptance” clause, i.e., the aforesaid time limits start upon acceptance by inspection or “deemed acceptance” upon expiration of the inspection period, as the case may be. Circumvention of the 30/60 day ceilings will be prohibited.
Transparency of SME Payment through Meaningful Information Disclosure and Digitized Credit System
The regulation imposes transparency requirement on governmental agencies, public institutions and large enterprises to annually release the status of payments to SMEs. Specifically, government agencies or public institution must disclose to the public, prior to March 31 of each year, the details (number and amounts) of contracts with payment failures to SMEs in manners “easily accessible to the public.”
This March 31 disclosure deadline does not apply to large enterprises, which should disclose so in their annual reports and ensure publicity through the enterprise credit information publication system. Given large enterprises include both SOEs and international Fortune 500s, the latter, if participating in fiscally-funded projects, must also comply with such local publicity and disclosure requirement.
Across-the-Board No Retaliation Policy
Pay SME Regulation stipulates zero tolerance against intimidation or retaliation by governmental agencies, against the complainants “in any form”, by public institutions and large enterprises who are subject to complaints on alleged payment delinquency. Once “convicted” on payment delinquency to SMEs, officials at governmental agencies or public institutions may be imposed with restrictive measures in terms of official expenses, office space, or funding arrangements.
Differentiating Liability of SOE Employees from Government Officials
Pay SME Regulations carves out “large enterprises (which consists of primarily SOEs and national champions)” from the aforesaid restrictive measures from official expenses to funding. It reflects the position by administering agencies not to generally treat SOE employees as “government officials.”
Delinquent SOEs Risk Enforcement by SAMR against Unfair Trade Practices
By contrast, large enterprise who fails to timely pay SMEs, disclose delinquency, conceal any true information or practice fraud, will be subject to supervision and enforcement by State Administration of Market Regulation (SAMR) or its local subordinates.
3. Outlook
The quiet release of Pay SME Regulation represents the latest progress from China-EU trade and investment negotiations in the area of “level playing field disciplines (SOEs, transparency rules for subsidies and rules tackling forced technology transfers).” China-EU negotiations are in parallel with the China-US Phase-1 Trade Agreement, with a broader coverage on structural issues such as SOEs. Effective enforcement of Pay SME Regulation will be critical to help international businesses to materialize and benefit from market access opportunities both domestically and overseas.
China has embarked its market-based SOE reform that seeks to reform SOEs into two categories, investment holding companies and operational vehicles. The government procurement reform has to be premised on the success of the market-based SOE reform, and the outcome of China’s engagement in plurilateral negotiations for GPA accession. Further regulations and substantiating rules are expected within 2020.
The anti-trade headwinds must be closely monitored, however. Notably, these legislation changes take place in an expeditious manner, despite the ongoing US-trade conflicts and the fact that US might withdraw from GPA entirely. These safeguards and mechanisms against abusive/unfair trade practices by “large enterprises,” for the first time, become law, but still at the level of an administrative regulation vulnerable to revocation later on.
Previous WTO/GATT rounds of trade liberalizations have been last-minute agreement, as observed by practitioners living through these cycles. It’s critical that multinational institutions and stakeholders beef up advocacy to institutionize and materialize the market-based reforms from within in China.
At micro-level, the eligibility and presence to contract and interact with SOEs in a sustainable and rule-based manner remains essential to international SMEs’ legitimate interests and survival.
Effective enforcement of Pay SME Regulation will be critical to help international businesses to materialize and benefit from market access opportunities both domestically and overseas.
About the author: Yi Wang, a US and China qualified trade and business attorney with public and private sector experience qualified trade and business attorney with public and private sector experience in corporate, regulatory counsel and enforcement defense, and may be reached at yi.wang@mind-re.org.
(This briefing first appeared at China Big Idea. If our commentaries add values or you simply like our newsletters to monitor with informed assessment, please subscribe at https://chinabigidea.substack.com)
