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LOCAL/DOMESTIC PREFERENCE IN PUBLIC PROCUREMENT

By: Gerald Umboniwanga Geremu Mabveka


Public procurement is a means by which government can empower local enterprises.
It is a fact that governments are the largest consumers in almost all countries’
economy. It is for this reason that through public procurement some countries ha
ve public procurement laws that favour their on local companies in contract awar
ding. This is called local/domestic preference in public procurement. There are
countries that have procurement laws that clearly spell out the need for governm
ent institutions to favour local companies. For example Swaziland, South Africa,
Malaysia, China and USA (in some states) public contracts are awarded to local
companies based on local preference (Friedrich E. Stifung: 1997; Diane E. Horvat
h: 1996; Dave: 2009; C. McCrudden and Stuart G. Gross: 2006). Even some donor pa
rtners support the idea of domestic preference. The developing partners of devel
oping countries also support this idea. For instance, in Malawi the Sector Wide
Approach (SWAp) clearly support this where domestic bidder are eligible for 15%
margin of preference where they supply goods which has 30% of its production cos
t made up of Malawian resources. (Malawi SWAp Agreement 2004). The objectives of
most of the countries for using local preference in public procurement are: to
empower the small and medium enterprises (SMEs), create and/ or protect jobs for
local populace and increase local revenue base.
In Malawi, the Public Procurement Act 2003 Section 28 encourages the procuring e
ntities (PEs) to promote the participation of SMEs. PEs are government ministrie
s, department and institution that procure goods, services and works for their o
perations. They are encouraged by that legislation to take all reasonable action
in ensuring SMEs’ participation in public procurement. It is in the Public Procur
ement Regulation 2004 82 that comes out clearly on the issue of local preference
which is referred as ‘domestic price preference’. The factors that are considered f
or an application of the domestic price preference are;
a) labour, raw materials and components from within Malawi should account f
or more than 30%
b) production/assembling facility that will be used
c) Ownership of bidder’s company in terms of construction services.
The regulation says bid document has to clearly indicate the preference and the
method how it shall be used during evaluation of bids. The domestic price prefer
ence has to be used as prescribed by Director of Public Procurement from time to
time. The legislation says this preference has to be used only for the qualifie
d domestic bidders not just because a bidder is a Malawian. The objective behind
this is to ensure quality of services, goods and works because there are some S
MEs that are not up to the standards.
In enhancing the implementation of the domestic price preference there is a pres
idential directive that public institutions have to ensure that the participatio
n of SMEs in public procurement is accelerated. The directive is under ‘Buy Malawi
Campaign’ and there is a task force that was established to come up with the stra
tegy on how this would be achieved in which ODPP is a stakeholder. This directiv
e is supported by both PPA 2003 and PPR 2004. In exercising his powers, as is in
PPR 2004: 163 and 164 which allows the Director to consult and cooperate with c
oncerned Ministries for the matter of policy to come up with programmes and meas
ures to promote SMEs, directed that a “bid securing declaration” should be used in a
ddition to bid security. This was done after it was observed that some SMEs were
finding it had to provide a bid security when participating in public procureme
nt. In the ‘bid securing declaration’ SMEs are only required to declare that they wi
ll abide to all conditions governing the particular public procurement process a
nd are liable for punishment in case of the breach of the same. Furthermore, the
Director issued a circular in which all PEs are to quarterly report on contract
s and their amounts that were offered to local bidders. Recently, ODPP has also
come up with a Standard Bidding Document for Non-Consultancy Services i.e. secur
ity services, landscaping, cleaning services which is user friendly for both PEs
and bidders with an aim of making bidding process easily understood.
The implementation of local or domestic preference is different in the countries
where it is in place. Nonetheless, all have the same basis of promoting their S
MEs. In United States of America (USA) state of Virginia, San Francisco and othe
rs have procurement legislations that state the percentages that are given to st
ate/city suppliers when evaluating bids. The legislation also defines what an i
n-state/city and outside-state/city company is. The definition is based on the n
umber of employees that reside in the city; the location of the company within t
he city among others. For example, the company has to be determined if it is wit
hin designated industrial area or not for it to be considered for the applicatio
n of the domestic preference. (Dave: 2009). In a case Setzer & Sons v. South Car
olina Procurement Review Panel, the complainant lodged a complaint that it was n
ot awarded a contract despite offering the lowest bid price. The court passed a
judgement that the city was justified because an econometric study done by the s
tate showed that although South Carolina could save $50,000 by purchasing Smith
Seltzer’s product, the state’s economy would suffer an overall economic loss of $2.1
million if it did so. This was in terms of lost jobs, tax revenue, and other th
ings. The learned judge said the state was justified to discriminate in favor of
local or in-state firms when they act as “market participants”, that is, when they
themselves were the customers (Dave: 2009:2). This justifies the implementation
objective of local preference in different countries.
In response to the economic crisis, people in Canada (Automotive Workers Union)
called on government to implement ‘Buy Canadian Policies’ across public sector with
an aim of creating and protecting jobs (Paul Emanuelli: 2009). The Canadian gov
ernment is a signatory to two agreements on public procurement which are World T
rade Organisation’s Government Procurement Agreement ("WTO’s GPA") and NAFTA. These
agreements do not allow her to discriminate public procurement at federal level
but not at local government level (Foreign Affairs and International Trade Canad
a: 2009). Therefore, local governments are at liberty to implement local/domesti
c preference in their procurements. Therefore, countries that want or are to imp
lement local/domestic preference have to find out if they are not restricted/ li
mited by international trade agreement they assented their signatures.
In the Republic of China, Government Procurement Law expresses an open preferenc
e for domestic suppliers. In 2008 the government announced an RMB 4 trillion (Fo
ur Trillion Renminbi) stimulus package in response to the global financial crisi
s. Government institutions were instructed to prioritize local/domestic companie
s when procuring services, goods and works using these funds. In May 2009 the go
vernment issued a Circular 1361.1 which is also known as ‘Buy Chinese’ policy to emp
hasise its preference for local companies in public procurement. Chinese governm
ent is not the signatory of the WTO’s GPA which discourages discrimination of fore
ign companies in public procurement. The WTO and European Union (EU) are current
ly negotiating with China to sign the non-discriminatory trade legislation with
an aim of leveling business opportunities in public procurement between local co
mpanies and international ones (B. Etgen and E. Seeber: 2009). Paul Emanuelli (2
009) pointed out the challenges of implementation of local/domestic preference w
hen a country is a signatory of international trade agreements like WTO procurem
ent legislations. He pointed out the possibility of legal challenges by the comp
any that has been disadvantaged by such domestic legislations on local/domestic
preference in public procurement.
In the case of USA states and cities within states, Dave (2009) presents a case
whereby well spelt procurement legislations are in place in support of local/dom
estic preference and being justified by the judiciary. Paul Emanuelli (2009) sta
tes that countries that are signatory to international trade agreements (i.e. WT
O’s GPA) and want to implement local/domestic preference have to critically analys
e their trade agreement if it is not in conflict with the agreement. This is imp
ortant as it reduces lawsuit that may lead to loss of public funds in litigation
s or compensations. To avoid this, a country has to have public procurement laws
that are clear on how local/domestic preference could be used. Some factors tha
t should be considered in case of local/domestic preference implementation inclu
de;
a) should it be used at national level, local level or provincial/regional
level
b) clear definition of a local/domestic company
c) clear definition of local products
d) country’s trade agreements on the international level
Therefore, implementation of ‘domestic price preference’ and ‘Buy Malawi Campaign’ in Ma
lawi has been done after a fair consideration of these areas. The PPA 2003 and P
PR 2004 have section and regulations respectively on implementation of ‘domestic p
rice preference’. However, the fact that PPA 2003 states that PEs have to do ‘all re
asonable action’ to promote participation of SMEs there is a need to properly defi
ned the reasonableness of an action a PE has to take in promoting SMEs in public
procurement. This is crucial as it may limit unprofessional public procurement
actions in the name of promoting SMEs. This is the reason the Director of ODPP i
ssued a circular on how PEs should implement ‘domestic price preference’. This means
there is a need to review our public procurement laws to make sure that impleme
ntation of ‘domestic price preference’ is applied properly by PEs.
On being a signatory to international trade agreements that has a bearing on pub
lic procurement, it has to be established if the country is a signatory of such
agreements (i.e. WTO’s GPA). This is imperative in order to avoid legal challenges
by some companies that may lead to loss of limited public funds in litigation a
nd compensations. Apart from the WTO’s GPA, there is a need to review the trade ag
reements Malawi has as a member of Southern African Developing Countries (SADC)
and Common Market for Eastern and Southern Africa (COMESA), Common Wealth and Af
rican Union (AU) among others. It is important because Malawian procurement laws
are national which may mean that all international trade agreements that includ
e public procurement are applicable at local government level unlike in federal
system of government. In Malawi local governments and central government are usi
ng the same public procurement law. This may mean that local governments are bou
nd to adhere to trade agreements on public procurement that Malawi is a signator
y. It is encouraging to see developing partners supporting this initiative in Ma
lawi. In addition, regional grouping like COMESA are in discussions on how they
could support their local business through public procurement by having regional
‘margin of preference for local bidders’. This may signal that the implementation o
f ‘domestic price preference’ Malawi is implementing is not in conflict with interna
tional agreements on public procurement. Or, that that international agreement t
hat prohibits ‘domestic price preference’ should be revoked or reviewed.
Another area of consideration is a well standardized definition of a local/domes
tic company in terms of ownership and workforce/labour. The legislation states t
hat 30% of workforce/labour has to be Malawian. However, it has to be clear on t
he definition of ownership (i.e. is it shareholding status, holding of senior po
sition by Malawians). On the part of workforce/labour, 30% which is in the legis
lation has to come up with percentage of workforce or (senior) positions held bu
y Malawian for that company to be deemed a Malawian. This would also solve the c
onfusion among local business owner who think that the mere fact they are local
businesses they have to enjoy ‘domestic price preference’ with respecting the condit
ions set in the PPA 2003, PPR 2004 and relevant circulars. Therefore, whilst the
law would be reviewed for it to be precise, local business owners should be civ
ic educated on what the law says on ‘domestic price preference’.
On the definition of Malawian product the PPR 2004 states that if 30% of the raw
materials are from Malawi, that product is Malawian. The 30% of raw materials o
f the product seem to be too high except for agricultural products. For instance
, the raw materials for making a treadle pump made at a local welding shop, what
raw materials could be deemed Malawian. On the other hand, the legislation tack
les the assembling process whereby facilities that are used are mentioned. Howev
er, it is not clear on this issue. Is it that the facilities should be in Malawi
or made in Malawi? Or the facilities used for assembling the product have to be
manned by Malawian? There is a need for that legislation to be developed furthe
r if the assembling issue is to be well understood.
It has to be pointed out therefore, that what Malawi Government is advocating is
not an odd proposal in public procurement. The discussion has shown that develo
ped and developing countries are championing local/domestic preference in public
procurement. The difference comes in on the levels at which how clear public pr
ocurement laws are (developed) and the international trade agreements a country
is a signatory. Recently, Ministry of Trade indicated that SMEs in Malawi employ
a good percentage of our workforce (about 70%). This can be translated to a goo
d revenue base for government through pay as you earn (PAYE) tax, registration f
ees among others which are used for national development. In reference to econom
etrics, Virginia State of USA generated $2.1 million (in terms of jobs, tax reve
nue, etc.) by denying a business to an out-side-state company a contract that co
uld have saved $50,000.00 only (Dave: 2009:2). This means Malawi can protect and
create more jobs and increase tax revenue base by using ‘domestic price preferenc
e’ and ‘Buy Malawi Campaign’. However, what is needed is to have public procurement la
ws that are explicit and not in conflict with the international trade agreements
Malawi is a signatory. On the other hand, the local business owners should know
what is required from them to enjoy ‘domestic price preference’.