Saturday, February 8, 2014

Crossrail procurement and WTO

The British government has awarded the £1bn contract to supply the 600 train carriages for the new London Crossrail east-west line to Bombardier. Bombardier, which would supply the trains from its factor in Derbyshire, was the only bidder with a production facility in UK. The contract is estimated to create or support about 1000 jobs. Bombardier's win follows political criticism over awarding contracts to bidders who would not create local jobs. As the FT writes,
The government came under heavy criticism for selecting Siemens over Bombardier to build trains for Thameslink. The decision for the £1.6bn order meant the trains would be built at a Siemens factory in Germany. Bombardier responded by threatening to close its plant in Derby unless it won the Crossrail contract. After the Thameslink controversy, ministers promised to “level the playing field” for UK-based manufacturers when they launched the Crossrail tender. Under European procurement law, the tender could not insist trains were made in Britain, but before they applied, the companies were asked to explain how their bids would benefit the UK economy.
This naturally raises the question of whether the contract is infringing on Britain's WTO commitments. The Article III (4) of the GATT prohibits protectionism and discriminatory treatment against imported products and in favor of domestic products, the "national treatment" principle. According preferential treatment to bidders on grounds of "benefiting the UK economy" would appear to amount to discriminatory treatment against foreign bidders. 

Would Hitachi or CAF (or Japan or France), the rival bidders go to WTO dispute settlement board (DSB) against the contract? In any case, it carries important lesson for countries like India which have been grappling with similar challenge with its own large public procurements for infrastructure projects. Constraints imposed the "national treatment" principle has left the country with limited room to maneuver in telecoms, power, renewables etc when faced with competition from Chinese producers. Is the British provision a way out for countries like India? Or does the EU procurement law allow this? If so does it not infringe WTO rules?  

Crossrail, a 120 km rail line linking Maidenhead, west of London, through the centre of the capital and out into thee eastern suburbs, both north and south of the river Thames, being built at a cost of £14.8 bn and to be commissioned in 2018, involves drilling 21 km of twin-bore tunnels under London's densest parts. It is expected to complement the existing 11 lines of London Underground and will increase the country's rail capacity by 10%. However its construction is running on schedule and on budget. Interestingly, the government has decided to go ahead with public procurement of the rolling stock, instead of the PPP route, since it perceives that the PPP route would take a long time to be finalized.

Update 1 (20/7/2014)

The Hong Kong Metro operator MTR has won the bid to operate Crossrail. The contract is for an initial period of 8 years, extendable to 10 years. MTR, which already operates the London Overground Metro service, is 77% owned by HK government. It also runs the Melbourne Urban rail system as well as five metro lines in China, including two in Beijing. The MTR is one of a number of state-backed entities - SNCF of France and Deutsche Bahn of Germany - who are seeking to expand their footprints outside their home markets.

Update 2 (3/12/2014)

A report by PwC estimates that half the £27.5bn cost of Crossrail 2, linking southwest and northeast London, could be met with revenue from fares, business rates (BRS) and a tax on new developments imposed as Community Infrastructure Levy (CIL).
This helps the project meet the requirement than atleast 50% of the cost comes from sources other than central government. The report estimates the project, which includes 36 km of twin tunnels from Wimbledon to Tottenham Hale and New Southgate, and  to be completed by 2030. The estimates includes rolling stock, connecting it to existing network, and a 66% optimism bias.

4 comments:

grv_i said...

Article III of GATT, has an exemption Art III: 8(a) which states - 'The provisions of Article III 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.'

The WTO Appellate Body was called upon to interpret this provision in a dispute (DS426 - http://www.wto.org/english/tratop_e/dispu_e/cases_e/ds426_e.htm
) between Canada and EU.
Find the interpretation at 5.3.3. in https://docs.wto.org/dol2fe/Pages/FE_Search/FE_S_S009-DP.aspx?language=E&CatalogueIdList=116589&CurrentCatalogueIdIndex=0&FullTextSearch=

My take on this is that the last term of Art III: 8(a) 'sale' would be responsible for UK not being able to get the benefits of Art III: 8 (a)

Wish to get your comments.

Srikar said...

Dear Gulzar,

Your question on whether the measure would infringe WTO law may be answered in Article III (8) (a) of the GATT which is an exception to the national treatment principle and states :

"8. (a) 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."

Therefore the question is two fold:

1. Was there a law, regulation or other requirements affecting the internal sale... wherein more favourable treatment was accorded to like products of national origin? Merely allotting bid to a local producer may not amount to a less favourable treatment. The contractual bidding terms would need to be looked into to see if local products were given more favourable treatment.

2. Is the procurement covered by the exception in Article III(8)(a). A prima facie reading of the text and the facts in hand indicate that it is covered.

Sai Prasad said...

It is unlikely that there would be any law, regulation or requirement which allows only domestic purchase and which would not against WTO provisions.

In any case, where was such a law in the case of previous procurement from siemens.

sai prasad said...

WTO seems to be getting to be more about technicalities and less about economic principles, in its operationalisation.