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THE WTO AGREEMENT ON GOVERNMENT PROCUREMENT AS A TOOL FOR UKRAINE'S INTEGRATION INTO THE GLOBAL VALUE CHAINS
Guzhva Igor
PhD, Vice-rector for Research and International Relations, Ukrainian State University of Finance and International Trade, Ukraine, e-mail: mfertua@gmail.com
ARTICLE INFO
ABSTRACT
Received 18 October 2015 Accepted 27 October 2015 Published 30 October 2015
KEYWORDS
Global value chains, Trade facilitation, Multinational corporations, Government procurement, World Trade Organization, Competition, Transparency of trade.
The article deals with the features of modern internationalization of production and economic relations among economic entities around the world based on the global value chains formation. The essence and the basic provisions of the multilateral WTO Agreement on Government Procurement as the integration tool of Ukraine's industries into the global value chains are revealed. The Ukraine's government procurement reforming progress towards the relevant WTO rules and regulations full implementation is analyzed. The foreign trade intensification potential of the domestic exporters as a result of Ukraine's accession to the Government Procurement Agreement is determined. The measures that will help in accelerating of the Ukraine's entry into the international market of government procurement under the WTO are suggested.
© 2015 The Author.
Introduction.
Analysis of the current state of Ukraine's foreign trade and investment inflows dynamic to the Ukrainian economy in 2010-2014 reveal the existence of significant shortcomings in the development and implementation of National Foreign Trade Policy. Addressing the negative trends in the decrease in exports, the loss of many positions in global markets, slowing foreign investment income requires urgent action by the authorities and, of course, pro-active position of the business community. Elimination of negative trends resulting in decrease in exports, losses of a number of trade positions in global markets, slowdown of foreign investment inflows require immediate actions of the state authorities as well as, certainly, pro-active role of the business community.
The negative trends elimination measure should take into account that the modern territorial organization of transnational corporations has been formed under the influence of irreversible processes of the international labor division that facilitated the development of a qualitatively new international cooperation form such as the global value chains. Therefore, the share of final consumption goods and services, which have passed through all stages of production and processing in one country, is declining rapidly, while the success of industrial and economic complex on the international arena increasingly determines the technological and managerial innovations implementation, the cross-border goods, services, capital and information movement liberalization.
Since a key role in terms of the global value chains expansion is played by the TNCs, the Ukraine's foreign trade intensification depends directly on the orders intensification for domestic corporate entities. The important tool is Ukraine's accession to the WTO Agreement on Government Procurement. It will ensure the opening of government procurement markets of the Agreement member countries (which in some countries come to 15% of GDP and are
estimated at 1.7 trillion USD per year on a global scale), that will favor to create significant additional opportunities to integrate national economic entities into the global value chains.
Results and discussions.
The Global Value Chains (the GVC) describe the full range of measures realized by international business over the whole goods production cycle, beginning from the idea of creation and ending with the end-use products output. This sequence includes consecutive stages such as design, all production stages, marketing, sales, service and warranty service of consumer of final products. In the context of the globalization, events that make part of the GVC, are usually carried out within inter-company networks at international scale. Due to the concentration on the sequence of all production stages of the added value creation beginning from a design and ending with a final consumption, the analysis in the light of the GVC provides an integral view on the global industry functioning. Therefore, the GVC is used as the internationally dispersed production organization strategies into a single effective production territorial complex based on specialization and cooperation of the separate links in the GVC in order to manufacture a specific end-use product or service.
Extraordinary prevalence of taking into consideration of international economic relations in the context of the global value chains is due primarily to its covering of the main global trends of world economy of the modern development, including:
-the increasing production fragmentation at the international level. The GVC relate geographically separated activities in certain industries, helping to define clearly appropriate industrial and trade ties. The foreign economic policy authorities can use the GVC to identify the national economy's stable relationships with the other countries' economies. In particular, the GVC give a clear idea of how the export competitiveness depends on the foreign raw materials supplies and on international markets consumer products stability;
- the development of international specialization of countries in separate manufacturing processes and business functions, and not in manufacturing the final products. While the majority of the economic theories of international trade are based on the existence of the competition among products made on the domestic market and with the ones produced on the foreign market, in reality most goods and services are "made in the world", and the countries compete for the economic role played within the GVC. Thus, the concept of the GVC overcomes the gap between economic policy and the realities of the international economy;
- the increasing role of the international mediators' in the global trade. The GVC analysis provides a comprehensive understanding of the specific managing mechanisms for international business, helps in identifying companies that control and coordinate the production and supply networks activities. Understanding the international business management structure is essential for foreign policy, in particular, to assess how these policies could affect the country's investment climate (Backer, 2013: 8).
Thus, at the current stage of the world economy development, international trade is increasingly generated by the intermediate goods exports: parts, joint units, components, subsystems, semi-finished products and services within the GVC. This contributes to the deepening of international specialization of companies which is linked to specific tasks in the final goods and services production, that is the international division of the production process (Shishkov, 2004: 15). The international specialization appearance to a totally new level stipulates a need in the intra-branch international trade growth among the various structures of TNCs and also among the independent cooperatives from different countries.
Of course, the GVC development is a globalization product because it allows to include almost all countries to the world economy, that contributes to their economic and social development. Moreover, for the countries that remain behind the economic development and lack significant drivers of growth, the integration into the GVC today is the
only possibility for a quality inclusion to the world capital flows and international goods and services movement system. Therefore, for the Ukraine there is an urgent need for new approaches and principles to pursue its foreign policy, which will result from the precondition that the real scale economies of countries at the present are determined not as much by the exports and imports volume as by the value added share created within the national economy and role and influence of certain countries in the GVC.
Current trends in the Ukraine's foreign trade currently mostly entail to further the domestic economy losses and already its almost insignificant role and place in the GVC. Thus, in the first quarter of 2015, the domestic goods exports volume has decreased by 32.9% and amounted to 9.4 billions USD. The goods supplies decrease compare to the corresponding period in the previous year occurred in all major sectors of the national economy. In particular it is necessary to mention the decrease in the exports of metallurgical complex products by 35.6%; in mineral products in 2.3 times; in engineering products in 1.9 times; in agricultural and food products by 15.1% and in chemical products by 30.3% (State Statistics, 2015).
However, the biggest problem for Ukraine is still its qualitative parameters of the involvement into the GVC, because its annual exports structure is dominated by raw materials and products with low levels of processing, and therefore with a law level of added value. The share of exports in raw materials, in the intermediate products and in finished products is respectively 24.1%, 44.7 % and 16%. As a result, only 20% of exports brings about 80% of foreign exchange earnings from it. Regarding the imports structure, the raw materials and semi-finished products constitute respectively 10.4 and 19.3 %, and the finished products constitute 50.2% (World Bank, 2015). Thus, in the International Labor Division system Ukraine is positioned on the initial (resource and raw material) links of the GVC, creating a small amount of added value on the international commodity market. Instead, the import structure is dominated by end-use products, which are obviously characterized by a considerable added value in it. This forms the basis of the national economy for an unequal international goods and services exchange, logical consequences of it become chronic problems with a negative payments balance, a foreign exchange and investment resources deficits and a technological backwardness of the economy.
In view of the stated problems, it becomes urgent to define the regulatory policy mechanisms that will help in eliminating the Ukraine's foreign trade and production and export potential structural imbalances and in promoting the active integration of the domestic economy into the global economic environment by accessing to the GVC on a qualitatively new level. One of such main mechanism at the present is the accession to the WTO Agreement on Government Procurement (the GPA). At this stage the Agreement on Government Procurement is an international, legally binding agreement on government procurement, which is becoming an increasingly important world trade element. 44 WTO member countries joined to the GPA, including 28 EU members (WTO, 2015).
According to the Protocol provisions on Ukraine's accession to the WTO, ratified by the Law of Ukraine on 10 April 2008 № 250 -VI (The Verkhovna Rada of Ukraine, 2015: a ) it is expected that after Ukraine's accession to this Organization the negotiations to join the Agreement on Government Procurement will begin. After joining the WTO in February 2009 Ukraine has become an observer of the WTO Agreement on Government Procurement. And in 2012 according to the commitments undertaken by Ukraine while joining to the WTO, the full negotiations on accession of our country to the GPA was launched.
It should be noted that Ukraine's accession to the GPA is a matter of principle, because the existing national regulatory environment allows foreign companies to take a part in the national tenders related to government procurement, while the other countries government procurement market remains closed to Ukrainian exporters.
One of the biggest current successes of Ukraine on the way of accessing to the GPA first of all is the ensuring the necessary compliance of Ukrainian the legislation according to the international standards in the field of government procurement that were highly favoured by parallelism of the Ukraine's accession processes to GPA and the Association Agreement with the EU. Reformating of the national legislation is embodied into the new Law of Ukraine provisions "On government procurement" on 04 April 2014, which envisages the following:
- a new approach of determining the customers, which are covered by the Law, which is based on the satisfaction of the state or territorial community needs as the main criterion that determines the need for the application of the law during goods, works or services procurement;
- a reduction of the list of exemptions under the Law application ( from 44 to 15);
- an adapting of the existing procedures for procurement from one participant to the negotiation procedure in accordance with the EU Directives terminology and shortened the list of grounds for the procedure application;
- a reduction of the list of grounds of the non-competitive procedures application;
- a mandatory publication on the Authorized Agency web portal of all information on the implementation of government procurement procedures, starting from the annual plans publication and ending with the he procurement contract implementation report and it is also canceled the need for the information publication in the newspapers;
- an enabling of submitting documents electronically and use of electronic media during the procurement procedure;
- a raising of the application thresholds of procurement request for price proposals up to 300.000 UAH (it used to be 200.000 UAH) and a reducing of procedural deadlines of its implementation (up to 7 days for the submission of price proposals and 3 working days for the right to conclude the procurement contract);
- an introduction of a new possibility of refusal tender if a participant in the last three years was brought to a responsibility for violations as a commitment of anticompetitive concerted actions (conspiracy) concerning distortion of public sales (tenders);
- an introduction of provisions on the customer right on proposals rejection of candidates registered in offshore zones;
- a granting of a right to the community to be present at the public opening of tender offers and to realize a fixation by technical means (The Verkhovna Rada of Ukraine, 2015: b).
Currently, the Ukrainian delegation of experts carries on consultations with the GPA Member States on the conditions for the Ukraine's accession to the Agreement taking into account the national economic interests. As a result of the February consultations round in 2015, the WTO Working Group members positively noted a renewed proposal of our country on the coverage level of the Agreement, and emphasized the positive steps made by Ukraine towards accession to the Agreement. Thus, as a result of negotiations, there were highlighted the real possibility of the Ukraine's accession to the WTO Agreement on Government Procurement by the end of 2015 ("Reduction", 2015).
On 29 June 2015 Ukraine issued a final proposal of its participation in the GPA, the key characteristic features of which are the following:
- the offer contains seven Annexes (Annexes 1-3 consist of a list of entities covered by the Agreement; Annexes 4-6 form the list of goods, works and services subject to the Agreement; Annex 7 contains general notes and a list of exceptions);
- the offer contains the GPA application thresholds;
- the offer is based on the national legislation on government procurement, and therefore includes only those subjects, goods, works and services that fall under the Law of Ukraine "On government procurement".
Experts consider that Ukraine's participation in the GPA will make the government procurement procedure more transparent, the administrative procedures of government procurement policies will stop from being changed as much as it used to be observed. The opportunities for officials to make decisions in favor of specific individual enterprises and organizations will be reduced. It is expected that participation in the Agreement will encourage domestic producers to produce more competitive products and services. Despite the trial of countries to charge mainly the domestic producers of accession during the instability in the world economic development, with the accession to the GPA the domestic goods and services exporters will have the opportunity to diversify sales markets. With its accession to the Government Procurement Agreement Ukraine will be able to enhance the competition on the domestic market, to improve governance and to restrain corruption by increasing transparency in procurement procedures.
The other advantages for Ukraine from participating in the GPA are the following:
- the GPA will create favorable conditions for investment in Ukraine;
- the government procurement in Ukraine will take place according to the international standards;
- the national legislation improvement, the introduction of a transparent system of government procurement and, consequently, the development of a market economy;
- the ensuring equal opportunities for participation of domestic business in international government procurement;
- the GDP growth through the effective integration to the goods and services markets of the GPA Member States (the Ukraine executive authorities single Web portal, 2015).
It is expected that the GPA will protect Ukrainian companies from the protectionism exercised by other GPA signatories on relevant procurement. The agreement will protect the Ukrainian companies on the international government procurement market from discrimination since they are foreign suppliers.
Thus, the membership in the GPA is not only the most effective instrument for reforming national legislation on government procurement, but also it is a kind of "quality mark" for foreign investors, helping in attracting direct foreign investment and the intensifying industrial activity. However, the only membership in the GPA is not able to lead to these positive results without organization the whole complex of activities at the national level to harmonize legislation, procedures and conditions for tenders carrying out within the framework of government procurement.
One of the key problems in this area, which is typical for domestic and international practice, remains a great propensity for corruption. Studies indicate that even in the EU member states almost 20-25% of the contracts in government procurement are lost due to the corruption, which is about 120 billion Euros a year (UNODC, 2013). Therefore, the main task of the state in reforming government procurement at this stage is to build a transparent, open and competitive government procurement system that meets international standards.
In order to prevent corruption leveling of potential benefits from the Ukraine's accession to the GPA it seems appropriate to develop and implement program in order to fight against the corruption in the field of government procurement. Such a program should complement the appropriate national legislation because the world experience shows that the only legislation is not enough to prevent corruption in government procurement. It is extremely important to support the efforts aimed to ensure the government procurement process legal implementation in the legal framework that can be achieved through the accountability and transparency. To ensure the highest possible effectiveness of a comprehensive program of fighting against the corruption in government procurement, the efforts under this program should focus on minimizing the corruption at all stages of carrying out of the government procurement procedures: stage of the tenders organization, stage of the
tender implementation, stage of the implementation of the tender provisions after the completion. Specific tools for this purpose should be:
- effective appeal systems of the tenders results;
- transparent rules for exceptions suspension and preventing tenders;
- monitoring of government procurement by civil society;
- reporting and responsibility of State authorities for violation of government procurement;
- electronic tender system in government procurement.
Conclusions.
Thanks to the technology development and a price reduction of the international trade, the global value chains have become the main and the most important component of the global economy, which determines the countries development rate. Given the diverse needs and economic crisis, Ukraine needs a comprehensive targeted integration strategy into the GVC. One of the key components of this strategy should be the integration into the WTO Agreement on Government Procurement as one of the most effective mechanisms for ensuring national interests in the field of attraction itno the global value chains and international investment flows.
To the fullest advantage of the GPA it is necessary to launch a series of technical assistance aimed at dissemination of information regarding the given Agreement, including Ukraine's accession conditions to the Agreement, the existing advantages and challenges. It is appropriate to ensure the training and retraining of the tender committees heads to ensure quality implementation of the considered Agreement, into the effective daily practice of local authorities and entities. Providing such training and retraining is advisable to be put on the responsibilities of the higher education of the relevant specialty, which employs a team of highly skilled professionals in the field of international economy.
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