Canada-US Agreement - Ground-Breaking Deal Heralds Major Changes in Provincial Contracting
Paul M Lalonde -
The recent 2010 Canada-US Agreement on Government Procurement (Canada-US AGP) is a ground-breaking development in government procurement in North America. For the first time, the provinces in Canada have agreed to be covered by an international trade agreement on government procurement.
There is no doubt that this agreement will cause the provinces to modify their procurement practices and tighten rules governing contracts by public bodies. But there are very different procurement systems in each province and ensuring compliance may be easier for some provinces and more difficult for others. Notably, the agreement will require the provinces to set up bid-challenge procedures. Currently, a formal procurement dispute resolution mechanism exists at the federal level, before the Canadian International Trade Tribunal (CITT), with a few provinces providing suppliers with access to complaint processes of varying degrees of effectiveness. Whether or not the provinces will be willing to adopt a model similar to the CITT remains an open question.
Background
In the wake of the 2009 financial crisis, the United States government passed the American Recovery and Reinvestment Act of 2009 (“Recovery Act”). The Recovery Act’s “buy American” provisions require that all iron, steel and manufactured goods used in public works projects that are funded by the Recovery Act must be produced in the US, subject to existing trade agreements. The trade agreements in question (Chapter 10 of NAFTA and the WTO Agreement on Government Procurement (WTO-AGP) protect Canadian suppliers from local preferences where procurement is being carried out by the US federal government. However, the bulk of the funds under the Recovery Act are transferred to state and local authorities in the form of grants and the actual contracting process is carried out by those local authorities. Chapter 10 of NAFTA does not apply at all to provincial, state and local bodies. The WTO-AGP applies to 37 US states, but on a reciprocal basis. This means that the benefits of the WTO-AGP only apply to suppliers from countries where the WTO-AGP applies at the sub-national level. Since the Canadian provinces are not covered by the WTO-AGP, Canadian suppliers do not benefit from the protections of the WTO-AGP where contracts are awarded by state or local authorities.
Prior to the passage of the Recovery Act, US procurement markets had generally been open to Canadian suppliers, with few states or localities imposing local preferences. The change in the status quo occasioned by the Recovery Act was greeted with considerable consternation in Canada. The potential losses to Canadian businesses were substantial; in one notable case, Canadian pipes already used to build a health-care centre in California had to be removed and exchanged for American products. Canadian industry mobilised and exerted pressure on the provinces to address the problem. The result of such pressure at the federal and provincial levels is the 2010 Canada-US AGP, which came into force on 16 February 2010.
The 2010 Agreement
Three main elements
• Permanent market access for Canadian companies to sub-federal US government procurements that are subject to the WTO-AGP. Thirty-seven US states are already covered by the WTO-AGP. In exchange, US companies get permanent access to provincial and territorial markets (except Nunavut).
• Temporary commitments: Canadian companies will be exempt from the “buy American” provisions of the Recovery Act with regard to seven US infrastructure projects in all 50 states. In exchange, US companies receive access to certain provincial/territorial agencies and municipalities not included in the WTO-AGP (to 30 September 2011).
• A commitment to explore the scope for a long-term government procurement agreement between Canada and the US. The Canadian and US governments have expressed the hope that this would result in commitments beyond those in the WTO-AGP and the NAFTA.
Importantly, the agreement requires the provinces and territories to set up a procurement review process for suppliers to challenge purchasing decisions. This review mechanism must be timely, effective, transparent and non-discriminatory.
Different Provinces Will Face Different Implementation Challenges
One of the major hurdles to the effective implementation of this agreement is that the provinces regulate government procurement very differently. Compare, for example, the situation in Ontario and Quebec.
In Quebec, bringing government procurement into compliance with the Canada-US AGP will be a relatively straightforward matter. All government procurement is regulated by An Act Concerning Contracting by Public Bodies, and is subject to the oversight of the Sous-secrétariat aux Marchés Publics. The primary purpose of this Act was to standardise the legal framework applicable to the adjudication and award of government contracts. The second objective of this Act is to codify the principles and enact general rules that govern public procurement in the province. In short, Quebec has established a simplified and comprehensive regime that governs the bulk of government procurement in the province. Complying with the terms of the Agreement can be accomplished by relatively straightforward amendments to this Act.
By contrast, provinces which do not have a similarly centralised procurement regime face more complicated compliance challenges. In Ontario, there is no single law that governs government procurement processes. The Financial Administration Act provides very general guidance about contracting and the disbursement of public funds, but virtually no guidance on the procurement processes that public bodies must follow. Ontario has no centralised purchasing authority and ministries do not follow tightly standardised tendering practices. The 2009 Supply Chain Guideline is the first attempt by the Ontario government to provide principles and standards to comprehensively regulate procurement practices. However, this document does not apply to all government procurement; the target sectors are hospitals, school boards, colleges and universities. Expansion to other sectors is planned for the future, but no timeline has been announced. Moreover, because the guideline is not a statutory or regulatory document, enforcement is based on the threat of funding withdrawal, the effectiveness of which is questionable and which may not result in consistent compliance by the agencies. Ontario ministries and agencies have developed different practices and follow a variety of different policies and guidelines, which will present significant challenges in implementing the commitments in the agreement.
Dispute Resolution: An Outstanding Concern
As mentioned, the agreement requires that provinces and territories provide an effective review procedure for suppliers wishing to challenge a covered procurement. Paragraph 19 of Appendix C specifies that “each province or territory will establish or designate at least one impartial administrative or judicial authority that is independent of the procuring entity to receive and review a challenge”. Currently, dispute resolution mechanisms vary from province to province. In British Columbia, there is a centralised Vendor Complaint Review Process which establishes a framework of rules and a division of responsibilities that government ministries must follow when a supplier raises a complaint. Complaints which are not effectively dealt with at the ministry level can then be elevated to the Procurement Governance Office. By contrast, in Ontario, the 2009 Supply Chain Guideline only requires that public sector organisations adopt bid protest procedures, leaving it to each organisation to design its own process. At the moment, provincial governments are designing or redesigning their review procedures to ensure compliance with the agreement. Different models of dispute resolution are available to the provinces and territories to comply with their obligations. For example, introducing arbitration proceedings, constituting a standing tribunal or formalising a referral mechanism to the courts might all satisfy the requirements of the Canada-US AGP.
Canada already has a model of a procurement dispute resolution procedure that is effective: the CITT. This is an independent administrative tribunal, constituted by statute that, among other things, inquires into complaints by potential suppliers about federal government procurements covered by the Agreement on International Trade (AIT), NAFTA, the 1994 WTO-AGP or bilateral free trade agreements (FTAs).
The CITT model has many advantages. It is a forum that has effectively dealt with supplier complaints for the last 20 years. It has had a salutary effect on federal procurement: in 1991, $3 billion-worth of contracts were awarded on a non-competitive basis; in 2006, that number was down to $1.5 billion. It is a forum that suppliers believe in and use; in 2008–09, 83 procurement complaints were filed with the CITT and 72 were resolved within the fiscal year. The CITT has achieved a balance between the interests of suppliers and the need of government to be able to purchase with minimal disruption to its operations. The model is not perfect, but it has worked reasonably well for the last two decades.
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The Canada-US AGP is a landmark agreement that for the first time requires sub-federal procurement markets to comply with international standards. No doubt some provinces will have a more difficult time implementing this agreement than others. Given developments such as the current Canada-EU free trade negotiations and the emergence of the 2007 draft WTO-AGP as a broadly accepted international consensus on the standards that government procurement should follow, the agreement represents another step toward greater international and domestic regulation of government procurement.
Provinces and territories are currently struggling to understand how they can reform their procurement regimes to comply with the new expectations brought by the agreement. The reforms being implemented will have profound and long-lasting impacts on public contracting in Canada. If industry stakeholders wish to have input into the new regimes that will govern procurement in the years to come, the time to speak is now.