On 24 June 2020, MPs of Ukraine introduced the Draft Law #3739 addressing amendments to the Public Procurement Act to set forth a local content requirements (LCRs) concerning machinery and public infrastructure sector in both open and limited tendering procedures.
The proposed amendments provide for introduction of LRCs as a compulsory technical specification to be applicable to 88 CPV codes in total covering wide range of public transport, railway rolling stock, utilities equipment, special purpose equipment, construction and energy equipment.
LRCs under the bill imply a minimum value of raw materials, components, parts, constructions services and other components sourced in Ukraine that shall be incorporated in the cost of the covered subject matters of the procurement.
The new initiative is proposed to apply for 10-years period, starting from 1 January 2021 with gradual increase of the LRCs threshold in 2024. Pursuant to the draft law, the local content assessment will be exercised by the Ministry of Economic Development, Trade and Agriculture of Ukraine; an assessment methodology is yet to be approved by the Cabinet of Ministers of Ukraine.
Authors of the draft law claim it allegedly enjoys the exemption under GATT 1994 Article III:8(а) as well as falls within the scope of the Security Exceptions under GATT 1994 Article XXI (b)(iii) and Special & Differential Treatment under Article V of the WTO Government Procurement Agreement. However, a more scrutinous analysis of the bill would give raise to rather skeptical views on its compatibility with Ukraine’s international obligations:
- LCRs, encompassed by a notion of “offset”, is prohibited by the WTO Government Procurement Agreement due to explicit violation of the national treatment principle. It is quite questionable whether Ukraine may benefit from the S&DT for developing countries, as Ukraine has not made any reservation as for development needs in its annexes to Appendix I. Moreover, any exclusions from the GPA commitments may be granted to a developing country upon agreement with other contracting parties and following mutual negotiations. Ukraine has yet to notify the proposed legislative amendments to the WTO GPA Committee, where the new initiative is likely to face severe criticism.
- As for the security exceptions, the wording of GATT 1994 Article XXI (b)(iii) is quite vague, and the WTO jurisprudence has been silent to date on whether an economic crisis triggered by pandemic may qualify as “emergency in international relations”.
- Interestingly, that the authors of the bill also try to present it as an effort of approximation with the EU regulation, notably, with Directive 2014/25/EU governing government procurement procedures in the water, energy, transport and postal services sectors. However, though Article 85 of the Directive 2014/25/EU indeed empowers the EU public buyers to apply LCRs under certain conditions, this provision is limited to the third countries which do not provide an access for the EU undertakings to public procurement markets. In opposite, under the DC FTA Article 148, EU and Ukraine agreed on mutual access to public procurement markets on the basis of the principle of national treatment which will be breached by LCRs-related provisions.
- If approved, the Draft Law #3739 will also violate Article 10.5 (6) of Ukraine-Canada FTA.
- Moreover, LCRs are included in the illustrative list of trade-related investment measures (TRIMs) that are inconsistent with the national treatment obligation under the WTO TRIMs Agreement.
- The last but not the least are potential concern about compatibility with the WTO discipline on subsidies and countervailing measures. If approved and implemented, LRCs provision of the amended Ukraine’s Public Procurement Act will fall within the scope of import substitution subsidies which are prohibited by Article 3.1 (b) of the SCM Agreement.
On a separate note, the draft law proposes extending application of the LCRs to procurements that are funded by international grants and loans from IBRD, EBRD, IDA, NIB and other international assistance institutions. This category of contracts is not covered by the Ukraine’s WTO commitments.
Currently, the document is under consideration within the Ukrainian Parliament Committee on Economic Development.
Legislation: Draft Law #3739 as of 24 June 2020 On Amendments to the Law of Ukraine “On Public Procurement” Concerning Enabling Sustainable Development and National Industry Modernization