China’s Draft Rules on Government Procurement of Software

July 2005
Frost Brown Todd LLC

As China’s proposed rules on government procurement of software were released for comment in March, both domestic and foreign software providers raised concerns about the new rules.

The proposed rules are based on the PRC Government Procurement Law, which provides that the government shall procure domestic goods and services, but allows for exceptions.  The proposed rules require PRC government agencies to purchase domestic software products and services, unless they receive a special waiver from the Ministry of Information Industry and Ministry of Finance to buy from the Catalogue of Non-Domestic Software Products with Priority Purchasing Preference.  Upon application to the China Software Industry Association and with final approval by the Ministry of Information Industry, non-domestic software providers may be listed in the Catalogue.  To qualify for a listing in the Catalogue, the non-domestic software providers must meet certain requirements such as R&D investment, technology transfer, subcontracting, and revenue.  These requirements have not yet been defined in the proposed rules.

The software must meet following requirements in order to be considered a domestic software product:

“Domestic software services” is defined as computer information system integration, information system engineering supervision, and other related professional technical services provided by natural person(s), legal person(s), or other organization(s) in China.  The value contributed by foreign companies may not exceed 30 percent of the total value of the project.

American software companies are concerned that the narrowly defined criteria for domestic software products and services would block them from competing equally in government procurement market with Chinese software companies.    Those software products developed outside China will not have access to the government procurement market.  On the other hand, many domestic software companies take it for granted that the rules should grant them preference over their foreign counterparts for government procurement contracts.   Some believe that the Catalogue of Non-Domestic Software Products with Priority Purchasing Preference is in conflict with the PRC Government Procurement Law and should be eliminated.

Why are both sides fighting for China’s government procurement market?  According to a software business analyst, software customers can be divided into three groups: corporate users, government users, and individual users.  Due to rampant piracy in China, the government is the one of the few organizations that would use only legitimately purchased software.  The software procurement budget of the Chinese government at all levels is as high as billions of Yuan and is increasing substantially each year.   In the next few years, the Chinese government at all levels will finish electronic government platform construction, and their purchase orders for software products will reach as high as 30 billion Yuan (US $3.6 billion).

It seems that the proposed rules try to use government procurement market as a bargain chip to make foreign software companies establish their R&D centers in China.  Not very long ago, deputy director of the Beijing municipal government’s Science and Technology Commission said that software “Made in China” include not only software made by Chinese companies, but also those made by foreign funded or joint-venture companies in China.

The US software business community has urged the U.S. Commerce Department and USTR to persuade China to shelve the new rules and open negotiations as soon as possible to join Government Procurement Agreement of the World Trade Organization (WTO).