Although CETA will not bring great changes to procurement in Canada, it will increase European firms’ confidence in investing here.
Getting access to provincial and municipal government procurement contracts was one of the primary objectives for the European Union in negotiating the Comprehensive Economic and Trade Agreement (CETA) with Canada. But why? First, it is helpful to have an idea about the nature of foreign participation in Canadian procurement.
First, foreign firms take part in procurement in various ways, depending on the nature of their products. Some goods can be shipped directly from foreign companies. Others, such as the construction of light rail transit (LRT) systems, can only be provided by a firm or a group of firms with a local presence.
In addition, firms rarely work on a product, whatever it is, from start to finish. The more complex the product, the more complex the business model for its delivery. Suppliers of complex products, for example, for major infrastructure projects, tend to partner with other firms. But even those partnerships rarely produce everything, and instead hire a network of subcontractors.
Second, foreign firms face domestic barriers when they bid on government procurement contracts.
Trade agreements like CETA include set rules on the procurement process that prohibit discrimination, require transparency and encourage competition. But these types of provisions, related to traditional barriers to trade, address only part of the larger set of barriers faced by foreign firms. The production of a good or service is heavily regulated in any country; firms must meet technical standards, deal with professional licencing, and follow health and safety regulations. Trade agreements touch on these matters only to ensure that such regulations are not used to create unnecessary trade barriers. Larger firms that have greater capacity and international experience — and perhaps a local subsidiary — can more easily absorb the costs of adhering to these regulations than can smaller firms.
We reviewed procurement processes for LRT projects in several Canadian municipalities, analyzed procurement data from those governments and interviewed procurement officials. We found that these municipalities have already adopted policies that promote nondiscrimination, competition and transparency. The barriers facing smaller EU firms, however, remain in place.
Nonetheless, we found evidence of participation by multinational European Union (EU) firms in larger contracts such as the design and construction of major municipal infrastructure projects. Consider, for example, the involvement of EU firms in public LRT projects in major Canadian cities. We used the Statistics Canada’s inter-corporate ownership tables to determine the home countries of firms and their parent companies.
The LRT line that will cross mid-town Toronto along Eglinton Avenue is being designed and built by a consortium known as Crosslinx Transit Solutions. This consortium is a design-and-construction partnership comprised of four global and domestic multinational companies: ACS-Dragados, Aecon, EllisDon and SNC-Lavalin. ACS-Dragados is a large, Spanish-controlled company, while EllisDon and SNC-Lavalin are Canadian-controlled. Aecon is a Canadian construction company that’s in the process of being sold to China Communications Construction, a Chinese state-owned firm.
The Caisse de dépôt et placement du Québec has proposed that it would design, build and hold a 51 percent stake in a $5.6 billion light rail line (Réseau électrique métropolitain) linking Montreal’s South Shore, North Shore, West Island and the Trudeau airport. Two consortia are bidding on the project, and both include multinational firms controlled by EU-based companies.
Both stages of Ottawa’s new LRT system are being designed and built by the same partnership, known as the Rideau Transit Group. The Rideau Transit Group is a partnership among three of the four firms involved in Toronto’s Crosslinx Transit Solutions: Canada’s SNC-Lavalin and EllisDon, plus Spanish-controlled ACS Infrastructure Canada.
A group of firms operating as TransED Partners is designing and building Edmonton’s Valley Line LRT, expected to open in 2020. TransED Partners consists of US-controlled Bechtel plus Canada’s EllisDon, Bombardier and Fengate Capital Management. Other firms playing important roles include UK-controlled Arup Canada and French-controlled Thales Group.
Our point here is not to judge the merits of enlisting international consortia to design and build large public transit projects in Canada. It’s simply to point out that EU firms already have a significant presence in these projects, even though CETA only recently came into force.
Given that the municipal procurement process seems open to EU firms and that EU firms are already participating in some of the largest Canadian infrastructure projects, what were EU negotiators hoping to achieve in the government procurement chapter of CETA?
Commitments made in trade negotiations sometimes serve to “bind” countries to certain practices even when those commitments don’t lead to a change in how they currently do things. We see this in international agreements dealing with trade in services, where actual practices are often more open than what the countries commit themselves to in the trade pacts.
By pushing Canada to commit itself to nondiscriminatory government procurement at all levels, the EU may have been trying to limit Canada’s ability to discriminate in the future. For example, suppose some Canadian governments want to greatly increase their use of social procurement. The CETA procurement rule might, for instance, rein in their ability to reserve some proportion of large contracts for companies owned by marginalized groups.
Alternatively, looking over time and across any number of bilateral and multilateral trade treaties, one can see that expanding access to public procurement has been a long-standing issue. It is a widely held view that there is significant “home bias” in government procurement, leading governments to discriminate against foreign suppliers.
Therefore, we don’t know whether EU negotiators believed Canada’s municipal and provincial procurement markets were already open. Instead, perhaps, the idea that greater access should be a theme of any trade negotiations — because they believe there is “home bias” — may have driven the EU position.
If CETA simply requires that Canadian provinces and cities maintain pre-CETA market access for European companies, then the key implication of the trade pact will be to prevent them from practising protectionism in the future.
For EU companies, this might be an important benefit. Because participation in government procurement in many cases requires a local presence, increased protectionism would put EU investments in Canadian subsidiaries at risk. Of course, as the ongoing renegotiation of NAFTA shows, trade agreements can only reduce uncertainty, not eliminate it.
We don’t anticipate, therefore, that CETA will bring any great changes to procurement in Canada, regardless of why the EU emphasized increased access. Nonetheless, Canada’s government procurement obligations in CETA aren’t immaterial — they shrink the space for policies aiming to provide support for local economic and social development, and they provide greater confidence for European firms seeking to increase their investments in the Canadian market.
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