Excerpt from Public Procurement Law Review (1998) Issue 6, Sweet & Maxwell & Contributors

1.    Introduction

Until Japan implemented the GATT Agreement on Government Procurement (GATT Code) in 1981, the Japanese Government had had little experience with open competitive bidding. Most of its public sector procurement was restricted to long-term local suppliers and was essentially closed to foreign firms. Japan's central government had used private contracts (single tendering) without public notice for approximately 90 per cent of its procurements. As a consequence, Japan's adherence to the GATT Code brought unprecedented changes to its procurement system and opened a new era in public procurement in Japan. Japan's subsequent assumption in 1996 of the obligations of the WTO Agreement on Government Procurement (GPA) brought additional procurement reform, in particular for local governments.⁽¹⁾

This Article examines Japan's public procurement system at both the central government and local government levels. The discussion is divided into three sections: (1) the legal framework for Japan's public procurement system at both the central and local government levels; (2) the public procurement procedures used at the central and local government levels; and (3) sector-specific procedures arising from bilateral procurement agreements.  

2.    Legal Framework of the Japanese Public Procurement System

This section examines the legal framework of Japan's government procurement system, covering both its implementation of multilateral obligations under the GPA and the domestic laws and regulations that provide the foundation for its procurement system.

(a)    Japan's Multilateral Obligations under the GPA

Japan was an original signatory of both the GATT Code and the GPA. As international agreements, these agreements entered into force in Japan upon the approval of the National Diet (Japan's parliament). In December 1994, both the Lower House and the Upper House of the Diet approved the WTO Agreement, which included the GPA. The Agreement entered into effect in Japan on January 1, 1996.

(i) Central Government Entities Subject to the GPA
Consistent with its coverage under the GATT Code, Japan has subjected 31 central government entities to GPA disciplines in its Annex 1 to the GPA. These entities include both houses of the Diet, the Supreme Court, the Cabinet, the Prime Minister's Office and 12 ministries. However, Japan did not cover its National Space Development Agency and has taken several other exceptions to its central government coverage, including limiting Defence Agency coverage to specified categories of procurements. Japan has committed to apply the same thresholds for central government procurements as other GPA signatories: 130,000 SDRs (Special Drawing Rights) for goods; 4.5 million SDRs for construction services; 450,000 SDRs for architectural, engineering and other technical services; and 130,000 SDRs for other services. However, as a voluntary measure, the Japanese Government has lowered the GPA threshold applicable to goods and services, other than construction services and architectural, engineering and other technical services related to construction services, to 100,000 SDRs in order to increase opportunities for foreign suppliers in the Japanese market.

(ii) Sub-Central Government Entities Subject to the GPA
With its adherence to the GPA, Japan for the first time subjected its most important sub-central government entities-its 47 prefectures and 12 Designated Cities (shitei toshi)⁽²⁾-- to international disciplines, subject to certain exceptions set out in its Annex 2 to the GPA. The exceptions include procurement related to the production, transport or distribution of electricity. Japan applies GPA thresholds for its sub-central government procurements of 200,000 SDRs for goods and services, except for construction services, for which it applies a threshold of 15 million SDRs, and for architectural, engineering and other technical services, for which it set the threshold at 1.5 million SDRs.

(iii) Government-Related Entities Subject to the GPA
Japan has included 84 government-related entities in the third category of entities listed in its Annex 3 to the GPA, which represent a significant increase over the 21 entities that it covered under the GATT Code. The covered entities include the partially privatised Nippon Telegraph and Telephone Company (NTT). However, Japan has exempted certain procurement of specific government-related entities, including NTT's procurement of public electrical telecommunications equipment, which is subject to a U.S.-Japan bilateral agreement. Japan applies the same thresholds to procurements of government-related entities as for central government entities, except for construction services, for which it applies a threshold of 15 million SDRs.

(iv) Services Covered by the GPA
In its Annex 4 to the GPA, Japan has listed the services, including certain construction services, that it has brought under GPA disciplines, subject to specified exclusions. The covered services include air transport services, courier services, telecommunications services, computer services and publishing and printing services.

        (b)    Japanese Government Procurement Laws and Regulations

(i) Central Government
The legal regime that governs Japan's government procurement system is typical of the Japanese legal system, with a basic law at the pinnacle and implementation delegated to cabinet orders (seirei) and ministerial ordinances (shorei), and further details spelled out in notifications (tsuuchi), circulars (tsuutatsu) and other lesser regulations. The Accounts Law (Kaikei Hou), Law No. 35 of 1947, which has been amended several times, is the basic procurement statute that governs budgeting, auditing and accounting by the central government in Japan and prescribes general procedures for government procurement.

After Japan signed the GATT Code, it had to modify significantly its legal framework to conform its procurement practices to the Code. However, it did not need to amend the Accounts Law as it was consistent with the principle of providing national treatment to foreign suppliers. Instead, Japan was able to undertake its GATT Code obligations through adoption and modification of administrative measures. For example, the Cabinet detailed requirements for central government procurement through cabinet orders, and the Ministry of Finance (MOF), the ministry with authority over the budget and procurement procedures, further elaborated on requirements through ministerial ordinances and other measures. When Japan implemented the GPA, it undertook similar, but more modest, measures to incorporate GPA obligations into its legal framework, again without amending the Accounts Law, but through the revision of cabinet orders, ministerial ordinances and other administrative measures. In addition, various ministries and agencies through internal circulars prescribe the fine details of procurement procedures that apply within the ministry or agency.

(ii) Local Government Procurement Law
Japan has two tiers of local government: the first tier consists of prefectures and cities, and the second tier includes towns and villages. While the Japanese Constitution (Article 94) gives local governments the "right to manage their property, affairs and administration and to enact their own regulations within law", in fact, national laws regulate most of the important aspects of local governments. The Local Autonomy Law (Chihou Jichi Hou), Law No. 67 of 1947, provides the legal framework for local government operations and sets out the general requirements for procurement by prefectures and other local governments and delegates detailed requirements to cabinet orders.

In 1995, in order to bring local governments into compliance with the requirements of the GPA, the Cabinet had to amend the basic cabinet order governing local government procurement, and also adopt a new cabinet order stipulating special procedures for the procurement of goods and services by local governments subject to the GPA.  Central government entities, primarily the Ministry of Home Affairs (MHA), which is responsible for local government affairs, have issued ministerial ordinances, as well as various administrative rules, including notifications and circulars that pertain to local government procurement. Also, the MHA and the Ministry of Construction, which is the ministry responsible for administrative matters relating to construction and civil engineering, have issued jointly a circular promoting the reform of bidding and contract procedures used for public works.

Within the parameters set out in national laws, cabinet orders, ministerial ordinances and other regulations, each local government regulates its own procurement practices through ordinances (jourei) enacted by local legislative bodies and regulations (kisoku) issued by prefectural governors and city mayors.

3.    Japanese Government Procurement Procedures

This section will describe the procurement procedures prescribed for Japanese governmental entities, with a focus on those of the central government as they are largely paralleled at the local government level.

        (a) Types of Procurement Procedures

Both the Accounts Law and the Local Autonomy Law require central government entities and local government entities, respectively, to use one of three types of procurement procedures: (1) open tendering (ippan kyousou nyuusatsu); selective tendering (shimei kyousou nyuusatsu); and limited (single) tendering (zuii keiyaku). The Japanese procurement system is premised on the use of open tendering procedures as the primary vehicle for government procurement, with selective and single tendering as exceptions that may be used only when they meet conditions set out in the law or cabinet orders.

(i) Open Tendering Procedures
When open tendering procedures are used, a procuring entity publishes in the official gazette, the Kanpo,⁽³⁾or its equivalents at the local levels (collectively referred to as the "Kanpo"),a notice inviting all qualified suppliers to participate in the tendering procedures. The contract is generally awarded to the tenderer who offers the lowest price.

(ii) Selective Tendering Procedures
Government entities are authorized to use selective tendering procedures where, due to the nature or purpose of the procurement, either: (1) it is deemed unnecessary to use open tendering procedures because only a small number of suppliers are expected to participate in the tendering procedure; or (2) the use of open tendering procedures is deemed to be disadvantageous. When selective tendering procedures are used, the procuring entity designates, from among the suppliers that have the necessary qualifications, the suppliers that will be allowed to participate in the procurement. The entity notifies the designated suppliers of the time and place for submitting their tenders and other necessary tender information.  Contracts are generally awarded to the tenderer who offers the lowest price.

(iii) Limited (Single) Tendering Procedures
Under limited (or single) tendering, entities award contracts without open competition. Use of single tendering is limited in procurements covered by the GPA to those that meet the conditions provided for in the GPA. These conditions include: (1) when due to an extreme urgency, the goods cannot be obtained in time by means of open or selective tendering procedures; (2) when there are no participants in a procurement using open or selective tendering procedures, or there is no successful bidder when a procurement is re-tendered, and the conditions in the initial tendering have not changed, other than the contract deposit and the date of performance; (3) when the successful tenderer failed to conclude the contract; (4) when for works of art or goods or services that are protected by exclusive rights such as patents, or based on specialised knowledge, only a particular supplier can supply the goods or services and no alternative good or service exists; (5) when the contract is awarded to co-operatives or associations in accordance with laws and regulations existing when the GPA entered into force for Japan; (6) when the procurement is for goods that are replacement parts or related parts for goods already procured or services of the same kind as those originally procured, and single tendering is necessary to realise the benefits of the previously procured goods, and procuring goods or services from a supplier other than the original supplier would be extremely inconvenient; and (7) when an entity procures a prototype or a sample of a good or service which results from experimental research undertaken by the government and a particular supplier.

As a voluntary measure, aimed at increasing market access opportunities for foreign suppliers to the Japanese market, the Japanese Government requires procuring entities (other than sub-central governmental entities) to publish a notice of their use of single tendering for procurements of goods and services covered by the GPA, above a threshold of 100,000 SDRs, in the Kanpo at least 20 days before the award of the contract. An exception applies to construction services and architectural, engineering and other technical services related to construction services, and there are also certain other exceptions, such as procurements to meet an extreme urgency.  

        (b)    Qualifications of Suppliers

In general, in using open or selective tendering procedures, entities must determine whether a supplier is qualified before the supplier will be allowed to participate in the procurement. Suppliers that are determined to be qualified are registered by the entity on their list of qualified suppliers. The determination of qualifications is important in the Japanese system because the selection of the winning tender is generally based on the lowest tendered price. By allowing only suppliers that they have determined are qualified to submit tenders in a procurement, entities can be assured that the supplier who offers the lowest price will be qualified.  

(i) Disqualification from Participation
In order to be eligible to participate in a tendering procedure, a supplier must avoid disqualification as well as meet certain affirmative criteria. A procuring entity may disqualify a supplier seeking to participate in tendering procedures on several grounds. First, the entity may exclude a supplier if the supplier has been determined to be incompetent, quasi-competent or bankrupt and not yet reinstated, absent extenuating circumstances with certain exceptions. Secondly, the entity may exclude a supplier from participation when the supplier, any of its agents, managers or other employees, or its representatives in the tendering has committed one of the disqualifying acts set out in a cabinet order. The disqualifying acts for both central governments and local governments include: (1) intentional construction or production of low quality goods or dishonest behavior related to the quantity or quality of goods in performing a contract; (2) obstruction of the conduct of fair tendering procedures, including conspiring to fix prices; (3) interference with the completion of a contract by a successful tenderer; (4) hindrance of an official performing his supervisory duty of inspection of the performance of a contract; (5) failure to perform a contract without a valid reason; and (6) employment of a person who in the prior two years has engaged in any of these disqualifying acts.

While disqualification on any of the foregoing grounds is made by a single entity, the practical effect is to disqualify the affected supplier from participating in procurements of other ministries and agencies because disqualifications at the central government level must be reported to the Ministry of Finance, which is responsible for preparing and maintaining a list of disqualified suppliers. This list is circulated to other ministries and agencies.

(ii) Affirmative Participation Criteria
In addition to avoiding disqualifications, suppliers must also satisfy affirmative criteria set by the procuring entity. Each central and local government entity is allowed to specify the qualifications of suppliers who will be allowed to participate in its competitive tendering procedures and to review their capabilities of implementing contracts, as long as the fairness of competition is not impaired. The central government gives direction to local governments as to the types of qualifications that they may impose on suppliers seeking to participate in tendering procedures. In order for the procuring entity to determine suppliers' eligibility to participate in procurements, suppliers must submit the documents described in a notice in the Kanpo, which usually include the following: (1) application form for qualification; (2) registration certificate, identification certificate or equivalent documents; (3) historical record of the company; (4) financial statements; and (5) tax payment certificate or equivalent documentation.

The affirmative participation criteria used at both the central and local government levels typically include the production, sales performance, and other matters relating to the scale of the supplier's business operations or past business performance; the number of employees in its workforce; the amount of its capitalisation; its capital structure; its financial condition; and its general state of affairs. Local governments must apply these qualifications when they use selective tendering procedures for certain types of contracts. Additionally, the local government may impose further qualifications on suppliers. While local governments are generally allowed to require that suppliers maintain an office within the jurisdiction, entities covered by the GPA are expressly prohibited from establishing such a qualification in procurements covered by the GPA.

In order to make objective determinations of a supplier's qualifications, central government entities use numerical figures for such items as annual average sales, amount of capital, number of employees, value of facilities, floating capital ratio and number of years in business. The larger the applicant's total score, the larger the procurement the applicant will be deemed to be capable of carrying out. Usually suppliers are divided into groups, such as A, B and C, according to their scores. Similar criteria are employed by local government entities in their qualification procedures. Qualification criteria and a list of groups based on the numerical scores are published in the Kanpo.

After each ministry and agency has determined the basic qualifications that suppliers must have in order to be eligible to participate in its open tendering procedures for a given fiscal year, it must publish a notice in the Kanpo. The notice must include the necessary qualifications, categories of products or services to be procured, documents to be submitted for qualification, time and method by which suppliers may apply for verification and certification of their qualifications, methods for notification of the results and duration of the validity of the qualification. Qualification review may be carried out at any time, although entities prefer that the application be made during the period specified in the public notice, for administrative convenience.

(iii) Scope and Duration of the Validity of Qualification
Following their review of applications for qualification, entities develop lists of qualified suppliers, which apply only to that ministry or agency. An entity's registry of qualified suppliers is accessible only to that ministry or agency. A qualification is generally valid for one or two years, unless the application for qualification is submitted outside of the qualification period set out in the Kanpo, in which case, it will be valid only for the time remaining in the qualification period. Specific information on qualifications is set out in the Kanpo, which is published around December to February.

    (c)    Notice of Proposed Procurement

An entity must publish notice of a proposed procurement in the Kanpo, at least 40 days prior to the deadline for submission of tenders. However, the Japanese Government, as a voluntary measure to increase access opportunities for foreign suppliers in procurements by entities other than local government entities, has extended, in principle, the period for the receipt of tenders to 50 days for GPA-covered procurements, with the exception of construction services and design and consulting services.

The procurement notice must include: (1) the subject matter of the contract; (2) place for obtaining contract terms; (3) qualifications required to participate in the tendering procedure; (4) place and process for obtaining tender documentation; (5) place and time for the submission of tenders; (6) obligations of tenderers; (7) information on the tender guarantee fee and contract guarantee fee; (8) a declaration that tenders by unqualified suppliers or in contravention of participation conditions will be deemed invalid; (9) whether or not a written contract will be required; (10) in the case of recurring contracts, the nature and quantity of products or services to be procured under all remaining contracts, the estimated date of the subsequent tender notices and the date of the notice of invitation for the first tender; (11) method of selection of the successful tenderer; (12) place, date and time for opening tenders; (13) name and department of the official in charge of the contract; and (14) the language and currency to be used for the contract. The Kanpo notice of procurement also includes the following information in English: nature and quantity of products or services to be procured, time limits for the submission of tenders, and the name and department of the official in charge of the procurement.⁽⁴⁾Public notices on selective tendering procedures must also include the requirements to be designated to participate in the procurement.

In procurement by entities subject to the GPA, other than local government entities, the Japanese government, as a voluntary measure, requires publication in the Kanpo of additional notices that include: (1) a notice to invite the submission of material for preparing specifications; (2) a notice to invite comments on provisional specifications; (3) a notice issued early in the fiscal year of large-scale procurements of products or services above 800,000 SDRs planned for that fiscal year; (4) a notice on the use of single tendering procedures; (5) a notice of designated suppliers where selective tendering procedures are used; and (6) a notice of contact points to obtain lists of qualified suppliers. In addition, the Japanese government holds a meeting to explain the large-scale planned procurements of products or services early in the fiscal year.

    (d)    Tendering Procedures

Suppliers who intend to participate in a procurement may obtain tender documentation containing detailed information on the procurement from the procuring entity. The Kanpo must indicate the means of obtaining tender documentation, and the date and place of explanation meetings, if any. In some cases, suppliers are required to pay a fee to obtain the tender documentation. When a local entity uses either open tendering or selective tendering procedures, it must make available to suppliers, upon request, a document that explains the local requirements for tendering.

Entities must generally provide the following information as part of their tender documentation: (1) a description of the products or services to be procured, e.g. nature, quantity, quality and specifications of products or services to be procured; (2) qualifications in relation to business and technical capabilities required for tenderers, such as capabilities for implementing contracts, research and development capabilities, after-service system, required business licences; (3) obligations of tenderers, such as explanation of products or services to be delivered, delivery time, provision of information, submission of specifications of products and services, submission of standard inspection certificate, and co-operation in supervision; (4) provision of information to tenderers, such as inquiry offices; (5) criteria for awarding the contract, e.g. tendered prices; and (6) basic contract provisions, such as delivery date, delivery method, settlement method and other requirements in performing contracts.

Suppliers must submit sealed tenders to the place and by the closing date and time set out in the Kanpo. In some procurements, the specifications of the products to be procured must be submitted with the tenders. Suppliers may submit tenders in person, by proxy, or by mail provided that the submission is received before the tendering deadline. After tenders have been submitted, they may not be replaced, modified or withdrawn.

To ensure that the successful tenderer actually concludes a contract, the entity is required to obtain a money deposit from the tenderer of at least five per cent of the estimated contract price as a guarantee fee. In select cases, a tenderer may be allowed to deposit securities in lieu of a cash deposit. As a practical matter, tenderers are often partly or wholly released from the obligation to make a tender deposit.

Procuring entities open tenders at the time and place specified in the Kanpo notice of the proposed procurement and in the presence of tenderers or their proxies. Where no tenderers or proxies are present, employees of the procuring entity who are not involved in the procurement must serve as witnesses. When tenders are submitted by unqualified supplies or where they violate tender requirements, they are regarded as invalid, and the tenderer is so informed.

    (e)    Evaluation and Selection of Successful Tenders

Under the GPA (Article XIII (4) (b)), contracts are to be awarded to the tenderer that is "determined to be fully capable of undertaking the contract" and that offers "either the lowest tender or the tender which in terms of the specific evaluation criteria . . . is determined to be most advantageous." The GPA does not express a preference between the two approaches.  

(i) Lowest Price Methodology
Under Japanese law, however, the selection of a tenderer other than the one offering the lowest price is narrowly restricted. The Accounts Law, in the case of central government procurements, and the Local Autonomy Law, in the case of local government procurements, stipulate that when open tendering or selective tendering procedures are used, the procuring entity generally must award the contract to the supplier who submits the tender with the lowest or highest price, depending upon the purpose of the contract, provided that it does not exceed the ceiling price or estimated contract price (yotei kakaku). The ceiling price, which is the upper limit of the expenditures that an entity is authorised to make for a given procurement, is determined at the beginning of the tendering process by taking into account such criteria as actual prices of similar transactions, the supply-demand situation, the complexity of the procurement, the quantity to be procured and the delivery time.⁽⁵⁾

Japan's rationale for using the lowest price methodology is that it eliminates the bias of officials in charge of the procurement, by qualifying suppliers in advance. As long as the product or service offered by the lowest tenderer meets the requirements set out in the specifications, the quality and other specifications of the product or service are considered to be sufficient. Two exceptions for awarding the contract to the supplier offering the second lowest price within the ceiling price are when the procuring entity finds that: (1) the supplier offering the lowest tender will be unable to perform the contract adequately because the tendered price is extraordinarily low; or (2) it would be inappropriate to award the contract to the lowest tenderer because it would not be in the interests of fair and orderly trade. In such a case, the entity may select the second lowest tender that is within the ceiling price.

If all the tenders in a procurement exceed the ceiling price, entities may require tenderers to re-submit tenders. If no tenders are lower than the ceiling price after the second submission, the procuring entity terminates the tendering procedures, and either: (1) negotiates individually with the tenderers involved without modifying the tender conditions and awards the contract to the tenderer offering a price lower than the ceiling price; or (2) repeats the whole tendering procedure, including reissuing the public notice of the procurement, with modified tender conditions. Suppliers offering two or more identically-priced lowest bids must draw lots to determine the one to whom the contract will be awarded.

(ii) Overall Greatest Value Methodology
To fulfil commitments in U.S.-Japan bilateral agreements, which will be discussed below, central government entities are allowed to use the Overall Greatest Value Methodology (OGVM) to award contracts for procurements in several sectors (supercomputers, satellites, medical technology, telecommunications, computers and supercomputers), rather than awarding to suppliers offering the lowest price. In such cases, entities may award a contract to the supplier submitting the most advantageous tender based on consideration of the technical and functional merits of tenders, as well as their prices.

By contrast, local government entities are not allowed to use OGVM. Even though the Local Autonomy Law itself authorizes the selection of tenderers other than the lowest bidder, the implementing cabinet orders and ministerial ordinances have not authorized local governments to use OGVM. Recently, however, the Japanese Government committed itself under the U.S.-Japan Enhanced Initiative for Deregulation and Competition Policy to undertake the necessary changes to allow local governments to use OGVM. As the first step, it is establishing a study group "to explore means of introducing the use of overall greatest value methodology, with a view to taking necessary measures, including submission of a bill amending the Local Autonomy Law, as appropriate in FY 1999 [which ends on March 31, 2000]."⁽⁶⁾ It is expected to make a decision on this issue by the end of FY 1998 (March 31, 1999).

(iii) Minimum Price System
While ceiling prices are used to set the upper limit of expenditures for a procurement, it has been a common practice for local governments to set a minimum price or "a lowest permissible value" (saiteiseigen kakaku) and to exclude from participation in a procurement all suppliers that submitted tenders with prices below the minimum price. This minimum price system is intended to prevent suppliers from being awarded a contract at a price that is excessively low and may result in inferior construction work. In fact, the minimum price restrictions have excluded firms that are fully capable of fulfilling the requirements of the procurement merely because they submitted a tender below the minimum price. As part of its implementation of the GPA, the Cabinet prohibited local entities from using the minimum price system in procurements covered by the GPA. In place of the minimum price system, entities are allowed to use a "low price investigation system" (teikakaku chosa seido), which allows entities to investigate very low bids. This is similar to the central government procedure that requires the investigation of any tender that is markedly lower than the other tenders. In such cases, the procuring entity investigates and determines whether the tenderer could complete the project at the low contract price.

    (f)    Public Announcement of Winning Tenderer

The procuring entity must inform tenderers of the contract award in writing, and publish a notice in the Kanpo containing the subject matter of the contract, the date of the award, the name and address of the successful tenderer and the value of the successful award. In order to ensure the faithful performance of the contract, the successful bidder must deposit money upon execution of the contract. It is stipulated in procurement regulations that tenderers are required to pay five percent or more of their estimated contract prices as guarantees fees. As with the tender deposit, the successful bidder may be wholly or partly released from the obligation to deposit money for the contract. If the successful bidder should fail to perform the contract, any contract deposit is automatically forfeited.

    (g)    Complaint Mechanism

Until 1990, Japan did not have a complaint mechanism tailored to government procurement. Beginning with the 1990 U.S.-Japan Supercomputer Agreement, Japan agreed in a series of bilateral agreements to establish review boards to hear complaints of suppliers regarding procurements covered by those agreements. These boards were designed to investigate complaints by domestic and foreign suppliers that alleged that government entities had conducted procurements covered by the agreements improperly.

In 1995, the Japanese Government established a complaint mechanism that applied to all the central government entities covered by the GPA. The Japanese Cabinet established two entities: an Office of Government Procurement Review (OGPR) and a Government Procurement Review Board ("GPRB" or "Board"). The GPRB is responsible for reviewing complaints filed by suppliers with regard to procurements by central government entities and central government-related entities. Members of the Board must be scientists, scholars and others with experience in government procurement. Any Board member "deemed to have a conflict of interest in the complaint" must not participate in the review of that complaint.

The OGPR has adopted Complaint Review Procedures for Government Procurement ("OGPR Procedures"), which detail the process that is to be followed in the review of complaints. Any supplier that believes a central government entity or central government-related entity has conducted a procurement in a manner that is inconsistent with a provision of the GPA or applicable Designated Measures (bilateral agreements) may file a complaint with the GPRB. Suppliers eligible to challenge a procurement are those who supplied, or were capable of supplying, the product or service that is the subject of the procurement. Other suppliers with an interest in the procurement may also participate. A supplier must file the complaint within 10 days after it knew or reasonably should have known the facts underlying the complaint. The GPRB may dismiss a complaint under certain conditions: if it was not filed in a timely manner; if it is not subject to the GPA or Designated Measures; if it is "frivolous or trivial"; if it is not submitted by a supplier; or if it is "otherwise inappropriate for review by the Board".

Within 10 days after a complaint is filed, the GPRB generally must request that the procuring entity suspend either: (1) the award of the contract, in the case of a pre-award complaint or (2) the performance of the contract, in the case of a post-award complaint, pending resolution of the complaint. When the GPRB requests suspension, the entity must suspend the award or performance immediately, unless its head determines that "urgent and compelling circumstances" or "national interests" prevents its compliance. When it does comply with a request, it must notify the Board immediately with an explanation.

In the Board's review of a complaint, the complainant and concerned entity are accorded certain rights, including the following rights: to submit briefs and other documentation; to present their views and the testimony of witnesses before the Board; to hear each other's statements at Board meetings, unless it would be inappropriate; and to request public hearings on the merits of the complaint. The Board may also hear from technical experts and others with knowledge or experience relating to procurement.

At the culmination of its review, and within 90 days after a complaint is filed, the Board must prepare a written report of its findings. In fashioning its report, the Board is authorized to consider in addition to whether the entity complied with the GPA or Designated Measures, factors such as: the seriousness of deficiencies in the procurement process, the degree of prejudice to suppliers, the good faith of the complainant and the entity concerned, the extent of performance of the contract to which the procurement relates, the cost of the recommendations to the Japanese Government, the urgency of the procurement, and the impact of the recommendations on the operations of the entity.

In its report, the Board must state whether or not the procurement was inconsistent with the GPA or Designated Measures. Where the Board finds that the procurement was not conducted in accordance with the GPA or Designated Measures, it must recommend appropriate remedies, which may include: (1) issuing new tender documentation; (2) seeking new tenders without changing procurement conditions; (3) re-evaluating the offers; (4) awarding the contract to a different supplier; or (5) terminating the contract. If the entity does not comply with the recommendations, it must report its reasons to the Board.

In a December 1995, the Ministry of Home Affairs (MHA) issued a notification to prefectural governors and mayors of Designated Cities covered by the GPA. In the notification, the MHA requested the local governments to make the necessary arrangements to establish a government procurement review board and complaint review procedures, which should be comparable to those instituted by the central government for its procurements.

4.    Bilateral Obligations

In addition to the procedures described in the previous section that apply generally to central government entities, there are specific procedures that apply to government procurement in six sectors, namely supercomputers, non-research and development satellites, computers, telecommunications, medical technology and public works. The obligations to follow these procedures arose through a series of 14 bilateral agreements that Japan entered with the United States between 1980 and 1997.⁽⁷⁾ The agreements set out procedures that are to be used for procurements above stipulated thresholds by specified central government and quasi-government entities, which are generally the entities subject to the GATT Code or the GPA. The agreements generally supplement or fill in "gaps" in the GATT Code or GPA, by covering procurement not subject to multilateral disciplines, providing more detailed procedures or addressing specific market access barriers. Because Japan accords the benefits of the bilateral agreements to all foreign suppliers, not just those from the United States, the key agreements will be examined briefly.

(i) NTT Agreement
When Japan signed the GATT Code, it included Nippon Telegraph and Telephone Corporation (NTT), its monopoly domestic telecommunications carrier, as a covered entity; but it exempted NTT's telecommunications equipment from GATT coverage. However, as a result of negotiations with the United States, Japan agreed to open NTT's procurement of telecommunications equipment to foreign bidders in the first U.S.-Japan bilateral procurement agreement, which became effective on January 1, 1981.⁽⁸⁾ NTT was obligated to follow procedures that govern generally the entire procurement process, including: issuance of an invitation to participate; qualification of participants; provision of procurement documentation, including specifications and evaluation criteria; use of Requests for Information and Requests for Comments; use of standard contract terms and conditions consistent with international practice; use of applicable international standards; protection of proprietary information; publication of key procurement documents in English; selection of winning bidders; and handling of complaints.

(ii) 1990 Supercomputer Agreement
The 1990 U.S.-Japan Supercomputer Agreement⁽⁹⁾ details requirements that specified governmental and quasi-governmental entities must follow in procuring supercomputers above the threshold of five billion floating point operations per second (GIGAFLOPS). The prescribed procedures encompass, inter alia, the procurement notice; establishment of requirements based on the actual minimum needs of the procuring entity; specifications; evaluation of supercomputer systems based on actual capabilities, rather than theoretical peak performance (maximum potential capability); and evaluation, for the first time, of tenders based on overall greatest value, which, as explained above, involves consideration of performance factors as well as price.

The Agreement also required Japan to establish for the first time a Procurement Review Board to hear challenges by suppliers of any aspect of a procurement. The sole use of this precursor to the GPA complaint mechanism involved a 1992 complaint by a U.S. company, which contended that the Japanese procuring entity had unfairly favored a Japanese supercomputer system, in particular with regard to its method of evaluating the winning system. The Supercomputer Review Board, which heard the complaint, concluded that there were no significant problems in the conduct of the procurement. However, both the U.S. Government and the U.S. firm that filed the complaint raised concerns with the Review Board's narrow interpretation of its mandate.

(iii) Public Works Agreements
Two bilateral agreements currently apply to procurement in Japan's $250 billion public works sector: the l99l Major Projects Arrangement (1991 MPA)⁽¹⁰⁾and the bilateral 1994 Public Works Agreement.⁽¹¹⁾ The 1991 MPA, which included Special Measures for Major Public Works Projects, applied to the procurement of goods, construction services and consulting services for the Japanese-government commissioned portion of 41 designated projects, including Kansai International Airport.⁽¹²⁾ The purpose of the MPA was to familiarise foreign firms with the Japanese public works bidding system in preparation for their participation without a need for special measures. The MPA outlined the procedures required for each step of the procurement process, including: registration and ranking; the requirement to publish notice of proposed procurement in industrial newspapers (rather than the Kanpo); public disclosure of all factors used to rank and designate firms; shortening the time between designation of bidders and the deadline for tenders to 40 days in construction procurements; provision of explanations for not being designated; evaluations of foreign companies that did not have prior experience in Japan; and establishment of an independent Procurement Preview Board to hear complaints of potential suppliers.

In 1994, Japan undertook a major reform of its public works procurement system by adopting an "Action Plan on Reform of the Bidding and Contracting Procedures for Public Works", which was subsequently incorporated into the 1994 Public Works Agreement. Instead of limiting access for foreign firms to designated projects as in the MPA, the 1994 Agreement requires central government and quasi-governmental entities covered by the GPA to use open and competitive bidding procedures for projects valued at or above GPA thresholds. The Agreement prescribes two types of procedures: open and competitive bidding procedures for procurement of construction services and a public invitation procedure for procurements of design and consulting services.

To participate in a procurement of construction services under the 1994 Agreement, a potential supplier must pass four hurdles: (1) obtain the necessary licences stipulated in the Construction Contractors Act for civil engineering, building construction and installation of machinery; (2) register with the commissioning entity (registrations are effective for two years, and may be made at any time); (3) obtain a minimum score on a business evaluation, which must be published in the procurement notice as the primary pre-qualification requirement; and (4) meet the publicly disclosed definitive criteria used to assess a supplier's ability to fulfill a contract, including prior experience in similar projects and availability of engineers with requisite qualifications and experience. In procuring construction services, entities must allow all qualified suppliers to participate in the procurement, rather than use a designated bidder system.

The procedures for procurement of design and consulting services are generally similar to those for construction services. However, rather than allowing all qualified suppliers to submit tenders, the procuring entities invite select firms to submit proposals based upon their submission of technical information, in accordance with the criteria included in the tender documentation, and then select the best proposal based on the evaluation criteria and negotiate a contract with that supplier at a price below the ceiling price. The Agreement includes measures designed to prevent discrimination against foreign firms. In evaluating foreign firms, procuring entities must consider their overseas' construction records on similar projects, the number of engineers they employ outside of Japan and the resources of the parent company (with proper certification). Also, entities may select a joint venture to undertake a project only when there is a compelling need because of the scale of the project or the technical requirements.

(iv) 1990 U.S. Japan Satellite Procurement Agreement
The U.S.-Japan Satellite Agreement⁽¹³⁾committed Japan to remove its ban on the procurement of foreign satellites and to open the procurement of all satellites, excluding research and development (R&D) satellites⁽¹⁴⁾ and R&D payloads on non-R&D satellites, by the Japanese Government or any entity under its control, including NTT, to foreign competition. Unlike other procurement agreements that were aimed at redressing specific problems with the Japanese procurement system, the Satellite Agreement was designed to ensure that Japan established a complete procurement process that is transparent, open, non-discriminatory and competitive. To that end, the Agreement sets out detailed procedures that govern each step of the procurement process, including procurement planning and market research; development of specifications that meet the specific requirements of the procuring entity; use of open tendering procedures to the maximum extent possible; distribution of tendering documentation; publication of a procurement notice, including prior to the award of a contract based on single tendering procedures; conduct of a pre-tender conference; disclosure of award criteria used to evaluate tenders; evaluations based on the overall greatest value to the entity; selection decision that is tailored to the particular procurement and that conforms to the solicitation; and notification of unsuccessful suppliers. A number of the procedures are similar to the supercomputer procurement procedures; some are based on GATT Code provisions.

(v) 1992 U. S.-Japan Computer Procurement Agreement
The U.S.-Japan Computer Procurement Agreement⁽¹⁵⁾ applies to the procurement of computer products, including peripherals and packaged software, and services⁽¹⁶⁾ above a threshold of 100,000 SDRs or the GATT Code threshold, as amended, whichever is lower, by entities covered by the GATT Code, as well as specified quasi-governmental entities. The procedural requirements set out in the Computer Agreement include the following: to provide foreign and domestic suppliers with equal access to pre-solicitation information; to make information available on future plans by announcing in the Kanpo plans to procure computer products and services that exceed 800,000 SDRs early in the Japanese fiscal year, and to invite potential suppliers to submit relevant materials and comments on the plans; to develop impartially technical specifications and not to give any supplier an unfair competitive advantage in the process; to reduce the use of single tendering; to disclose all factors used in evaluating bids; and to use either a "pass-fail" method under which contracts are awarded to the lowest-priced bid that meets evaluation criteria or the best overall value method.⁽¹⁷⁾ The Agreement also requires entities to ensure that all potential suppliers are given the same opportunity to participate in technical committees, advisory groups, study councils and other such groups that discuss the technology, budget, specifications, functions or other aspects of planned procurements of computer products and services.

(vi) 1994 Framework Procurement Agreements
On October 1, 1994, the United States and Japan concluded two government procurement agreements under the 1993 United States-Japan Framework for a New Economic Partnership: the U.S.-Japan Medical Technology Procurement Agreement (Medical Technology Agreement);⁽¹⁸⁾ and the U.S.-Japan Telecommunications Procurement Agreement (Telecommunications Agreement).⁽¹⁹⁾ Since the two agreements contain for the most part the same provisions, they will be considered jointly, with significant provisions applicable to only one sector duly noted. Both agreements cover procurements valued at 100,000 SDRs or more, or the WTO/GATT Code threshold, whichever is lower. Both also cover the same central government entities, but differ with regard to their coverage of quasi-governmental entities, in order to tailor the coverage to those entities that procure products and services in the respective sectors; for example, only the Medical Technology Agreement applies to NTT since NTT's telecommunications procurements are covered by its own agreement, as discussed above.

The Medical Technology Agreement requires all covered entities, including all of their hospitals, to follow prescribed procedures for all procurements of medical technology products⁽²⁰⁾ and medical technology services (i.e. design services of medical technology products, and design services of software which is solely used in medical technology products). Similarly, the Telecommunications Agreement applies to all procurements of telecommunications products⁽²¹⁾ and services set out in Annex 3 of the Agreement by the specified entities, as well as new enhanced or value-added services that emerge in the future.

As with other bilateral agreements, one of the most significant aspects of the Framework Procurement Agreements is the requirement that entities evaluate tenders based on the "overall greatest value" instead of the lowest price, in procurements above a threshold of 385,000 SDRs, of: (1) modified products or services;⁽²²⁾ (2) specially developed products and services (that is, products or services that do not exist in a form that meets the performance requirements in the international marketplace and must be developed especially to meet the requirements of the entity); and (3) off-the-shelf products (that is, products or services that exist in the international marketplace at the time the Request for Comments or the Notice of Procurement is published in the Kanpo).

The Agreements emphasize the importance of providing information on procurement early in the procurement process and opportunities for foreign firms to participate in the formative stages of a procurement when the budget, specifications and other procurement details are developed. To this end, the Agreements require the publication of procurement plans early in the fiscal year and an opportunity for suppliers to comment on the plans. Also each entity must hold an annual conference for entity procurement officials and domestic and foreign suppliers to discuss the entity's procurement plans and longer-term outlooks.

Both Agreements include detailed procurement procedures. The Agreements set out procedures for each stage of the procurement process, including: procurement planning and market research; qualification of suppliers, including the required consideration of suppliers' net worth and business activities outside of Japan; and requests for comments.⁽²³⁾ The Agreements also limit the use of single tendering to "exceptional cases" and require the public announcement of the use of single tendering procedures at least 40 days before the contract is awarded.

The Telecommunications Agreement requires entities to base their technical standards, where appropriate, on existing international standards, and if there are none, to use national technical regulations or recognised national standards. In addition, where international standards do not exist, the entity must consider fully using de facto international standards. Also, where the government establishes committees or groups with private sector participants related to public sector procurement, it must publish notice of the group's establishment in the Kanpo.

5.    Conclusion

Over the past 17 years since Japan's adherence to the GATT Code in 1981 and subsequently to the GPA in 1996, as well as its implementation of sector-specific procedures as the result of 14 bilateral agreements entered with the United States, Japan's government procurement system has undergone significant reforms.

*  Senior Counsel for Trade Agreements, U.S. Department of Commerce, Washington, D.C.; Adjunct Professor of Law (Japanese Law), The George Washington Unitversity, Washington, D.C.  The views expressed in this article are solely those of the author, and do not neccessarily reflect those of any department or agency of the U.S. Government.

1. See Kozo Toyama, et al., "Government Procurement Procedures of Japan", 21 (1987). Geo. Wash. J. Int'l L. & Econ. 91, and Jean Heilman Grier, "Japan's Implementation of the WTO Agreement on Government Procurement", 17 (1996) U.PaJ. Int'l Econ. L. 605, for an examination of Japan's response to its GATT Code and GPA responsibilities, respectively; see also Japanese Ministry of Foreign Affairs, Questions and Answers on Government Procurement Contracts -- Guide to the Government Procurement Market of Japan (Revised Edition, April 1996).

2. Designated Cities are cities with populations over 500,00. The cities subject to the GPA are: Osaka, Nagoya, Kyoto, Yokohama, Kobe, Kitakyushu, Sapporo, Kawasaki, Fukuoka, Hiroshima, Sendai and Chiba. Tokyo is classified as a prefectural government.

3. In 1994, Japan created a Government Procurement Kanpo for publication of government procurement-related notices.

4. An electronic data base containing the information published in the Kanpo is available at the local branch offices and Business Support Centers of Japan External Trade Organization (JETRO) and through on-line information and data base retrieval services (address: http://www.jetro.go.jp/).

5. The Japanese Government recently announced its intention to make public the ceiling price for public works projects after the results of the tendering are announced, in order to increase the transparency of the tendering process.

6. First Joint Status Report on the U.S.-Japan Enhanced Initiative on Deregulation and Competition Policy, May 15, 1998, 18.

7. See Jean Heilman Grier, "U.S. Japan Government Procurement Agreements", 14 (1995) Wis. Int'L.J.1 for an examination of the bilateral procurement agreements.

8. Agreement on the Government Procurement Code, December 19, 1980, United States-Japan, 32 U.S.T. 4495, T.I.A.S. No. 9961. It has been renewed six times, most recently in 1997.

9. Letters between Ryohei Murata, Japanese Ambassador to the U.S., and Carla A. Hills, U.S. Trade Representative (June 15, 1990). This Agreement substantially revised a 1987 Agreement, which was negotiated because the U.S. supercomputer industry was effectively excluded from bidding on Japanese public supercomputer systems.

10. Letters between Ryohei Murata, Japanese Ambassador to the U.S., and Robert A. Mosbacher, U.S. Secretary of Commerce (July 31, 1991). This Agreement revised a 1988 Agreement.

11. Letters between Takakazu Kuriyama, the Japanese Ambassador to the U.S., and Ronald H. Brown, the U.S. Secretary of Commerce (Jan. 19, 1994).

12. Although Japan had refused to cover the procurement of goods for Kansai International Airport (KIA) under the GATT Code, in a 1987 bilateral agreement with the United States, Japan agreed to apply elements of the GATT Code to KIA's procurement of goods, construction services and consulting services above specified thresholds. The KIA agreement has been subsumed into the 1991 Major Projects Agreement.

13. Letters between Ryohei Murata, Japanese Ambassador to the U.S., and Carla A. Hills, U.S. Trade Representative (June 15, 1990).

14. R&D satellites are defined as "satellites designed and used entirely, or almost entirely, for the purpose of in-space development and/or validation of technologies new to either country, and/or non-commercial scientific research". R&D satellites do not encompass satellites "designed or used for commercial purposes or for the provision of services on a regular basis". ibid., Attachment I, Policies and Procedures Regarding Satellite R&D/Procurement, at 1-2.

15. Letters between Ryohei Murata, Japanese Ambassador to the U.S., and Carla A. Hills, U.S. Trade Representative (January 22, 1992).

16. Computer services are defined as the "operation and maintenance of computers; input of data into computers; development of computer systems, including development of software and systems integration; maintenance of computer software; and other related services". ibid., Measures at 1.

17. The Japan Government committed to use the overall greatest value method for computer procurements above 800,000 SDRs after July 1, 1995.

18. Letters between Takakazu Kuriyama, Japnanese Ambassador to the U.S., and Ronald H. Brown, U.S. Secretary of Commerce (November 1, 1994) 34 I.L.M. 78 (1995) [Medical Technology Agreement].

19. Letters between Takakazu Kuriyama, Japnanese Ambassador to the U.S., and Michael Kantor, U.S. Trade Representative (November 1, 1994), 34 I.L.M. 125 (1995) [Telecommunications Agreement].

20. Medical technology products are "medical instruments and apparatus, medical supplies and dental materials, excluding these for animal use, listed in Annex 1 of the Enforcement Ordinance of the Pharmaceuticals Affairs Law". Medical Technology Agreement, above, n.18, Appendix B, at 93.

21. Telecommunications products are defined as "all types of terminals, switching equipment, transmission equipment, wireless equipment and telecommunications cable". Telecommunications Agreement, above, n.19, Appendix B, at 150.

22. Modified products or services are "products or services that exist in the international marketplace at the time the Request for Comments is published in the Kanpo but require modification to meet the legitimate requirements of the entity for the procurement that substantially transform their function or essential physical characteristic". Medical Technology Agreement, above, n.18, Appendix A, at 93. The same definition is used in the Telecommunications Agreement, except that in place of "substantially transform" it used "significantly alter". Telecommunications Agreement, above, n.19, Appendix B, at 140.

23. The provisions require publication of:(1) a request for submission of materials in procurements in which entities face difficulties in developing appropriate specifications without requesting the submission of materials form suppliers, and the contract awards of which are expected to be greater than 800,000 SDRs; and (2) request for comments on draft specifications in procurements that involve modified or specially-developed products and services, and off-the-shelf products and services with a value greater than 385,000 SDRs and certain other procurements, with exceptions applicable to telecommunications procurements.