and judicial review of bail-outs, i.e. when a government chooses to reimburse unanticipated cost overruns of a firm which has won a procurement contract. If the government exercises its discretion in favour of domestic firms, i.e. domestic firms are more likely to be bailed out while foreign firms are more likely to be sued, then it can bias ex ante bidding behaviour in favour of domestic firms. Given the likelihood of cost overruns in certain types of procurement contracts, this may create scope for discriminatory procurement.
Finally, the paper examines some of the restrictions that the GPA imposes on the method of procurement. It shows that while the ability of the procurer to alleviate problems of asymmetric information has been constrained in some minor ways, considerable scope remains for using competition as an efficient incentive mechanism. For instance, procurers are free to introduce yardstick competition, which involves fragmenting contracts between firms and basing the rewards to each on the costs of others. Provided the contracts for each unit, even if they fell below scheduled thresholds, were subject to international competitive bidding, there would be no violation of GPA obligations. As long as there is no collusion and conditions facing each firm are similar, this method offers the possibility of achieving the goals of both internal and allocative efficiency.
I. The GPA: Past, present and future?
The Agreement on Government Procurement was originally negotiated during the Tokyo Round of Trade Negotiations and entered into force on 1 January 1981.2 This extended, for the first time, the fundamental obligations of non-discrimination, i.e. national treatment and most favoured nation (MFN) treatment, to covered government procurement. National treatment means that products from other parties to the Agreement should benefit from a treatment "no less favourable" than domestic products. MFN treatment prohibits discrimination between products of other Parties to the Agreement. Furthermore, in order to ensure the implementation of its basic principles, the Agreement laid down detailed operational rules, with particular emphasis on transparency at each step of the procurement process, and provided for multilateral dispute settlement.
(The older Agreement has the same membership as the new one except that it includes Hong Kong and Singapore and does not include Korea.