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“Modern Approaches and Innovation in Public Procurement”

Prof. Gustavo PigaChair, EBRD-Tor Vergata International Master in Public Procurement ManagementUniversity of Rome Tor Vergatawww.gustavopiga.it

Good Governance Summit Manila, January 17, 2014

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Public Procurement, so relevant!

• Government expenditure for purchases of goods, services and works (public procurement) is a key component of national income and well-being. World estimates (OECD) see procurement as approximately 15% of GDP; while across the European Union expenditure on goods, services and works currently (2008) represents 17,2% of GDP on average (OECD Economic Outlook 2010) and, at the end of the century, the 106 developing countries’ procurement markets amounted to 13.9 percent of the total worldwide procurement spending.

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What is Public Procurement all about?

• “how to buy”: transparently, a concern for civil society, efficiently, a concern for taxpayers pockets and effectively, a concern for citizens’ preferences;

• “what to buy”: green and sustainable, a concern for the environment;

• “who to buy from”: SMEs, a concern for justice.

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• Study of Italian waste in Public Procurement (Bandiera, Prat, Valletti, American Economic Review).

• How much waste in purchases could be eliminated by bringing “the worse at the level of the best”? “If all public bodies were to pay the same prices as the one at the 10th percentile, sample expenditure would fall by 21% . . . Since public purchases of goods and services are 8% of GDP, if sample purchases were representative of all public purchases of goods and services, savings would be between 1.6% and 2.1% of GDP”!

Is there space for improvement?

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“The challenge of modernity is to live without illusions and without becoming disillusioned.”

Antonio Gramsci

Identify illusions (erroneous perceptions).Find credible grounds to keep enthusiasm going.

In procurement.

Where is the space for modernization?

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Some modern illusion-prone procurement fields

E-PROC SMEs

CORRUPTION

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E-PROC SMEs

ANTI-CORRUPTION

Some modern illusion-prone procurement fields

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Away from E, welcome C

E PROC

• The three Cs economists worry about when thinking of e-proc.

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COMPLACENCY

“A feeling of quiet pleasure or security, often while unaware of some potential danger, defect, or the like; self-satisfaction or smug satisfaction with an existing situation, condition, etc.”

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Guide to Enactment of the UNCITRAL Model Law on Public Procurement • “if paper communications are simply replaced with e-mails, Internet-

based communications, and advertising procurement opportunities on a website, many of the above benefits will not materialize. Further, weaknesses in a traditional procurement system will be transported to its new, digital equivalent”.

• “However, the existence of such systems may raise the risks of overuse and misuse, because their ease of operation may lead procuring entities to use them whether or not they are really suitable or appropriate for the procurement at hand”.

COMPLACENCY

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COMPLACENCY

EPROC % REGIONS EPROC % REGIONS

BrowsingTenders 100%

Portals with login

43,2%

Browsing Tenders with advanced research tools

43,2% E-tendering RFQ

13,6%

Database signed contracts

43,2% E-tenderingReverse auction

14,8%

Search signed contracts

14,8% E-purchasingOnline payment

0%

(Old) data about 82 Russian regions

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110

120

130

140

150

160

170

180

190

200 ultimi 10 min.Migliore offerta a 147.500 Euro

(-25,8%)

€ x

1000

Inizio autoestensioneMigliore offerta a 137.000 Euro

(-31%)

Asta aggiudicataa 116.000 Euro

(-42%)

200 10 30 40 50 60 70 80 90 100 110 120

Minuti

7 fornitori 3 fornitori6-5-4 fornitori8 fornitori 2 fornitori

Does e-proc generate competition or collusion? The case of reverse auctions (Russia 100%)

SupplyWheelchairs for

Persons

Contracting Authority

Umbria Region

Base price199.000 €

Awarded price 116.000 € Euro

Price decrease42%

N° of suppliers participating

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COLLUSION

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IT and e-proc make centralizing procurement more natural and less costly

[Centralization is becoming more and more widespread.]

Think hard before pushing for e-proc only to centralize. It might hurt SMEs.

CENTRALIZATION

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“We … analyz(e) the transactions - below the European threshold - that took place on the Italian e-marketplace during the period 2005-10. Although micro suppliers are the most represented group of firms in the emarketplace, evidence suggests that the largest suppliers display the highest success rates in getting public contracts. Degree of loyalty with buyers and geographical location of both buyers and suppliers also emerge as relevant factors of success in the e-procurement market, proving, at least to some extent, that some features of “physical” procurement markets are mirrored in the “virtual” markets.”

“Il Public Procurement come stimolo alle PMI: il caso del Mercato Elettronico della Pubblica Amministrazione” by Gian Luigi Albano, Federico Antellini Russo and Roberto Zampino.

Can e-proc solve SMEs issues?

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E-PROC SMEs

ANTI-CORRUPTION

Some modern illusion-prone procurement fields

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SMEs are special

Potential problems Micro Small Medium Large TOTAL %

Over-emphasis on price 1,1 1,0 0,9 1 1,0 Long payment terms 1,4 1,2 1,1 1 1,1

Late payments 1,3 1,0 1,1 1 1,1 No debriefing 1,2 1,0 0,9 1 1,0

Administrative burden 1,5 1,1 1,2 1 1,1 Lack of clarity 1,4 1,0 1,0 1 1,1

Limited options for interaction 1,4 1,0 0,9 1 1,0 Disproportionate financial criteria 2,0 1,2 1,1 1 1,2

Insufficient time to bid 1,4 1,2 0,7 1 1,0 Lack of information on opportunities 1,4 1,3 1,1 1 1,1

Tenders not evaluated fairly 5,3 4,7 8,7 1 6,3 Disproportionate technical criteria 1,4 1,4 1,1 1 1,2

Large contract value 22,0 22,0 5,0 1 7,0 Joint fulfillment of criteria not allowed 2,0 2,0 1,5 1 1,3

Problems faced by EU bidders, (by bidders size relative to large firms)The column of totals displays on average which portion of firms interviewed answered “always” or “often”

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Suffering discriminationWhy prefer (some) firms?

Negative discrimination due to barriers:

1) corruption :1.1 via networks (easier among large firms/dominant race)1.2 via collusion (easier among large firms)1.3 via politicians (easier among larger firms?)

2) risk-aversion:2.1 via ignorance (according to EU survey asking public procurers “what current barriers

prevent their organization from undertaking additional activities to favor SMEs”, most CAs mentioned risk –aversion)

2.2 via routines (minimum size of revenues etc.)2.3 via banks

3) bias:3.1 via racism3.2 via politics (no connection with size of the firm?)

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- skills assessment and development programs- business mentoring or coaching- training in commercial tendering

- small business advice- simplification of bidding documents and questionnaires

- translation of documents into local language- lowering or rationalization of pre-qualification criteria

- reduction in costs of bidding, e.g. payment for bidding documents- lowering of barriers to entry, e.g. compulsory industry

registrations- access to additional or cheaper forms of business financing and

investment- more transparent publication of business opportunities

- communication programs

Classic solutions to deal with them

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With little success?

• “In terms of estimated total contract value secured, SMEs accounted for between 31% and 38% of public procurement while their overall share in the economy, as calculated on the basis of their combined turnover is 52%”

EC Green Paper

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E-PROC SMEs

CORRUPTION

Some modern illusion-prone procurement fields

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High Expectations. Too High?

The paradox of the right solution.It works best there where needed the least.

Anticorruption AuthoritiesMichela Wrong – It is Our Turn to Eat

WhistleblowersSøreide (2008)

firms will not engage in whistleblowing against corruption- related challenges in thelocal business climate unless local levels of corruption are considered to be low

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The Case for a Different Approach

• “Corruption cannot be considered in isolation […] it follows that anti-corruption policies which focus narrowly on the corruption issue will miss the complexity of the relations and are therefore likely to fail. More appropriate, then, are policies which aim to suitably reform prevailing governance systems.”

Lucio Picci, Reputation-Based Governance, Stanford University Press, 2011

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How Much Public Money Is Wasted, and Why? Evidence from a Change in Procurement Law - Oriana Bandiera, Andrea Prat, Tommaso Valletti, American Economic Review

How much of this waste is passive (inefficiency) vs. active (corruption)? “On average, at least 82% of estimated waste is passive and that passive waste accounts for the majority of waste in at least 83% of our sample public bodies.”

What do we Know about Corruption?

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Corruption’s Companions

1) Incompetence.Corruption pushes for low investments in competence. Incompetence drives “capture”, which often coincides with “soft corruption”.

2) Collusion.a) Collusion benefits from corruption:- To make defection harder or impossible;- To make cartels even more profitable. b) Corruption can be facilitated by collusion- Rents (extra profits) are resources for corruption;- Lower probability to blow the whistle against corrupt officers.

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MODERN AND INNOVATIVE APPROACHES

IN WHO TO BUY FROM

IN PUBLIC PROCUREMENT

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Smes, again?

“One idea, for instance, might be to set targets for SME shares in overall procurement”. EC Green Paper

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The EU paradigm

• “The EU is not in favour of reserving markets to specific undertakings. Such actions would also be in contradiction with the principle of equal treatment of tenderers, a fundamental pillar of the EU public procurement regime anchored by the Court of Justice in the Treaty freedoms.” Green Paper.

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Are they all against equal treatment?

A few tiny nations have been using this approach:

• USA (since 1953), SB Act and SB Authority• Brazil• South Africa• China (last year)• India is back.• Mexico.

Shouldn’t we at least discuss it?What is its impact on Competitiveness and Innovation?

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The US one: the Small Business Act

“The essence of the American economic system of private enterprise is free competition … The preservation and expansion of such competition is basic not only to the economic well-being but to the security of this Nation. Such security and well-being cannot be realized unless the actual and potential capacity of small business is encouraged and developed. It is the declared policy of the Congress that the Government should aid, counsel, assist, and protect, insofar as is possible, the interests of small-business concerns in order to preserve free competitive enterprise, to insure that a fair proportion of the total purchases and contracts or subcontracts for property and services for the Government (including but not limited to contracts or subcontracts for maintenance, repair, and construction) be placed with small business enterprises ….”

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At least import this!

The Sba Procurement Center Representative (Pcr).

These are representatives of the U.S. Small Business Administration in the various large Procurement Agencies.

Functions and Powers:

• 1. Analyze the procurement strategies and verify if contract-bundling is necessary and justified

• 2. Propose alternative solutions to the contracting officer to foster SMEs partecipation

• 3. In case of a failed agreement, escalate the issue in the hands of the Agency Manager.

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E proc and SMEs

E proc is not a sufficient condition for solving SMEs problems.

Is it a necessary one?

I would argue not.

I would argue that SMEs sensitivity makes e-proc a better tool. Develop that sensitivity!

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ICENTRALIZATIONT

• A few or even a unique platform for all the nation’s public procurers.

• Those procurers remain independent in their pocurement strategy so as to avoid political issues, large tenders against SMEs, repeated purchases of e-proc systems, lack of interoperability that depresses benchmarking, best practices and competition and raise costs.

• Spending review and society’s monitoring and participation is made easier.

• The Korean Koneps model (supporting SMEs).

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MODERN AND INNOVATIVE APPROACHES

IN HOW TO BUYIN PUBLIC PROCUREMENT

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A “good procurer” avoids waste

Waste arises from:

Incompetence and Corruption.

Keeping in mind that:

a) Incompetence and Corruption sustain each other;b) Cartels and Corruption sustain each other;c) Cartels are pervasive in … procurement.

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Spotting a cartel in PPToo hard to do:

a) Cartels can be done over time (today I go, tomorrow you go) or over space (I go to Rome you go to Milan): how can one notice?

b) Stopping a cartel might mean stopping sourcing of urgent services or delivery of goods: organizational problem and internal resistance.

So….

Antitrust authorities and availability of CENTRALIZED public procurement data, together with (credible) whistleblowing legislation are the best instruments to fight it.

Removing breathing space for corruption.

Internally, competences and the right procurement strategy might play the same role:

making cartels’ and thus corruption’s life miserable…

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Investing in Competences (UK 2009)

“Since we can’t borrow anymore, we see procurement as the best source of revenue

stream… Investing in the function tasked with delivering these (efficiency) targets is a clear spend

to save business case”.UK Government

(that makes corruption riskier and less palatable)

Is it Enough? How to Maximize Competence Returns?

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• Use Data! For Internal Improvement.• Use Data! For Setting Targets, Motivations,

Rewards.• Use Data! That are oriented toward output-based

measurement of performance.• Organize Institution Around Self-Improvement.• The Philippines example stands out as a potential

benchmark:

In One Slide …

Foster Organizational Change in Procurement Toward Performance

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• The results should not be used to compare the agency’s score against that of other agencies but to provide a benchmark against which it will measure its own subsequent performance. The assessors shall then identify areas of strength (sub-indicators receiving a satisfactory or Very Satisfactory score) where it can continue to improve and weaknesses (sub-indicators rated poor or acceptable) where it needs to develop a specific plan of action.

• A Plan of Action to Improve Procurement Capacity will then be developed …

A comprehensive approach

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Summing-Up

Good Governance in Public Procurement

Relies Fundamentally on the Motto:

“Attract, Reward, Retain and Develop”within

Performance-Based Procurement

The challenge of modernity? Live without illusions and

organize life around your aspirations.It can be done, it is not an illusion.