“Modern Approaches and Innovation in Public Procurement” Good Governance Summit Manila, January 17, 2014 Prof. Gustavo Piga Chair, EBRD-Tor Vergata International Master in Public Procurement Management University of Rome Tor Vergata www.gustavopiga.it 1 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. 2 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. 3 Is there space for improvement? • 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”! 4 Where is the space for modernization? “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. 5 Some modern illusion-prone procurement fields E-PROC SMEs CORRUPTION 6 Some modern illusion-prone procurement fields E-PROC SMEs ANTI-CORRUPTION 7 Away from E, welcome C E PROC • The three Cs economists worry about when thinking of e-proc. 8 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.” 9 COMPLACENCY 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”. 10 COMPLACENCY (Old) data about 82 Russian regions EPROC Browsing Tenders Browsing Tenders with advanced research tools Database signed contracts Search signed contracts % REGIONS 100% 43,2% 43,2% 14,8% EPROC % REGIONS Portals with login 43,2% E-tendering RFQ 13,6% E-tendering Reverse auction E-purchasing Online payment 14,8% 0% 11 COLLUSION Does e-proc generate competition or collusion? The case of reverse auctions (Russia 100%) Supply Wheelchairs for Persons Contracting Authority Umbria Region Base price 199.000 € 200 Awarded price 116.000 € Euro N° of suppliers participating 8 ultimi 10 min. Migliore offerta a 147.500 Euro (-25,8%) 190 Inizio autoestensione Migliore offerta a 137.000 Euro (-31%) 180 € x 1000 Price decrease 42% 170 160 150 Asta aggiudicata a 116.000 Euro (-42%) 140 130 120 8 fornitori 110 0 10 7 fornitori 20 30 40 6-5-4 fornitori 50 60 Minuti 70 2 fornitori 3 fornitori 80 90 100 110 120 12 CENTRALIZATION 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. 13 Can e-proc solve SMEs issues? “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. 14 Some modern illusion-prone procurement fields E-PROC SMEs ANTI-CORRUPTION 15 SMEs are special 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” 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 16 Suffering discrimination Why 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 racism 3.2 via politics (no connection with size of the firm?) 17 Classic solutions to deal with them - 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 18 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 19 Some modern illusion-prone procurement fields E-PROC SMEs CORRUPTION 20 High Expectations. Too High? The paradox of the right solution. It works best there where needed the least. Anticorruption Authorities Michela Wrong – It is Our Turn to Eat Whistleblowers Søreide (2008) firms will not engage in whistleblowing against corruption- related challenges in the local business climate unless local levels of corruption are considered to be low 21 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 22 What do we Know about Corruption? 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.” How Much Public Money Is Wasted, and Why? Evidence from a Change in Procurement Law - Oriana Bandiera, Andrea Prat, Tommaso Valletti, American Economic Review 23 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. 24 MODERN AND INNOVATIVE APPROACHES IN WHO TO BUY FROM IN PUBLIC PROCUREMENT 25 Smes, again? “One idea, for instance, might be to set targets for SME shares in overall procurement”. EC Green Paper 26 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. 27 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? 28 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 ….” 29 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 contractbundling 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. 30 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! 31 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 eproc 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). 32 MODERN AND INNOVATIVE APPROACHES IN HOW TO BUY IN PUBLIC PROCUREMENT 33 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. 34 Spotting a cartel in PP Too hard to do: a) b) 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? 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… 35 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? 36 In One Slide … Foster Organizational Change in Procurement Toward Performance • 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: 37 A comprehensive approach • 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 … 38 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. 39