Better spending through public procurement
Györgyi NYIKOS1 and Tünde TÁTRAI
2
Abstract
In the economic crisis, an important question is how to use the limited resources available,
especially public sources, in the most efficient and sustainable way. Public spending must be
efficient with well-targeted outlays. Obviously, public procurement is meant to ensure the
optimal use of public sources, but it also has various divergent objectives because it is
increasingly seen as a problem-solving tool (e.g. for prioritizing SMEs under EU Directives
and Policies, etc.) and efficiency in spending public money is often forgotten.
In our paper based on Hungarian case studies and other researches, we point out that public
procurement should be better oriented and focus on primary issues, such as better outcomes at
the same level of spending.
Keywords: public procurement, public spending, efficiency and effectiveness
I.1. Introduction
The connection between public procurement and economic efficiency has been studied form
several aspects.
Edler J., Georghiou L. (2007) examines the topic from the innovation point of view, how to
improve public policy and services to make public procurement effective. Hunja R. R. (2003)
describes the problems from the system reform point of view . Evenett, S. & Hoekman, B.
(2005). Naegelen, F. & Mougeot, M. (1998) focuses on cost reduction, however Erridge, A.
& Greer, J. (2002) highlights the importance of the partnership, when through interaction and
exchange between network members, social relations provide an efficient distribution process.
The examples show that controlling and improving the spending of public money through
public procurement is a multidimensional research field. The focus of researchers changes
from time to time. The main topic of the International Research Study on Public Procurement3
was the contribution of public procurement to a government's response to the economic crisis.
We found that wrong and distorted practices lead to an inefficient way of spending public
money, which is aggravated by the economic downturn. At the 2012 International Public
Procurement Conference, we identified the relevant objectives of the Hungarian public
procurement policy and tried to call the attention for to weaknesses of the multidimensional
public policies using public procurement as a general policy tool. The time has come to focus
more on procurement procedures and identify best practices for improving the level of
efficiency of public spending through public procurement.
1 Györgyi Nyikos – Associate professor, National University of Public Service, Hungary email: [email protected], National University of Public Service 1118 Bp., Ménesi út 5. Tel: +36 (1) 386-9054 /20-263
2 Tünde Tátrai – Assistant professor, Corvinus University of Budapest, Hungary; email: [email protected] Corvinus University of Budapest. Hungary 1093. Budapest Fővám tér 8. Tel:003614825424 Fax:003614825567
3 www.irspp.com
Our goal is to stress that the most important aim of public procurement is how to use public
money in accordance with new economic and fiscal requirements, and to define the meaning
of better outcomes at the same level of spending.
I.2. Why is efficient public spending more important than ever for “better
spending” and growth?
At a time when European countries have to deal with increased pressure on public balances,
stemming from demographic trends and globalization, improving efficiency in public
spending features high on the political agenda. Clearly, there is potential for increasing
efficiency in public spending, however, in some cases, there are difficulties of measuring
efficiency and effectiveness.
Improving efficiency and effectiveness of public spending not only helps to maintain
economic governance and ensure budgetary discipline required by the Stability and Growth
Pact (SGP), but is also instrumental in promoting the structural reform in the context of
Integrated Guidelines outlined in National Reform Programmes to ensure progress towards
the agreed goals of the EU Strategy for Growth and Jobs ("Europe 2020"). It alleviates budget
constraints as it allows achieving the same results at lower levels of spending or increases
value for money by achieving better outcomes at the same level of spending.
Researches4 increasingly focus on the central role of the financial sector in economic growth
and therefore in economic development more generally. “A prudent, sustainable fiscal
position promotes economic growth. In the long run, low and stable levels of government
deficits and debt are typically associated with higher rates of economic growth. In countries
with high deficits and debt, reducing budget imbalances generally increases growth, even in
the short run. Since there is less need to create money to finance government expenditure, the
resulting inflation rates for countries with low budget deficits are often lower. Low fiscal
deficits also increase the pool of savings for higher levels of investment, leading to higher
economic growth. In addition, low deficits promote growth by reducing the probability of
economic crises caused by concerns about the government’s ability to service its debt. Indeed,
research suggests that the macroeconomic stability associated with the absence of such crises
yields numerous benefits, including higher rates of investment, growth, and educational
attainment, increased distributional equity, and reduced poverty”.
On 13 April 2011, the European Commission presented its Communication ''Single Market
Act - Twelve levers to boost growth and strengthen confidence: Working together to create
new growth"5. The Single Market Act (SMA) focuses on twelve projects with a clear set of
proposed priority actions to address the objectives therein in order to re-launch the Single
Market by the end of 2012. These twelve instruments of growth, competitiveness and social
progress range from worker mobility, SME finance and consumer protection to digital
content, public procurement and trans-European networks. Their aim is to reduce barriers and
to improve efficiency for everyone on the Single Market: businesses, citizens, consumers and
workers. Each one of these measures, to be adopted in co-legislation by the European
Parliament and the Council, are currently at a different stage of the legislative process.
4 e.g.: IV. FISCAL SUSTAINABILITY: THE CONTRIBUTION OF FISCAL RULES, OECD Economic Outlook 72 © OECD 2002 http://www.evancarmichael.com/African-Accounts/1667/Fiscal-Balances-and-Growth.html
5 http://ec.europa.eu/internal_market/smact/index_en.htm
I.3. What is the importance of the public procurement linked to “better
spending”?
The economic significance of public procurement in Europe is considerable, with yearly
purchasing valued at 3,6 percent of the region’s GDP6.
EU public procurement is an important driver for innovation in European businesses and there
is yet an unleashed potential in opening up the single market for public procurement7.
The efficient and strategic management of public purchasing is an issue of paramount policy
importance on a number of levels:
- “the sound management of increasingly scarce public resources;
- the daily administration of government departments, agencies and public bodies involved
in the award and management of public contracts;
- the impact on the supplier base, many of whom are heavily dependent on public sector
business;
- the role of the public sector as a buyer of 'first resort' for innovative or environmentally
superior solutions.”8
The focus of the study is to show the use of public procurement as a tool in efficient spending
of public money. Particular public procurement values are well-known and generally accepted
throughout OECD countries9, such as transparency, efficiency and anti-corruption. However
public procurement is part of a wide administrative and policy system that has its own
priorities. Such policy priorities are emerging due to EU integration or the current EU
economic governance system, a new mechanism, and to the package of reforms to strengthen
existing tools and extend them for coordinating economic and fiscal policy in the EU. It is a
time when public procurement should focus once again on basic issues, such as efficiency and
transparency.
The main purpose of EU public procurement rules is to ensure that public money is spent in
an expedient way. Furthermore, public procurement mechanisms are key elements to the
overall efficiency of public sector management because they can contribute to a better
allocation of resources and improved governance in the public sector. Weak and corrupted
procurement systems often lead to a waste of public financial resources and higher transaction
costs.
The incomplete single market for public procurement leads to a lack of competition and
unnecessarily high expenses. Cross-border procurement accounted for only around 1.5% of all
public contracts awarded in 2009. Trade intensity in public procurement markets is much
lower than in private procurement markets, suggesting that the full benefits of cross-border
6 Public Procurement in Europe – Procedures and techniques – A study on the cost and effectiveness of
procurement regulation, PricewaterhouseCoopers, London Economics and Ecorys, 2011 p.13. 7 Evaluation Report Impact and Effectiveness of EU Public Procurement Legislation
ec.europa.eu/internal_market/publicprocurement/docs/modernising... · p. 3.
Only 20 percent of the total EU public expenditure is currently purchased through EU wide public tenders. 8 Evaluation Report Impact and Effectiveness of EU Public Procurement Legislation
ec.europa.eu/internal_market/publicprocurement/docs/modernising... · p. 3.
9 See OECD (1999) Competition Policy and Procurement Markets
trade and competition are not being fully reaped. At the start of the preparation of the new EK
public procurement regulation, 3 key problems were identified:
-“ Insufficient cost-efficiency — current EU rules generate estimated savings of
approximately € 20 billion on € 420 billion p.a. but procedures may be unduly burdensome as
the associated cost is around € 5.6 billion.
- Missed opportunities for society — current rules may not always allow stakeholders to
optimize the use of their resources and/or make the best purchasing choices.
- National rather than EU PP market — over 98% of contracts awarded according to EU rules
are won by national bidders (approximately 96% of total value).”10
1. Figure: Total expenditure and value of tenders published on TED on works, goods
and services in 2005-2009 in billion € by EU MS11
2005 2006 2007 2008 2009
Total TED Total TED Total TED Total TED Total TED
Belgium 49,75 6,94 46,94 7,65 48,67 10,56 51,95 12,35 55,91 13,53
Bulgaria no
data
no
data
no
data
no
data 4,72 2,45 5,67 2,96 6,41 4,14
Czech
Republic 20,39 2,68 30,1 5,86 32,14 5,21 37,54 7,90 36,50 7,11
Denmark 29,61 4,60 32,08 6,49 33,79 7,31 35,74 6,92 39,17 8,83
Germany 362,1
1 36,10
375,6
1 38,39
399,0
5 27,07
119,2
6 29,65
461,8
4 34,14
Estonia 2,10 0,79 2,27 0,97 2,67 1,13 2,92 1,32 2,60 1,15
Ireland 19,79 4,19 22,13 5,78 26,09 6,37 27,80 4,48 27,56 3,52
Greece 18,72 9,49 20,23 11,81 22,67 7,98 22,84 6,64 26,28 8,70
Spain 126,8
8 39,10
142,4
9 41,17
160,8
4 42,97
164,5
0 39,28
194,9
6 35,45
France 303,3
0 51,44
315,6
3 62,23
328,9
0 63,96
342,1
4 71,86
367,2
7 73,11
Italy 204,4
9 38,19
212,9
9 44,86
215,1
2 35,50
221,4
9 36,32
241,1
5 38,67
Cyprus 1,53 0,48 1,73 0,64 1,65 0,81 1,80 0,81 1,91 1,41
Latvia 2,11 1,27 2,68 2,22 3,38 2,61 3,62 2,21 3,15 1,59
Lithuania 2,81 0,74 3,98 1,16 5,05 1,20 5,62 1,17 4,69 1,29
10 COMMISSION STAFF WORKING PAPER EXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT
Proposal for a Directive of the European Parliament and of the Council on Public Procurement and the Proposal
for a Directive of the European Parliament and of the Council on procurement by entities operating in the water,
energy, transport and postal sectors ec.europa.eu/.../docs/modernising_rules/SEC2011_1586_en.pdf ·p.3.
Source: DG MARKT, estimated, data based on OJ/TED Public Procurement Indicators2010
ec.europa.eu/internal_market/publicprocurement/docs/indicators2010... · PDF file pp. 1-2.
Luxembo
urg 4,16 0,74 4,48 0,47 5,01 0,45 5,41 0,51 5,90 0,57
Hungary 16,33 6,02 19,41 6,14 21,98 4,57 21,09 5,45 20,77 5,86
Malta 0,76 0,05 0,76 0,09 0,76 0,11 0,87 0,07 0,80 0,40
Netherlan
ds
123,6
5 8,23
136,9
2 12,44
146,2
0 10,19
156,0
9 11,13
176,8
5 11,60
Austria 45,35 4,86 44,46 4,31 49,45 4,55 54,81 6,86 60,89 6,40
Poland 39,03 18,63 50,33 14,24 56,66 18,13 67,65 25,95 56,43 25,54
Portugal 23,18 3,19 24,00 2,97 27,10 2,90 29,21 4,33 32,17 5,75
Romania no
data
no
data
no
data
no
data 27,18 9,12 27,89 10,29 27,72 7,56
Slovenia 4,08 0,91 6,03 1,56 5,22 2,26 5,80 1,90 6,04 2,12
Slovakia 8,77 2,43 11,36 1,36 13,98 1,97 15,89 2,41 13,96 4,31
Finland 25,27 5,17 26,75 5,10 28,89 6,39 31,54 7,30 33,32 8,36
Sweden 51,32 9,41 55,43 9,62 59,08 10,24 60,74 11,82 59,28 12,43
UK 316,7
5 64,21
356,9
0 89,52
365,4
0 81,19
344,8
9 80,55
324,9
1 96,89
Total EU
27
1802,
23
319,7
8
1945,
80
377,0
6
2091,
63
377,2
0
2164,
47
392,4
2
2288,
44
420,4
4
Public procurement in Hungary currently amounts to over 5 percent of the GDP, which is a
drop from 7 percent in 2006. The government uses public procurement as a means to combat
illegal employment, to protect SMEs as well as to improve compliance with invoicing
deadlines or to increase employment rates.
2. Figure: The value of public procurement contracts in the percentage of the Hungarian
GDP (1996-2011)12
12 Source: Public Procurement Authority, http://www.kozbeszerzes.hu/ based on the Annual Report of the Public Procurement Authority for the Parliament
I.4. Uses and abuses of public procurement?
Public procurement can be used for many sensible goals, and recently it is abandoning its
original goal and among its manifold targets cost-effective spending of public money has
ceased to be the most important priority. According to our understanding, priorities shaping
public procurement can be categorized slightly differently, and, based on the public
procurement Directives, Member States have devised their specific policies, models,
solutions. The particular public procurement priorities based on the Hungarian case are
presented in the next figure.
3. Figure: The contrasts of the main objectives of public procurement in Hungary13
13 Tátrai T., Nyikos Gy. (2012) pp. 6-7.
Fighting againstcourruption
Transparency
Supportingenvironmental
protection
Easing up the fiscalcrisis by slowing
down publicprocurements
Supporting socialconsiderations
Efficientspending of
public money
Increasingemployement
Supporting SMEs
Decreasing go-round debt
3
In order to facilitate the better overview of priorities affecting public procurement, we
elaborated the enlisted categories. The categories are defined by the priorities that do not or
contradict each other less and have a common purpose.
4. Figure: The main objectives of public procurement as ranked by respondents in
Hungary14
(The lowest point shows the highest priority)
“Based on the effects and counter-effects of the objectives, we state that over-complicated
models bearing multiple messages are likely to fail. It is impossible to simultaneously defend
SMEs, to stop public procurement in order to balance the budget and to increase employment,
14 Tátrai T., Nyikos Gy. (2012) pp. 4.
which could be solved by supporting SMEs. Objectives expressly stated are sometimes bound
to lead to deformations. For example, if social considerations come to include employing the
jobless while prisons manage to have regulations passed whereby the police and public
hospitals are to buy goods and services provided by prisons, local enterprises will be
destroyed economically, though the employment of prisoners has factually increased. “15
II.1. Efficiency in public procurement procedures (literature review)
Generally speaking, the greater the output for a given input or the lower the input for a given
output, the more efficient the activity is. This latter option would allow cutting public
expenditure. For growth-enhancing spending, the approach aiming at higher output is perhaps
more promising. Effectiveness shows the success of the resources used in achieving the
objectives set.
However, measuring the efficiency and effectiveness of public spending, especially of public
procurement, remains a conceptual challenge. Problems arise because public spending has
multiple objectives with numerous direct and indirect impacts.
The literature has determined and investigated several ways of increasing the efficiency of
public procurement, such as:
- the type of auction (that sealed bids are preferred when bidders face some certainty and high
knowledge on the goods or services provided)16
- the importance of electronic tools (e-auction, e-catalogue)
- subdivision of contracts into lots17
,
- usefulness of open versus negotiated procedures (at simple and well specified projects
competitive tendering is efficient,18
and at complex projects negotiations may be more
efficient due to the increased scope for information exchange) 19
,
- the impact of centralized purchases (at standardized, strategic, urgent or very essential
products)20
, or consortium purchases (collaborative purchasing can aim to reduce transaction
costs in other ways than volume discounts, such as sharing expertise in the procurement
process, and making the purchasing process more professional and efficient),21
15 Tátrai T., Nyikos Gy. (2012) pp. 6-7 16
Albano, Gian Luigi; Dimitri, Nicola; Pacini, Riccardo and Spagnolo, Giancarlo ”Information and competitive
tendering” in: Dimitri, Nicola; Piga, Gustavo and Spagnolo, Giancarlo (eds.) (2006) Handbook of Procurement,
Cambridge: Cambridge University Press, p143-167. 17
Grimm, Veronika; Pacini, Riccardo; Spagnolo, Giancarlo and Zanza, Matteo: “Division into specific awards
and competition in procurement” in: Dimitri, Nicola; Piga, Gustavo and Spagnolo, Giancarlo (eds.) (2006)
Handbook of Procurement, Cambridge: Cambridge University Press, pp.168-192. 18 Bajari, Patrick and Tadelis, Steve: “Incentives and award procedures: competitive tendering vs. Negotiations
in procurement” in: Dimitri, Nicola; Piga, Gustavo and Spagnolo, Giancarlo (eds.) (2006) Handbook of
Procurement, Cambridge: Cambridge University Press, pp. 121-139. 19 Asker, John and Cantillon, Estelle (2010): “Procurement when price and quality matter” in: RAND Journal of
Economics, Vol 41, No 1, pp. 1-34. 20 Dimitri, Nicola; Dini, Frederico and Piga, Gustavo “When should procurement be centralized?” in Dimitri,
Nicola; Piga, Gustavo and Spagnolo, Giancarlo (eds.)(2006): Handbook of Procurement, Cambridge: Cambridge
University Press, pp. 47-81. and Bajari, Patrick; McMillan, Robert and Tadelis, Steven (2008): “Auctions versus
negotiations in procurement: an empirical analysis” in: The Journal of Law, Economics, & Organization, Vol 25,
No 2, pp. 375-399. 21 Walker et al (2007) p. 589.
- dealing with contracts which include a quality component or mechanisms for dissuading
collusion or preventing corruption.
The literature on procurement recommends using some form of tender or auction which is
advertised publicly to potential bidders. It also recommends the division of contracts into lots,
using open or negotiated procedures (depending on the situation), the net benefits of
centralizing purchases and how different mechanisms are required in situations where both
price and quality are needed22
.
Procurement outcomes are considered in light of the costs incurred (human resources and
time), the level of competitiveness achieved (number of bids, participation from cross-border
bidders) and the perception of transparency.
II.2. How to ensure better outcomes at the same level of spending? How to
optimize the use of sources?
Efficiency is hard to measure directly; there are a lot of potential impact factors. In this paper,
we examine a limited number of factors whereby we can make inferences about the relative
effectiveness of procurement processes, such as transparency, extent of competition (number
of bids and participation of cross border bidders), selection criteria or functional requirements.
Transparency
Achieving greater transparency in public procurement is important. Providing an adequate
degree of transparency throughout the entire public procurement cycle is critical to minimize
the risk of fraud, corruption and mismanagement of public funds in order to ensure fairness
and equitable treatment of potential suppliers. Additionally, it allows for effective oversight
by the institutions concerned and the general public.
5. Figure: Transparency in public procurement, 201023
Central
PP
website
Contracting
entity
website
Domestic printed
or electronic
journal
Other
website
Pct. OECD
countries that
publish info
Information for
potential bidders
NO NO YES NO 97%
Selection &
evaluation criteria
NO NO YES NO 97%
Tender
documentation
NO NO NO NO 82%
Contract award NO NO YES NO 100%
Justification for
award
NO NO NO NO 59%
Tracking
procurement
NO NO YES NO 32%
22 Duncombe, William and Searcy, Cynthia (2007) “Can the use of recommended procurement practices save
money?” in: Public Budgeting and Finance, Vol 27 No 2, pp. 68-87. 23 Government at a Glance 2011 Country Note: HUNGARY http://www.oecd.org/gov/48214236.pdf
spending
Percentages refer to the share of OECD countries that reported publishing information
„always” or „sometimes”
In Hungary, to insure the publicity of public procurement procedures24
the contracting
authority has to publish advertisements, guidelines, the full content of the contracts,
completion and legal remedy data, etc. concerning the particular procurement procedure on its
homepage or if it does not have one, on the homepage of the Public Procurement Authority. It
could be said that the publicity rules are well beyond the European practice25
. The publicity
rules obviously were incorporated into the legislation in order to combat corruption, but
disregarded the extensive administrative burdens for the contracting entities to insure
continuous publicity. Because of using the so called “PDF publicity”, there is no aggregate
data about the practice of contracting authorities and about the practical details of the public
procurement market.
“Using an open procedure is associated with benefits of a 3 percent lower award value when
compared to cases where non-standard procedures were used without explicit explanation of
any extenuating circumstance. For restricted procedures, the corresponding effect was 1.1 per
cent. The total effect for a contract using an open procedure and publishing an ITT is about 4
per cent”26
.
In Hungary, open procedures accounted for 66% (1466 out of 2211) of all procedures above
EU threshold and 65,73% of their total value (HUF 710,51 billion out of HUF 1080,87
billion) in 201127
, a slight increase compared to the previous years.
Measures of competition
The number of offers is analyzed and interpreted as a proxy for effectiveness in both
procedural and outcome terms. All other things equal, we would expect that procurements that
receive a large number of bids will result in the authorities being able to select a superior
contractor at more competitive prices. A large number of bids further indicate that the
procedural aspects were not perceived as cumbersome to the point of significantly
discouraging bidders.
6. Figure: Number of offers per country28
24 Article 30-30 of Act CVIII of 2011 on Public Procurement (PPA)
25 Besides the public advertisements and guidelines, only the most important parts of the contracts have to be published electronically. 26
“Estimating the Benefits from the Procurement Directives, A Report for DG Internal Market”, 2011
ec.europa.eu/internal_market/publicprocurement/docs/modernising... · PDF file 27 Public Procurement Authority, http://www.kozbeszerzes.hu/ based on the Annual Report of Public Procurement Authority for the Parliament
28 Public Procurement in Europe – Procedures and techniques – A study on the cost and effectiveness of procurement regulation, PricewaterhouseCoopers, London Economics and Ecorys, 2011
The degree of competition in public procurement varies dramatically between the top and the
lower performing group of countries, and it is logical to expect that such large differences in
degree of competition are significantly reflected in the outcomes of public procurement.
Hungary is unfortunately in the lower performing group.
As far as the number of bidders is concerned, the open procedure is very effective in attracting
more bidders. Restricted procedures do not raise the number of bidders and, unsurprisingly,
the use of nonstandard procedures under extenuating circumstances is associated with a lower
number of bidders.
However, the Hungarian public procurement practice seems to be controversial from some
aspects. The 2009 and 2011 research at Budapest Corvinus University on public procurement
featured several questions directly regarding the relation between public procurement and
competition. The most interesting questions were whether public procurement in Hungary
helps competition or hinders it. ¾ of the respondents deemed public procurement as not really
helping competition. Compared to 2009 data recent statistical data show a grimmer picture
about the ability of public procurement to hinder unfair competition.
7. Figure: Does public procurement help competition or hinder it?29
29Tátrai T., Nyikos Gy. (2012) pp. 12.
Respondents mentioned inter alia invoice control: the aim to control the implementation phase
and make the whole payment process transparent. But the process slows down the payment
for the contractors, so their interest is to hide subcontractors and present themselves as sole
performers. This is similar to “Public dues”, and shows that a solution itself can spoil its
optimal effect. These unreasonable regulations, which were intended in principle to help
SMEs, have had the opposite effects in practice, i.e. have been against SMEs and have
hindered competition.
Economically most advantageous tender
Given the significant and influential role of public procurement in the economy, it is clear that
it has the potential to impact other policies (EU2020). The areas mentioned most frequently
for future strengthening of the rules are: environmental sustainability; respect for certain
social conditions; and supporting innovation. Tenders can be selected by using the lowest
price criterion or a combination of qualitative and quantitative aspects30
.
Contracting authorities and entities (CAE) in the EU mainly use the combined criteria. “Price
only” is mostly used with the least complicated procedures – such as negotiated without
publication and the accelerated procedures. More complex procedures such as restricted and
negotiated ones use price much less.
Using the economically most advantageous tender, the CAE is at liberty to set the method for
such procedure. However, such liberty is not unlimited. In accordance with the fundamental
principles of public and utilities procurement, a contracting authority or entity must, in a
transparent and predictable manner, present the method for the evaluation procedure. This
obligation raises a central question in the field of procurement. How should an evaluation
model be constructed and applied in order to comply with the fundamental principles of
transparency, predictability and equal treatment? Looking one step further, how should an
evaluation model be constructed in order to certify the award of “best spending of public
money”?
30 Economically most advantageous tender – EMAT: enables the contracting authority to take account of criteria that reflect qualitative, technical and sustainable aspects of the tender submission as well as price when reaching an award decision.
In our opinion, the model itself must be constructed in a way that satisfies the fundamental
principles of public procurement, and that can never lead to the award of a tender which,
based upon the given criteria, is not the most attractive one.
The term value-for-money means the optimum combination of the various cost-related and
non-cost related criteria that together meet the CAE’s requirements. However, the elements
that constitute the optimum combination of these various criteria differ from procurement to
procurement and depend on the outputs required by the CAE for the procurement exercise
concerned.
Award criteria may be divided into two broad categories: cost related and non-cost related.
Life cycle cost (LCC) is an established methodology which allows the evaluation of the costs
of an asset throughout its entire life-cycle. The calculation of life cycle cost is highly
dependent on the training and experience of the staff involved in tender specification and
evaluation, and, based on the current levels of experience and use, increased use, even
drawing on standardized (EU provided) methodologies could reasonably be expected to
trigger learning and application costs. There would be a need for clear and competent
execution of procedures under this option.
According to a recent survey31
of CAEs, “48% seek innovative products, solutions or services
in their tender documents on at least some occasions; 7% indicate that they aim to do this as
much as possible and 10% indicate that they do so regularly”.
“Strategic procurements are perceived to cost more than traditional procurements, more often
than vice versa. To the extent that CAEs are subject to a fixed budget constraint, this may
imply lower volumes of purchasing. However there is some evidence from green procurement
that strategic procurement can deliver lower costs as well as higher environmental benefits.
Strategic procurement can be expected to shift consumption and supply towards welfare-
improving outcomes”.32
There is evidence33
from across the EU of how properly conceived
and executed procurement procedures have led to the selection of promising offers and helped
improve performance against strategic goals.
8. Figure: Summary of impacts of all options in strategic public procurement
Specific objectives Improve cost
efficiency
Realize
opportunities to
achieve best
outcomes for society
Create EU wide
rather
than national
markets
In the short term
lower cost efficiency
due to lack of
experience and
knowledge;
improving over the
long term, depending
shift consumption
and supply towards
welfare-improving
outcomes
Strategic objectives
more
convergent across the
EU:
but detailed
supporting
metrics and
31 Adelphi, Belmont, PPRC (2011), "Strategic use of public procurement in Europe" page 82. 32
COMMISSION STAFF WORKING PAPER IMPACT ASSESSMENT Accompanying the document
Proposal for a Directive of the European Parliament and of the Council on Public Procurement and the Proposal
for a Directive of the European Parliament and of the Council on procurement by entities operating in the water,
energy, transport and postal sectors - www.europa-
nu.nl/id/vivjakse0bzp/commission_staff_working_paper_impact 33 Buying Social, pages 33 and 45.
on availability of
standardized
methodologies
measurement
needed
Functional requirements
Functional requirements are applied where the requirements are on such a level that the
supplier can determine how he can make best use of his own products, intelligence etc. For
example, in the case of the bus service, the amount of passengers that have to be transported,
the routes and the minimal frequency of the service would be sufficient to describe the
requested functionality. The supplier can then propose different types of buses or other means
of transport. The European Union, in its “Buying Green” guidebook, encourages the use of
functional requirements because it is expected to incentivize the market to use its creative and
innovative potential and thereby produce innovative, sustainable and efficient results34
.
Private sector purchasing versus public procurement
Private sector purchasing has many similarities with public procurement, but there are also
important differences, such as that private sector companies are hard-pressed to achieve
success in purchasing as they may otherwise succumb to competitive pressures while such
competitive pressures do not exist in public procurement.
Competitive bidding is one of the most often used purchasing techniques in the private sector.
Many of the purchasing processes in the private sector are in principle designed to achieve the
lowest possible price and the highest possible quality. Best price evaluation is understood as a
strategic sourcing approach used in many procurements. Sourcing techniques of this kind
include internal price benchmarking, price re-negotiations, price unbundling, “threaten-back”
leverage, price indexing/capping and competitive bidding.
The comparison with private procurement shows a market perception that efficiency is higher
in private sector procurement than in public procurement.
In our survey (2011), we asked whether public procurement can attain the efficiency level of
profit-oriented sectors. Though there has been a slight improvement in recent years, an
unequivocal 84% regard this as unrealistic.
9. Figure: Can public procurement attain the efficiency levels of profit-oriented
sectors?35
34 Functional requirements are by nature imprecise, and therefore make the procurement process vulnerable to
lawsuits from losing parties. Experience is needed to structure the tender process according to functional
requirements. 35 Tátrai T., Nyikos Gy. (2012) pp. 9.
III. Conclusion
Good value for money is essential because of the increased pressure on public expenditure.
But measuring the efficiency of public spending, especially of public procurement, remains a
conceptual challenge.
The challenge is to develop a regime that will balance the competition and transparency
safeguards and efficiency aspects in public procurement. Transparency and competition both
play an important role to ensure the achievement of the best results while spending public
money, but there is a tension between the objectives of increasing competition and limiting
costs. There is equally a tension between fairness and transparency on the one hand and
flexibility on the other.
The time has come to forget about public procurement as a means, and to ensure better
outcomes at the same level of spending; we ought to start focusing on using EMAT,
functional requirements, acceptance of alternatives and life-cycle costing more often to
promote innovation through more efficient public procurement. Better spending is a challenge
for regulators, practitioners, policy makers to improve a sustainable public procurement in
Europe.
The improvement of the efficiency of public spending features high on the political agenda.
However, fulfilling policy makers' demands for further progress in this area is necessary to
overcome various shortcomings as techniques and data are concerned.
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