E-procurement challenges or the Challenge of e-procurement? GUSTAVO

E-procurement challenges or the Challenge of e-procurement? GUSTAVO PIGA Chair, Master in Procurement Management University of Rome Tor Vergata, Department of Economics and Territory [email protected], www.gustavopiga.it Prepared for Connected Governance: Vision or Reality? Scuola Superiore della Pubblica Amministrazione October 21-22, 2009, Rome Definitions? E-GP is the use of Information & Communications Technology (especially the Internet) by governments in conducting their procurement relationships with suppliers for the acquisition of goods, works, and consultancy services required by the public sector. (World Bank) 2 E-proc mushrooms with Central Purchasing Bodies! OGC - UK 380 people serving 450 Public

Administrations Around 300 framework contracts Value of Contracts : around 2.75 bn Savings obtained in the three year period 2000-2003: 1,6 bn. SKI Denmark Serving 8500 public bodies 250 suppliers 45 framework agreements Volume of contracts: around 551 million HANSEL Finland Handled volumes, 4 mn. BESCHA Germany 26 public institutions 3000 contracts per year of goods and services MINEFI Ireland 500 people 22 frame contracts Volume of contracts: 637 million

BBG Austria 35 people Orders equal to 378 mln in 2003 10-120 frame contracts awarded per year ABA Belgium Value of purchases 2003: 15 mln 80 frame contracts betwen 2000 and 2004 Ministry of Development Greece 135 people Orders equal to 216 mln in 2003 438 frame contracts between 2000 and 2003 UGAP France 500 suppliers involved in 2003, 80% SMEs Program being restructured Source: Official Websites, Data collected by Consip and by Hansel in 2004

NB: the list does not intend to be complete STATSKONTORET Sweden Orders near 1 bn. 16 commodities handled in 2003 CONSIP Italy 500 people In 2003, approximately 41.000 ordering units Orders equal to 1,9 bn. Approximately 60 contracts for goods and services 3 Centralization and E-proc Developments: the U.S. Experience in Procurement Survey over 47 US states (1998 vs. 2001), in Moon, Journal of Public Procurement Electronic Ordering: from 44,7 to 68,1% of all States; Purchasing Cards: from 68,1 to 85,1%; Digital Signature Accepted for Tender Documents: from 0,1% to 15%; Reverse Auction: 10,6% in 2001 E-proc Adoption Grows with: Managerial Innovation; Centralized procurement with a high level of authority; Size of the State.

4 e-proc and centralization Why do e-proc and centralization arise together? Centralization makes e-proc less costly and more profitable; IT and e-proc make centralization more natural and less costly; So it is hard to judge if the final impact is due to one or the other! 5 E-proc is costly! How much? The more costly the: smaller the Administration. However large organizations driven by e-proc generate less SMEs participation; lower the professionalism of procurement personel; lower the degree of IT development of the country/Administration (security is key); lower the organizational skills available within.

6 But is e-proc also beneficial? The new EU Directive on public procurement seems to say YES: Certain new electronic purchasing techniques are continually being competition developed. Such techniques help to increase and streamline public purchasing, particularly in terms of the savings in time and money which their use will allow. Contracting authorities may make use of electronic purchasing techniques, providing such use complies with the rules drawn up under this Directive and the principles of equal treatment, nondiscrimination and transparency (whereas 12). 7 Does e-proc generate competition or collusion? The case of reverse auctions

Fornitura Ausili per disabili Ente Appaltante ASL Umbria Prezzo di aggiudicazione 116.000 Euro Prezzo base 199.000 200 N di fornitori partecipanti 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 Riduzione spesa 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 8 Reverse auctions, opposite views THE PRACTITIONER: Thanks to electronic tools enterprises make various offers and at the same time see the others bids. In this way already at the psychological level competition is increased. This in turn leads to better results and savings for the Public Administration. Bidders are masked with a code, which does not allow them to know the identity of others during the tender. In this way the Administration tries to avoid collusions (cited in Magrini, p. 36). THE THEORIST: ascending auctions remove uncertainty about the value of the good and make firms bid more agressively. But online auctions can increase collusion: competitors get to see, in real time, if a cartel agreement is being broken by a defector and have the possibility to retaliate with lower prices. Knowing this, there will be no defection and collusion will be

self-sustained, causing harm to the Administration; the openness of the format may scare away small firms that anticipate being easily topped by big firms during the auction. 9 Does e-proc Curb Corruption? Procurement and corruption by Lengwiler e Wolfstetter, in Handbook of Procurement edited by Dimitri, Piga and Spagnolo, Cambridge University Press, 2006 Yes! Possible formats of corruption removed by e-proc tenders (including reverse auctions): Modify bid of favored bidder to let him/her win: reverse auction keeps all players active until price hits each players cost; Pre-Auction to determine favored bidder: with sealed bid tender the purchasing price for the taxpayer is higher as winning firm has to pay the bribe. With reverse on-line auction firm wins, not paying bribe, by having taxpayer pay lower price; After seeing bids, the most advantageous briber is approached: on-line auction eliminates this by making bids public. BUT CORRUPTION THROUGH LOWER QUALITY IS NOT AFFECTED BY E-PROC 10

Does e-proc help transparency? 82 Russian regions EPROC Browsing Tenders Browsing Tenders con advanced research tools Database signed contracts Search signed contracts % REGIONI 100% 43,2% 43,2% 14,8% EPROC Portals with

login % REGIONI 43,2% E-tendering RFQ 13,6% E-tendering Reverse auction E-purchasing Online payment 14,8% 0% 11 Does e-proc help SMEs? No! SMEs need affirmative action and not affirmative rights: to treat unequals as equals is to perpetuate inequality. The US reserves a 23% share of Public Procurement only to SMEs.

Yes! Some tools like the procurement-card or the market-place target small purchases, using technology to lower costs for procurers without crowding-out SMEs, unlike centralization. 12 Where is the benefit in procurement? (1) 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! 13 Where is the benefit in procurement? (2) How much of this waste is passive (inefficiency [and capture from ignorance?]) 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. While competence drives e-proc, it is doubtfuI that e-proc drives competence. So why and when use it? 14 E-proc: Why and When? In reverse auctions with asymmetric information across bidders, in proc card, in market-place. Sustaining interoperability across e-platforms. But what if One is to use e-proc to expand e-Bay-like features of the public process of acquisition where it generates greater transparency and benchmarking across administrations? Wouldnt corruption and incompetence be exposed better? 15

Give power and voice to the Public Administration stakeholders. The role of DATA and benchmarking. 16 ICT for procurement Collect data, normalize them and publish them on Internet: Interested citizens will be able to voice their opinion, contributing to reinforce the reputation of virtuous firms and public administrators. Two results would be achieved: - first, maximum visibility (also thanks to the press) would be given to critical situations, so addressing inspections of the Administration, and ultimately the auditing process. - second, administrators and firms would be forced to build a positive reputation to avoid social stigma, punishment of voters or of superiors. Worse procurers would try to imitate the best ones. 17 The Mexican case: CompraNet www.compranet.gob.mx

Compranet is the first Internetbased government procurement system implemented in Latin America. Introduced in 1996 by the actual Ministry of Public Administration This system contains the legal framework, bidding opportunities, statistics, notifications and all other relevant information for government procurement activities. Certification by World Bank and IDB 50.00% 45.00% 40.00% 35.00% 30.00%

25.00% 20.00% 15.00% 10.00% 5.00% 0.00% 2001 WORLD BANK CERTIFICATION BIRF 2002 2003 2004 PROMEDIO 2001-2003

ESTIMACION 2004 IDB CERTIFICATION 18 Scope of the Compranet Plus platform Public Works: Public Works follow up Photographic report Material report and/or non-returned equipment Public Work pay-off Dashboards: Purchasing information analysis Statistic reports and graphics Standard purchasing dashboards for every involved unit Regulatory dashboards by contract, showing KPIs status

19 Conclusions Good procurement is what we need. Following the rules is a necessary but not sufficient condition to achieve it. ICT is the tool that can help ex-ante monitoring in procurement finally take-off in Europe; For that, central organizations and Authorities are in a perfect position to lead the reform process thanks to their IT capabilities; Within the framework of EU rules, new life must be given to trust within benchmarking. 20 Definitions? E-GP is the use of Information & Communications Technology (especially the Internet) by governments

in conducting their procurement relationships with suppliers [for the acquisition of goods, works, and consultancy services required by the public sector] that allows citizens to better participate and monitor the process of acquisition of goods, works and consultancy services by the public sector . (A new one!) 21

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