August 8, 2016Doug Hadden
Impact of Government Procurement
The estimated annual government spending of $9.5 T has a significant country and global economic impact. All public spending has been estimated at 34% of global GDP . Government spending has been estimated at 13% in OECD countries, 16% in the European Union and 20% in developing countries.
“The introduction of ICT, more specifically E-procurement has the potential to significantly improve
transparency, efficiency and effectiveness in public procurement.” This is of particular benefit to emerging economies and developing countries. “Transparent procurement procedures can contribute to a more efficient allocation of resources through increased competition, higher quality procurement and budgetary savings for governments and thus for taxpayers. They can also help attract more investment by lowering risk.” Improved government procurement can have a positive impact on government performance and country growth through:
- Improved cost for government purchasing
- Increased value for money
- Reduced corruption
- Increased trust in government
- Improved growth
- Increased tax compliance
Improved Cost for Government Purchasing
Electronic Government Procurement automates the publication of government tenders on web sites with search and alert facilities for vendors. This has been estimated to reduce government costs by analysts and case studies in the range of 5% to 30% 1. E-GP increases the reach of government procurement opportunities resulting in additional bids.
E-GP is often used to replace traditional printing of tenders, saving millions of dollars in annual printing costs2 with estimated savings ranging from $10 to $70 per government transaction or up to 90% of government transaction costs, with further benefits associated with e-invoicing.3
Government efficiency is also improved with reduced process cycle time of 20 to 40%.4
Data analysis of government spending enables saving money through spending analysis. Governments are able to leverage purchasing power to receive more competitive bids. “The more that e-catalogs and online ordering are used, the more real-time data about purchasing behaviours can be collected and applied. Analytical reports generated using e-GP enable government agencies to evolve their public procurement policies.“
Governments also leverage this information to segment spending enabling the use of framework agreements and purchasing cards. Framework agreements accelerate acquisition time while aggregating purchases to save money and improve contract terms and conditions. Framework agreements “saves public sector organisations significant procurement process costs by avoiding the need to let and manage individual procurement contracts.” Savings on commodity items such as computers have been reported as 30%.5 The use of purchasing cards for small transactions provides savings of up to 85%.6 Data from purchasing cards have enabled governments to find significant savings.
Improved “Value for Money”
In addition to reducing procurement costs, e-GP systems can improve government value for money. “Value for money is the differential between the total benefit derived from a good or a service against its total cost, when assessed over the period the goods or services are to be utilised.”
Value for money (VfM) is achieved through balancing economy, efficiency and effectiveness measures. Whole life costs, risk mitigation, quality and cost are considered in VfM procurement. These measures are described to bidders with formulas used to calculate VfM. Although these improvements are hard to measure, there are cases that show improvements of up to 38%7 in value for money.
VfM particularly important in the case of public investments like infrastructure that have a positive impact on growth. “Comparing the value of public capital (input) and measures of infrastructure coverage and quality (output) across countries reveals average inefficiencies in public investment processes of around 30 percent. The economic dividends from closing this efficiency gap are substantial: the most efficient public investors get twice the growth “bang” for their public investment “buck” than the least efficient.”
Reduced Corruption through Automated and Transparent E-Procurement
Corruption costs an estimated 5% of global GDP or US $2.6T, with more than $1T paid in bribes each year that adds up to 10% to the total cost of doing business globally, and up to 25% to the cost of procurement contracts in developing countries and moving business from a country with a low level of corruption to a country with medium or high levels of corruption is found to be equivalent to a 20% tax on foreign business.
“Few government activities offer more opportunities for corruption than public contracting. When taxpayer money is sapped away from providing services and completing public works, not only are resources wasted but lives can be put at risk.” Corruption has been estimated to occur in 10% to 25% of public contracts, where European Union countries losing about $163B annually. “57 per cent of foreign bribery cases prosecuted under the OECD Anti-Bribery Convention involved bribes to obtain public contracts.” Therefore, the reform of government procurement through transparent e-GP is an important anti-corruption initiative that reduces the cost of goods and services while improving the profitability of local businesses.
Citizen Expectations for Transparency Includes E-Procurement
There is an “increasing demand for more government transparency, increased operational efficiency, and better government service delivery, ushering in the age of the citizen.” Citizens and Civil Society Organizations (CSOs) are lobbying for improved accountability and reduced corruption. International CSOs target transparency and accountability domains such as Transparency International (corruption perception), International Budget Partnership (open budgets), Publish What You Fund (aid effectiveness) and Natural Resource Governance (extractive industries transparency) Open Contracting Partnership, and Construction Sector Transparency Initiative (public procurement).
Public procurement transparency, particularly in public investments like infrastructure, is critical to improving trust in government and country stability. Studies in Public Investment Management (PIM) “highlights the importance of transparency and well-governed institutions at key stages of the investment cycle.”
Reduced Transaction Costs on Aid through use of Country Systems
Many countries receive international aid. This aid is often deployed outside country systems, like procurement, increasing transaction costs and reducing aid coordination. The Paris Declaration and the Accra Agenda for Action encourage international donors to use “country systems” to deploy aid, particularly indicators 2 and 5. The use of country systems is an enabler of procurement reform.
Countries need robust and transparent Government Resource Planning (GRP) systems to demonstrate effectiveness. Transparent e-GP systems reduces the perceived risk for using country systems for procurement.
Local and Small Business Growth
“The public sector in many instances is an important market for small businesses, so improving public procurement practices by removing obstacles and boosting the involvement of SMEs is a key priority.” In developing countries, SME are estimated to accout for nearly 86% of employment opportunities. The automation of government procurement has an important economic value-add for vendors because of faster procure-to-pay. E-GP can be used to open up markets to international competition. This can be seen as a disadvantage for local businesses. Government have leveraged policy and systems to encourage the growth of local businesses while benefiting from international competition.
“Governments frequently use Public Procurement to incentivize, support and otherwise sustain local SMEs.” Programs that assist Small and Medium Size Enterprises (SMEs) have been implemented by many governments, including in developed countries.8 For example, the American federal government 23% of all contracts to SMEs.
The benefits sought by these governments include increased employment, improved local economic development, improved competition and reduced collusion by large firms, “creation of skilled jobs, increased domestic tax revenue, and more robust domestic economic growth”. SME procurement policies often “consider ‘social value’, including SME-friendly procurement and contracts with businesses employing disabled and disadvantaged people.”
The benefits of government procurement reform and e-GP can be significant in emerging economies. For example, “In Latin America, small and medium-sized enterprises (SMEs) account for 99% of businesses while employing 67% of the workforce, representing the overwhelming majority of private enterprises. However, their relative contribution to overall productivity is low; whereas large firms in Organisation for Economic Co-operation and Development (OECD) countries on average achieve levels of productivity 2.4 times greater than those of SMEs, in Latin America this multiple is a factor of six. Policies targeted at promoting the development of SMEs are therefore integral to achieving the region’s growth potential .”
Increased Tax Compliance
In countries where many “SMEs are informal, the lure of a significant government contract can serve as a strong motivator to register and formalize – bringing these companies in from the shadows.” The transition of informal to formal business improves economic and employment stability while increasing the tax base in countries. “The informal segment of the economy is typically not well served by the government… In order to decrease the gap between the productive and unproductive sections of the economy, it is important to increase the opportunities available to successful entrepreneurs and SMEs, through policies designed to help them develop, grow and increase their ability to compete in the formal economy.”
Tax compliance can be increased by ensuring that “all vendors for government products and services are registered for taxation and are not in arrears.”
Government procurement reform and transparent e-procurement has a significant economic value add9 for businesses by lowering costs and making it easier to do business. “The use of electronic workflows and improved access can significantly reduce the time it takes to complete procurement processes, leading to transactional efficiency for both suppliers and governments.” Procurement transparency leads to lower government costs, improved value for money and reduced corruption. “E-procurement can lead to substantial cost and administrative savings, wider market access, and enhanced accountability.” This fuels economic growth10.
E-GP appears to be a public sector “best practice”. However, procurement reform can be difficult to implement. The next posts will explore how to optimize reform impacts and articulate some of the pitfalls experienced when implementing e-GP.
1 4 to 17% (UK and Brazil), 5 to 20% (EU), 5 to 25% (World Bank), 6 to 13% (World Bank), 6.62% (India), 10% (Asian Development Bank), 10% (Indonesia), 10 to 15% (Chile),10 to 25% (Asian Development Bank), 10 to 30% – with 5% to 10% at implementation stage (Inter-American Development Bank), 10 to 30% (Malaysia), 10.23% (South Korea), 12% (World Bank), 12% (Republic of Korea – following years), 12% (Georgia), 12 to 20% (Anhra Pradesh), 16% (Emilia Romagna, Italy) 18% (Portugal), 21% (Austria), 25.5% (Brazil); with 51% savings in transaction costs (Brazil); with specific sector improvements of 43% on medicine (Guatemala), 25% on pharmaceuticals (Nicaragua) and 47% on military goods (Colombia); coming from increases in average number of bidders on government tenders from 2.3 to 3.6 (Slovakia) or number of bidders up by 18% (Karnataka, India)
2$560,000 (Anhra Pradesh), $1M per month (Philippines), $1.4 billion savings to the public sector and $6.6 billion compared to the previous paper-based system, with average bid processing time reduced from 30 to 2 hours (Republic of Korea), savings of C$1.5 million a year in photocopying and courier charges, C$2 million a year in newspaper advertising and C$1 million in the service start-up costs (Canada)
3 €6.66 per e-invoice (Denmark), £41 per transaction, (UK), 25 to 90% (Inter-American Development Bank), 10 to 50% (UK), with estimates of savings from e-Invoicing of “up to 90 percent of the processing cost of submitting invoices by adopting electronic invoices“, with saving in the United States estimated between $150M and $260M annually
4 20 to 40% on procure-to-pay (Norway), from 90 to 135 days for high value tenders to an average of 35 days (Anhra Pradesh)
5 30% on computers (Ireland), 20% to 60% on computers (Cyprus), 24% on pharmaceuticals (United States), where doubling framework agreements could results in yearly savings £120 million with further optimization resulting in yearly savings of £260 million in professional services (UK)
6 85% (UK)
738% (UK Environment Agency)
9 estimates that e-GP system implementation has provided a $6 billion economic benefit for both the government and its suppliers through efficiencies, tangible and intangible cost savings (Republic of Korea)
10 One study found that by “winning at least one contract in a given quarter increases firm growth by 2.2 percentage points over that quarter, with 93% of the new hires coming from either unemployment or the informal sector. These effects also persist well beyond the length of the contracts.”