The estimated annual government spending of $9.5 T or about 34% of global GDP has a significant country and global economic impact. Making sure this spend is efficient, transparent and represents value-for-money is clearly in the best interests of tax payers and donors.
Why is it Important For a Government to Use an eProcurement System?
The introduction of ICT, more specifically electronic procurement (eProcurement) such as the (PEM) Public Expenditure Management modules of the FreeBalance Accountability Suite™, 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.*
What are the Benefits of eProcurement in Government?
There are many benefits of eProcurement in government and the use of such a system can have a positive impact on government performance and country growth through:
- Reduced costs on government purchasing
- Increased value for money
- Reduced corruption
- Increased trust in government
- Improved growth
- Increased tax compliance
1. Reduced Costs on Government Purchasing
Government eProcurement automates the publication of government tenders on websites with search and alert facilities for suppliers. This has been estimated to reduce government costs in the range of 5% to 30%1. eProcurement also increases the reach of government procurement opportunities resulting in additional bids.
eProcurement 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 eInvoicing.3 Government efficiency is also improved with reduced process cycle time of 20 to 40%.4
Data analysis of government spending enables cost saving through spend analysis. The more the system is used, the more real-time data about purchasing behaviours can be collected and applied. Analytical reports generated using eProcurement enable government agencies to evolve their public procurement policies * and leverage their purchasing power to attract more competitive bids.
Governments can also leverage this information to segment spending thereby 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 save public sector organizations 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.
2. Improved Value for Money
In addition to reducing procurement costs, eProcurement systems can improve government value for money – 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 (V4M) is achieved through balancing economy, efficiency and effectiveness measures. Whole life costs, risk mitigation, quality and cost are considered in V4M procurement. These measures are described to bidders with formulas used to calculate V4M. Although these improvements are hard to measure, there are cases that show improvements of up to 38%7 in value for money.
V4M 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%. 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.*
3. Reduced Corruption Through Automated and Transparent eProcurement
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. 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 with European Union countries losing about $163B annually. 57% 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 eProcurement is an important anti-corruption initiative that reduces the cost of goods and services while improving the profitability of local businesses.
4. Increased Trust in Government
There is an increasing demand for more government transparency, increased operational efficiency, and better government service delivery. 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) highlight the importance of transparency and well-governed institutions at key stages of the investment cycle.*
5. 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 eProcurement systems reduce the perceived risk for using country systems for procurement.
6. 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 account 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. eProcurement can be used to open up markets to international competition.
Governments frequently use public procurement to incentivize, support and otherwise sustain local SMEs.* Programs that assist SMEs have been implemented by many governments, including in developed countries.8 For example, in America, 23% of all federal government contracts are awarded to SMEs.
The benefits of eProcurement sought by these governments include increased employment, improved local economic development, improved competition and reduced collusion by large firms, skilled job creation, 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 eProcurement can be significant in emerging economies. For example, In Latin America, SMEs account for 99% of businesses while employing 67% of the workforce, representing the overwhelming majority of private enterprises. Policies targeted at promoting the development of SMEs are therefore integral to achieving the region’s growth potential*.
7. 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 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. Studies show the use of a Unique Business Identifier (UBI) for government taxation and procurement results in improvements in tax and procurement compliance in most countries.
The benefits of eProcurement and government procurement reform represent 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. eProcurement can lead to substantial cost and administrative savings, wider market access, and enhanced accountability. This fuels economic growth10.
For more information on how FreeBalance can help with eProcurement, please get in touch.
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)
8 (British Columbia, Canada), (Egypt), (Republic of Korea), (United States)
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.”