Centralizing Public Procurement: Opportunities, Risks, Optimal

Policies

Gustavo Piga, Direttore

Master in Procurement Management

• When product standardization is easy (IT hardware?);• When product is delivered by large and oligopolistic firms with

relevant bargaining power (phone?);• When knowledge (k) and k-sharing is important (IT projects?

Defense?);• When products require large fixed costs (Defense?);• When standards and network externalities are important and

coordination is needed (operative systems?).• Emergencies.

See Handbook of Procurement, Cambridge University Press.

What to centralize?

To know if “yes to” CPB is to ask about public procurement goals. National welfare, ok but how?

There could be many answers• Support SMEs competitiveness through procurement (Usa,

Canada, Brasil, Korea, South Africa do it!). The Usa lowers centralization;

• Generate innovation through procurement (EC recommends it). Defense is often centralized;

• Support national industry (the case of the Buy-American Act) to obtain competitiveness;

• Selecting the best supplier i.e. the more adequate for the supply process. EU Directives

• First, establish the potential impact of a CPB;

• Then ensure that the CPB helps delivering those goals (not an easy task), identifying the appropriate instruments.

• Keeping in mind that: if goals are not properly set or instruments not properly used, some actor will shut down the CPB.

So, maybe first…

FIRST STATEMENT

CPBs GENERATE

SAVINGS

Can direct (price) savings be achieved?

“Another obvious conclusion from our work is that agencies like Consip (Italian CPB) can produce serious public savings. The cost of running Consip is limited (160 people are employed in the procurement department). Public bodies that switch to Consip save 28% of the purchase price. Public bodies that do not switch pay on average 12% more than the price of similar items on the Consip catalog.”

“How Much Public Money Is Wasted, and Why? Evidence from a Change in Procurement Law” - Oriana Bandiera,

Andrea Prat, Tommaso Valletti,

American Economic Review, 2009

3,00

2,50

Average Price (€/package) Paper A4 Formato A4 Natural

€/risma

2,00

2,21 2,10

2,06

01/2002 Before Consip Frw Contract 06/2002 06/2004Consip Contract After Consip Contract 06/2005

2,25

2,75

5 Record 74 Record 338 Record

2,50

Legend:

Avearge Consip price

Average price Dati di SintesiDati di SintesiN° Amministrazioni che hanno fornito dati 291N° Record presenti nel database 827N° Record con dati non utilizzabili 28

But not always. A4 Paper Procurement example.

• Lack of economies of scale: cleaning services;• Lack of evident standards of quality: pencils and

stationery.

But most of all it is about…

Other mistakes?

• 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!”

Determinants of savings? Training (1)

Determinants of savings? Training (1)

• 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.”

Good news! Corruption is harder to eradicate than ignorance

Competition vs. economies of scale concept: while sometimes the latter do not exist, the former can always be enhanced. And, if economies of scale exist they are valueless for Governments without competition.

Determinants of savings? Competition, not economies of scale! (2)

• But does competition drive participation? The issue of Small and Medium Firm seems to point to a vanishing link as contract-bundling becomes more important.

• How do we protect SMEs from centralization?

Competition without participation?

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 contract-bundling 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.

SECOND STATEMENT

CPBs GENERATE

(higher) QUALITY

• centralizing facilitates knowledge-sharing if the best are gathered in the CPB;

• to attract from the private sector, sometimes special salaries are needed;

• to have special salaries, difficult to place personnel within the Public Administration.

Benefit analysis would seem to justify personnel cost to establish such a CPB, also because CPB quality has

potentially high externalities on the Public Administration tenders

Who is hired by CPBs?

What if quality monitoring is not centralized?• Albano et al. (2008): 800 inspections between 9/2006

and 4/2007. 437 where not at the required contractual level. In only 16 cases (3,66%) penalties where enforced;

• Resistance to monitoring is natural in some centralization schemes that eliminate empowerement of local, smaller bodies.

This resistance feeds “discounts with no quality” by firms during contract life

Now for Quality. Savings: at what price?

Lowest price is the worse supplier when:• Supplier knows more than procurer about

contract features;• Supplier expects not to be asked to provide the

required quality;• Supplier underestimates cost;• Supplier is near bankrupt and bids

aggressively, relying on limited liability.

How to obtain quality? Sometimes lowest-price open tenders do not help

• Penalties tightly linked to quality aspects rewarded in tender (but who checks?).

• Reputation rewards in the formula: when the winner does not have the lowest price but the best history of quality provision.

• Centralization of quality control raises bargaining power of the purchaser in contract dispute.

• Allowing losers to check winners. • Dual sourcing.• Surety Bonds.

DEFENSE JURIDICAL FLEXIBILITY MIGHT HELP?BUT FEW ACTORS ARE DEFENSE SUPPLIERS…

How to ensure quality?

• CPB success depends on good organization and human capital, but two more pre-conditions are required.

• The key role is to be played by politics: the success of centralization relies on a tight coordination and backing of procurers by politicians OR high-ranked officials.

• E pluribus unum: just like for a Federal State, this can only hold if there is a gain for everyone to begin with. All agencies involved must feel part of this project and contribute to it, not just the CPB.

Finally ….