Government procurement
Government procurement or public procurement is the purchase of goods, works or services by the state, such as by a government agency or a state-owned enterprise. In 2019, public procurement accounted for approximately 12% of GDP in OECD countries. In 2021 the World Bank Group estimated that public procurement made up about 15% of global GDP. Therefore, government procurement accounts for a substantial part of the global economy.
Public procurement is based on the idea that governments should direct their society while giving the private sector the freedom to decide the best practices to produce the desired goods and services. One benefit of public procurement is its ability to cultivate innovation and economic growth. The public sector picks the most capable nonprofit or for-profit organizations available to issue the desired good or service to the taxpayers. This produces competition within the private sector to gain these contracts that then reward the organizations that can supply more cost-effective and quality goods and services. Some contracts also have specific clauses to promote working with minority-led, women-owned businesses and/or state-owned enterprises.
Competition is a key component of public procurement which affects the outcomes of the whole process. There is a great amount of competition over public procurements because of the massive amount of money that flows through these systems; It is estimated that approximately eleven trillion USD is spent on public procurement worldwide every year.
To prevent fraud, waste, corruption, or local protectionism, the laws of most countries regulate government procurement to some extent. Laws usually require the procuring authority to issue public tenders if the value of the procurement exceeds a certain threshold. Government procurement is also the subject of the Agreement on Government Procurement, a plurilateral international treaty under the auspices of the WTO.
History
Public procurement occurred in Europe in various forms since at least the 18th century, even it lacked regulations and strict procedures. Nonetheless, the need to regulate public procurement procedures and to constrain the powers of heads of administrative departments began to be deemed necessary as early as the French Revolution.Noteworthy in Italy is the first regulation on public procurements, dating back to the time of the Kingdom of Italy of Napoleon Bonaparte and dated May 1, 1807. This regulation contains many terms and principles typical of modern codes on public procurement.
Overview
Need for government procurement
Government procurement is necessary because governments cannot produce all the inputs for the goods they provide themselves. Governments usually provide public goods, e.g. national defense or public infrastructure. Public goods are non-rival and non-excludable, which means that one individual's consumption does not diminish the quantity or quality of the commodity available to others, and individuals cannot be prevented from freely consuming the commodity, or "free-riding". Consequently, private markets cannot provide public goods. Instead the government provides those goods and finances them by raising taxes from all citizens.In addition to public goods, governments often also provide merit goods, such as education or health care. Merit goods are private goods which are rival and excludable and are therefore provided by private markets. Nevertheless, governments also provide merit goods because of reasons of equity and fairness and because they have positive externalities for society as a whole.
In order to provide public and merit goods, the government has to buy input factors from private companies, e.g. police cars, school buildings, uniforms etc. This process is called government or public procurement.
Scope and impact
Government procurement practice impacts on all public works, services and supply contracts entered into by a public authority, and the markets from which these are purchased.Public procurement regulations normally cover all works, services and supply contracts but there may be exceptions. These most notably cover military acquisitions, which account for large parts of government expenditure, some aspects of health care, and low value procurement. The GPA and EU procurement law allow for exceptions where public tendering would violate a country's essential security interests. Additionally, certain politically or economically sensitive sectors, such as public health, energy supply or public transport, may also be treated differently. Government procurement is linked to economic growth, protection and enhancement of competitive market conditions, policy achievement, and innovation promotion.
The United Kingdom's Office of Fair Trading, as it then was, commissioned a review addressing the impact of public sector procurement on competition, which reported in 2004. The review found that
Contract types used in government procurement include fixed-price contracts, cost-plus contracts, time-and-materials contracts and indefinite-quantity contracts.
Strategic purchasing
One of the consequences of the 2008 financial crisis was an attempt to reduce public spending in order to control public debt. This trend has affected government procurement for its significant share in public spending. Therefore, various purchasing strategies have been implemented to increase quality and to decrease cost of government procurement. These strategies include public e-procurement, centralized purchasing or framework agreements.A United States federal memorandum issued in 2005 created an expectation that the procurement, finance and IT functions within federal government departments would work together to generate savings through a process of strategic sourcing.
Public e-procurement
stands for replacing various phases of public procurement with electronic means. Purpose of using e-tools is reducing administrative costs by automation. E-procurement can also mitigate some barriers to entry for smaller suppliers, consequent increase of competition can reduce price of procurement.Public procurement and innovation
The large buying power of the public sector has led to the consideration of using public procurement as a stimulus to foster innovation. The activities of public procurement and innovation intersect in three specific areas: public procurement for innovation, public procurement of innovation, and innovative public procurement. First, multiple studies have established that public procurement for innovation is a viable and efficient tool to stimulate innovation as a demand - side tool in the innovation policy mix. Second, public procurement may also be used to innovate the public sector itself, through the inclusion of "innovativeness" as a procurement goal. Third, novel procurement approaches may be introduced to innovate public procurement processes and entities.Centralized purchasing in public procurement
Centralized purchasing means awarding procurement contracts on behalf of one or more procuring entities. This method has been used to gain various benefits emerging from demand aggregation. Centralized procurement can be done by ordinary contracting authorities or established central purchasing body. Centralized procurement is regulated by local legislation. For instance, directives 2004/17/EC and 2004/18/EC are dealing with this issue in the EU. Commonly mentioned benefits of procurement centralization are as follows:- Final unit price decrease – Higher procurement value coming from demand aggregation can increase buyers bargaining power and decrease final price. Moreover, higher value can attract more companies to bid in the tender, increased competition might lead to better price as well.
- Transaction costs reduction – Key objective of centralized procurement is preventing duplication of some procedures. Contracting units can reduce their transaction costs in cooperating with other entities. This aspect is often considered as most relevant argument for procurement centralization.
- Knowledge sharing – Cooperation in purchasing can also result in sharing best procurement practices. Some central procurement bodies also perform research activities.
Procurement centralization might also negatively impact supply side. Higher procured values might require higher capacity of supplying company and it might create barrier to entry for small or medium companies. Consequently, it might lead to monopolizing public procurement market.
Critics also mention that only some goods can be purchased centrally. Goods that are heterogeneous or they have many characteristics are not suitable for this strategy.
Thresholds
Under many jurisdictions, there are certain thresholds in value which oblige procurers to publish tender details and information on contracts awarded and expenditure incurred, and to follow specific procurement procedures. Greater transparency and regulatory compliance are incurred at higher levels of expenditure. For example, the GPA applies to the letting of "any procurement contract with a value that reaches or exceeds the amounts set in the Agreement".Framework agreements
A framework agreement is another method for aggregation of demand. It is a type of two-stage bid tendering procedure, that establishes incomplete contracts awards with one or more suppliers for given period of time.The discussed advantage is an administrative costs reduction again as tender procedure do not have to be duplicated for agreed period of time. On the other hand, the term "Winner's curse" is associated with framework agreement as there is a price uncertainty in time.
All of these three procurement strategies are not mutually exclusive. So, framework agreements can be processed centrally through e-procurement.