Centralizing Public Procurement: Opportunities, Risks, Optimal Policies Gustavo Piga, Direttore Master in Procurement

1. Centralizing Public Procurement: Opportunities, Risks, Optimal Policies Gustavo Piga, Direttore Master in Procurement Management

2. What to centralize? • 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.

3. 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

4. So, maybe first… • 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.

5. FIRST STATEMENT CPBs GENERATE SAVINGS

6. Candirect (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

7. Average Price (€/package) Paper A4 Formato A4 Natural But not always. A4 Paper Procurement example. €/risma 74 Record 338 Record 5 Record 3,00 2,75 2,50 2,50 2,25 2,10 2,21 2,00 2,06 06/2004 06/2005 Before Consip Frw Contract 01/2002 06/2002 After Consip Contract Consip Contract Legend: Average price Avearge Consip price

8. Other mistakes? • Lack of economies of scale: cleaning services; • Lack of evident standards of quality: pencils and stationery. But most of all it is about…

9. Determinants of savings? Training (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!”

10. 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

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

12. Competition without participation? • 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?

13. 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.

14. SECOND STATEMENT CPBs GENERATE (higher) QUALITY

15. Who is hired by CPBs? • 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

16. Now for Quality. Savings: at what price? • 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

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

18. How to ensure quality? • 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…

19. Finally …. • 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.