An Exploratory Analysis of Public Procurement Practices in Europe – First Draft

1. An Exploratory Analysis of Public Procurement Practices in Europe– First Draft Stockholm, October 4th2004 Gustavo Piga – Chairman of Consip S.p.A.

2. Introduction • First of all, we would like to thank you because this Report has been written using data and information that you provided us • Questionnaires have been sent to 30 “members” of the EUPPLL representing 24 countries • 20 institutions, representing 20 countries, sent back the Questionnaire, herewith distinguished by functions: Institutions that did not send the Questionnaire back: Ministry of Finance and Informatics Office (Czech Republic); Ministry of Environment (Greece); Ministry of Labour (Norway); Hansel (Finland); Public Procurement Directorate (Bulgaria); PPO(Slovenia); Public Procurement Office (Lithuania) Countries that have not been asked to fill the Questionnaire: Portugal, Spain, Luxemburg, Holland

3. Economic Value of Auctions Performed During 2003 To have an homogeneous description of the relative importance of each institution the Purchased Value should be ideally compared with the civil government expenditure on goods – services – works, which we did not ask in the Questionnaire. We used TGGE (Eurostat) Actions and Issues • Data needed: share of 2003 purchased goods and services as a percentage of TGGE and GDP • Homogeneity of data (i.e. Belgium – B, Greece – H) • Availability of data (i.e. Contact largest purchasing administration?)

4. Sealed Bid Pay As You Bid Auction is the most common format Two main reasons It is simple and reduces participants’ legal claims It may reduce collusion Awarding Procedures: Standard (Paper) Auctions • To award frame contracts, framework agreements, procurement contracts through non electronic procedures: Combinatorial Auction: 3 countries (Austria, Cyprus, Italy) Actions and Issues Framing of question (should it be re-phrased to see if the format was not only “the most common” but the “only one”?)

5. Awarding Procedures: OnLine Auction • 7 institutions applied this procedure Common feeling that it permits to use different kinds of auction formats because many bids can be managed in a very short time Three different formats have been applied Sealed Bid auction Descending auction (reserve auction) Multiple round descending auction Each solution provides different functionalities Limited or unlimited n. of rounds Bid Decrements Extensions Weightings Actions and Issues • Extent (share) of e-procurement over Total procurement? • Technical platforms Working group on Technical Issues?

6. Number of Lots • The procurement entity can award a certain supply as a single lot or splitting it into lots, depending on several factors • market concentration • geographical distribution of suppliers • participation of SMEs • etc. 17 institutions split contracts into lots Why? 3 main reasons: To facilitate participation of SMEs To increase participation to the auction To increase the efficiency in the provision of good/services (i.e. Optimisation of transport’s costs, Qualitative apply differentiations)

7. Grouping of Firms and Awarding Constraints • Almost each institution lets firms group together in a single larger entity in order to submit a larger bid The EU legislation does not impose particular restrictions and they are discretionally imposed by institutions 3 institutions use the restriction of preventing grouping between two or more firms able to bid individually Other countries do not regulate grouping: firms can group as long as it is not a restriction for competition The awarding constraint limits the fraction of supply that each firm can be awarded Several countries adopt it in order to: • Increase participation • Increase competition because it fosters participation • Avoid lock-in: multiple-winners auctions do not constraint the administration to purchase from only one winner

8. Contract length varies from country to country and strictly depends on the object of the auction The Time Length of a Contract • The economic theory underlines how longer contract can help in hindering collusion (lower repeated interaction) but, on the other hand, they constrain the administration to purchase good/services from the same firm for a long time, possibly leading to undesirable lock in Contracts for goods are usually shorter than those for services Several countries permit to extend the length of contract Actions and Issues Data across countries for a subset of homogeneous items?

9. Competition1/2 • To find an indicator that defines the level of competition during the auction procedure is not simple A reliable indicator could be represented by the discount expressed as the difference between the awarding price and the market price Responses show that the highest discounts have been obtained in the Telecommunication and IT sectors

10. Competition2/2 • Mechanisms adopted to avoid collusion: • To use the Sealed Bid auction (the most common one) • To forbid controlled or affiliated suppliers to take part to the auction • To establish a number of lots not greater than the number of participants • To increase the length of contracts to avoid rotation among firms • To limit the grouping of enterprises • To try to facilitate entry of SMEs • To split the contracts into lots accessible to SMEs 55% of institutions interact with the National Antitrust Authority (advises, sharing of information, discussions, etc.) Sectors considered more “risky”: • Fuel • Energy providers • Lunch coupon

11. Reserve Price • If bids exceed this estimated price the procurement entities can: • Request an explanation • Declare the auction unsuccessful and re-run it Reserve Price: maximum amount that the procurement entity is willing to pay 8 institutions consider the reserve price as an estimated price that not necessarily has to be disclosed to the bidders But: 6 other institutions usually disclose the reserve price 5 of them give more weight to participation rather than competition Actions and Issues Implications of choice for competitive outcome of auction?

12. Participation Requirements Actions and Issues Previous performance?

13. Awarding Criteria • The majority of institutions use both: When good features are well defined • The Lowest Price criterion • The Most Economically Advantageous Offer criterion (the most commonly used:H 65%, M 78%, I 90% and O 61% ) Additional aspects other simply than price are relevant to award the contract When contracts are awarded on the basis of the Most Economically Advantageous Offer tenders are composed by an economical and a technical part Actions and Issues List of all formulas and properties?

14. Only the name of the winner Disclosure Policy • Before the auction • Information related to the auction: number of lots, economic value and length of the contract, etc. (as defined by the EU legislation) • Few institutions contact potential suppliers • The number of potential bidders is usually not disclosed Actions and Issues Pro and cons of contacting bidders before auction and content of the contact? After the auction Actions and Issues Method of disclosure and implications of disclosure?

15. Subcontracting • All institutions that sent back the Questionnaire grant the possibility of subcontracting to winning firms • 65% of institutions impose restrictions on firms that decide to subcontract, for example: • documents proving that potential subcontractors satisfy the requirements relative to the subcontracted activities • only secondary activities are eligible for subcontracting 46% of institutions directly monitor subcontracting Actions and Issues Ceiling?

16. Conclusions • From the answers the issue related to the participation to the auction of SMEs emerges vigorously • Procurement entities aim at enforcing SMEs participation through different mechanisms: • Using particular auction formats (i.e. combinatorial auction with package bidding) • Splitting the supply contract into many smaller lots • Setting the reserve price at sufficiently high level • Defining less restrictive participation requirements • Promoting grouping of enterprises among smaller firms • Using awarding constraint in order to have more than one winning supplier • Disclosing as much information as possible to level information asymmetries • Promoting subcontracting

17. Working Programme Distribution of Questionnaires Filling in the Questionnaire Collection Elaboration First Draft (third meeting) Further collection & Elaboration Final Report