REPORT ON POLICY RECOMMENDATIONS CONCERNING THE ESTABLISHMENT OF CENTRALISED PUBLIC PROCUREMENT BODIES IN UKRAINE. Dana Mitea.

Transcription

1 HARMONISATION OF PUBLIC PROCUREMENT SYSTEM IN UKRAINE WITH EU STANDARDS REPORT ON POLICY RECOMMENDATIONS CONCERNING THE ESTABLISHMENT OF CENTRALISED PUBLIC PROCUREMENT BODIES IN UKRAINE Dana Mitea September 2015 A Project funded by the European Union and implemented by a Consortium led by Crown Agents Ltd

2 The contents of this Report are the sole responsibility of the Crown Agents and its Consortium partners and the opinions expressed in this Report are not to be understood as in any way reflecting an official opinion of EUROPEAID, the European Union or any of its constituent or connected organisations. 2

3 ABBREVIATIONS AMCU BBG BIG CIP CPB DPS ESPAP EU Hansel ICT MEDT NUTS PEPPOL PPL PR SIGMA SIK SME TED UGAP Anti-Monopoly Committee of Ukraine An Austrian CPB An Austrian CPB EU Competitiveness and Innovation Framework Programme Centralised Purchasing Body Dynamic Purchasing Systems A Portuguese CPB European Union A Finnish CPB Information and Communications Technology Ministry of Economic Development and Trade Nomenclature of Units for Territorial Statistics Pan-European Public e-procurement On-Line Law of Ukraine On the implementation of Public Procurement Public Relations Support for Improvement in Governance and Management (a largely EU funded Programme operated by the Organisation of Economic Cooperation and Development (OECD) The Danish CPB Small and Medium-sized Enterprise Tenders Electronic Daily The French CPB 3

4 TABLE OF CONTENTS Page Executive Summary 5 1. Introduction The Project The Assignment 7 2. Main Findings Current level of centralisation Main stakeholders and their role The Strategy on Public Procurement Reform Drivers for centralisation Legal provisions Procurement in the Health sector Recommendations and next steps Recommendations Next Steps 24 Annexes 26 Annex 1: Centralised procurement in the EU 27 4

5 EXECUTIVE SUMMARY The EU funded Project Harmonisation of Public Procurement System in Ukraine with EU Standards commenced work in Kiev on 11 November The general objective of the Project is to contribute to the development of a solid and consistent public finance management through the establishment of a comprehensive and transparent regulatory framework for public procurement, an efficient public procurement institutional infrastructure, the accountability and integrity of public authorities in regard to public procurement and the development of the Ukrainian state aid system. In the context of the Project s assistance to the Ukrainian authorities in regard to Public Procurement institutional development, the overall aim of this Report is to provide policy recommendations concerning the establishment of centralised public procurement bodies (CPBs) in Ukraine 1. Ukraine has so far successfully introduced framework agreements in the legal framework. However, no real attempt has yet been made to move forward in the direction of the establishment of centralised purchasing body(ies) which have proven to be efficient in the practice of many EU Member States. At the same time, there is growing recognition that the establishment of a centralised purchasing body for selected types of standard procurement and movement in the direction of, at least a partial, compulsory use of centralised procurement by certain contracting authorities would bring economic benefits for the public sector. At present, most public procurement in Ukraine is carried out on a decentralised basis. Centralised public procurement techniques are not used and there is no legal framework for centralised procurement. The aim of this Report is to provide an analytical comparison of existing CPB solutions in EU Member States and to elaborate recommendations as to which elements of existing solutions in these cases could be relevant to Ukraine. It also emphasises the importance of accurate legal provisions in primary and secondary laws and offers concrete proposals for amendment of the PPL. As to why centralised procurement is a tool which is increasingly used in EU Member States, the contro of public spending is clearly one of the key issues Governments are confronted with, especially in recent years, after the financial crisis. Aggregating public procurement demand and conducting procurement in a centralised way is a method which can help reduce purchasing costs considerably. Throughout the EU, Member States have decided to introduce a certain level of centralisation and to implement so-called Centralised Purchasing Bodies (CPBs) to manage the bundling of demand and to purchase for or on behalf of contracting authorities. It is legitimately recognized by a series of studies as well as by policy makers and practitioners that centralised procurement can be seen not only as an adequate instrument to reduce public spending but also as a powerful lever in order to target broader policy goals 2 like reduction of corruption, introduction of e-procurement tools or professionalisation of staff. 1 Component 3.4.C of the Project s approved Work Programme. 2 Flexible Strategies for Centralised Procurement Gian Luigi Albano and Marco Sparro in Review of Economics and Institutions Vol.1 No.2, Fall 2010-Article 4. 5

6 In Ukraine, the main reason for implementing a CPB seems to be of economic nature (savings to the budget) but also the reduction of corruption and professionalisation of staff are important expected results. This Report reflects the main findings of the mission and analyses key questions which need to be taken into consideration before a CPB is established in Ukraine: What are the expectations towards a CPB? What is the best organisational form for a CPB? How should the operations of a CPB be financed? What products and services should be covered by the CPB? Should the use of CPBs services be compulsory or not for the contracting entities? It also deals with positive and negative effects of centralisation and formulates recommendations as to which aspects need to be taken into consideration when building-up a CPB. The Report offers an analysis of the current legal framework in the EU and suggests some proposals for the amendment of the Ukrainian PPL with regard to the inclusion of a definition of a CPB and the possibility for contracting authorities to purchase through it. Provisions on the establishment and functioning of the CPB should be the subject of a separate legal act (secondary legislation). A proposal on which provisions can be included in such legal act, can also be find in this Report. The annexed paper on Centralised procurement in the EU provides a comparative overview of centralised purchasing bodies operating mostly at the national level administration of EU Member States, and offers an insight into some of the main relevant issues, including: the way they are organised, how they are financed, the fields in which they operate etc. The best practice examples covered in the Annex serve to demonstrate that there is no single best model or a one fit for all solution for a centralised purchasing system. These systems can be organised and managed in several different ways, each with its advantages and disadvantages which need to be taken in consideration. One of the main findings illustrated in this Report is that there is a general lack of strategic coordination for the establishment of a CPB in Ukraine. While the Action Plan under the draft Public Procurement Reform Strategy/Road-Map foresees a gradual development of centralised procurement until 2020, no concrete strategy on how the requirements will be met has been drafted so far and no study has been conducted as to the possible effects of centralisation at different administrative levels. A strategic approach in this respect is absolutely necessary to give coherence and to be able to better coordinate the envisaged action. Recommendations focus accordingly on four main levels of action which need to be considered in order to successfully implement this complex project: the political, the strategic, the operational and the legal levels. There is no doubt that a centralised purchasing body is an appropriate solution for tackling many of the problems confronting the Ukrainian public procurement system. There are enough good practice examples in Europe to support this and academic studies also demonstrate the positive effects centralisation can have. The challenge is to correctly implement the system and to find the right balance between a centralised and a decentralised structure. 6

7 1. INTRODUCTION 1.1. The Project The EU funded Project HARMONISATION OF PUBLIC PROCUREMENT SYSTEM IN UKRAINE WITH EU STANDARDS commenced work in Kiev on 11 November The Project is being implemented by a Consortium led by CROWN AGENTS Ltd and will operate until November The Project is working to contribute to the development of a solid and consistent public finance management through the establishment of a comprehensive and transparent regulatory framework for public procurement, an efficient public procurement institutional infrastructure, the accountability and integrity of public authorities in regard to public procurement and the development of the Ukrainian state aid system. The main beneficiaries of the Project are the Ministry of Economic Development and Trade (MEDT) and the Anti-Monopoly Committee of Ukraine (AMCU). At the same time, the scope of work of the Project anticipates collaboration with a wider range of stakeholders including the Cabinet of Ministers, the Parliament (Verkhovna Rada), the Ministry of Finance, the Ministry of Justice, the Accounting Chamber, the State Financial Inspection and other organisations involved and with an interest in the public procurement and state aid sectors. It can be noted that in 2014 the Project completed a Report on draft amendments to the existing legislation on framework agreements and supporting documents for framework agreements3 and has more recently prepared detailed proposals for a Comprehensive Public Procurement Reform Strategy for the period 2015 to 2023 in the context of the public procurement approximation Road Map required by the EU-Ukraine Association Agreement. This envisages, inter alia, the piloting of initiatives concerning CPBs, the detailed development of e-procurement, the expanded use of framework agreements and significant moves to achieve professionalisation in public procurement in Ukraine The Assignment The assignment was intended to contribute to Sub-Component 3.4 of the Project s approved Work Programme by assisting the MEDT in the introduction and promotion of centralised procurement body(ies) as well as in the formulation of practical recommendation as to the required legal and organisational actions to be undertaken. The main objective of the assignment was to assist the members of the Project Team dealing with public procurement by providing a Report on policy recommendations concerning the establishment of centralised public procurement bodies in Ukraine. In that regard, the tasks were focused on: 1. Assessment of current primary and secondary legislation that may have influence on the establishment of centralised procurement bodies in Ukraine. 3 The Report is available at the Project web-site : 7

8 2. An analytical comparison of existing CPB solutions in EU Member States and the elaboration of recommendations as to which elements of existing (legal, institutional, organisational, usage of e-procurement tools, staff managements etc.) solutions in these cases are relevant to Ukraine and the measures that would need to be undertaken to implement these recommendations. As part of this task the possible functional structure and draft legislation regulating the functioning of a CPB (competence, rights and obligations, subordination etc.) must be included as an annex to the Report. 3. Discussions with Project experts to clarify the follow up action required by the recommendations (e.g. the legislation to be developed, the most suitable sectors etc.) and specific changes to the PPL and other legislation, if relevant. 4. Presentation of the Report and recommendations at a Workshop for discussion by relevant stakeholders and the adjustment of the recommendations in the light of these discussions. 8

9 2. MAIN FINDINGS 2.1 Current level of centralisation The present level of decentralisation in the Ukrainian public procurement system gives rise to quite inefficient procurement of widely used and similar goods and services which are available on the market (e.g. IT hardware and software, office equipment, fuel, cleaning services, etc.) and which are purchased on an individual basis by numerous contracting entities including central and municipal authorities, different departments of the same municipality and neighbouring municipalities. This situation is inefficient and ineffective for several reasons: it reduces the possibilities for efficiencies arising from economies of scale in public purchasing, it is not timely efficient, it is not effective from the point of view of the high number of involved staff and it is more likely to encourage corruption. Due to the high number of tenders, the risk of review procedures is also considerably high and involves too much staff within the contracting authorities. Another problematic aspect of numerous tender procedures is related to the efforts which need to be undertaken by control bodies for reviewing these procedures. At present, some centralised purchasing takes place in the field of railways (State enterprise Ukrzaliznuchpostach ) and health. This level of centralisation seems to be insufficient as public finance constraints demand the achievement of greater efficiencies and better prices Main Stakeholders and their role The institutional framework in the field of public procurement plays an important role in the transition from a decentralised to a centralised system. The current institutional framework for public procurement in Ukraine seems to be highly dispersed and complex. The range of organisations and the number of persons involved in the public procurement system poses particular challenges when thinking about their possible role in the process of centralisation and after a CPB has been established. The main stakeholders are: The Ministry of Economic Development and Trade is the State regulator in the public procurement sphere and also performs consultative and monitoring activities together with the representation of Ukraine in international relations concerning public procurement. The Ministry has a Department of Public Procurement Regulation responsible for various aspects of public procurement regulation. The MEDT would be the main regulator in respect to the new provisions on centralisation (primary and secondary legislation). The Public Procurement Web-Portal - ( publishes free of charge all formally required contract notices, tender documentations, procedural protocols and reports on public procurement procedures by all contracting authorities. The PPL requires the disclosure of a wide scope of tender information and the MEDT, as the sector regulator, has established particular formats for the official tender documents. Contracting authorities must use this portal to publish their procurement 9

10 plans and tender information and can also use their own websites for publications, at their own discretion. The web portal is managed by a State-owned enterprise and regulated by administrative procedures established by the MEDT. The web portal would play a very important role in the relationship with the CPB, as it can endorse all e-procurement related activities a CPB would have. The Cabinet of Ministers is the highest body of State executive power in Ukraine. This body is the driver of the political will and thus plays a crucial role in most of the decisions concerning centralisation (level of centralisation, mandatory use of CPB, financing model, etc.). Oversight of Public procurement procedures is the responsibility of several public authorities, such as the State Financial Inspectorate, the Treasury Service, the Accounting Chamber, the Anti-Monopoly Committee and law enforcement authorities dealing with administrative and criminal violations, according to their competences provided for in the legislation governing these organisations. The State Financial Inspection controls contracting authorities through planned and ad-hoc audits of compliance with the rules for the disbursement of budgetary funds and the regulations for the use of state-owned and municipal assets. The State Treasury performs operational control over payments to be made under public contracts resulting from public procurement procedures. In particular, it monitors the compliance of contractual terms with published tender documents, with relevant tender decisions, the availability of actual budget allocations and necessary authorisations. The Accounting Chamber is a body of parliamentary control over the execution of the State budget, the efficiency of public institutions in the implementation of budgetary programmes and the effectiveness of public procurement as a component of public finance management. The Anti-Monopoly Committee of Ukraine has a very important function of complaints review in the context of public procurement procedures and a special function to combat bid collusions. From the institutional development and organisational point of view, it can be said that the current decentralised system is dealing with the challenge of having a multitude of contracting authorities (over 15,000) both at national and local level which have to organise their own tender procedures through their own capacities. In order to conduct a procurement procedure, each contracting authority must set up a Tender Committee consisting of at least 5 public servants. These people are not specialised procurement officers and carry out procurement tasks on a part-time basis; while also being personally responsible for decisions they take on behalf of their institutions. In this respect it can be concluded that the system is lacking in well trained public procurement professionals and further actions need to be taken in this respect The Strategy on Public Procurement Reform From a general, strategic point of view, the draft Public Procurement Reform Strategy, incorporating the EU-Ukraine Association Agreement Road Map 4 offers some broad guidelines on steps towards centralisation. 4 This was prepared by the MEDT and submitted to the Cabinet of Ministers for adoption at the time of preparation of this Report. 10

11 It foresees several measures to be implemented gradually until 2020: Setting up (creation of a concept) of a centralised procurement organisation(s) to implement a pilot project introducing the mechanism of centralised procurement and legal regulation of centralised procurements (Directive 2014/14/EU, Articles 37 38) - to be implemented until 2016; Organisation of centralised procurement in compliance with international best practices as regards structure, financing, functions and activities in procurement process - to be implemented until 2018; Introduction of compulsory procurement via centralised purchasing organisations (under framework agreements and based on e-platforms) - to be implemented until Even though the Action Plan defines these milestones, a general Strategy on concrete steps to be undertaken is still missing and it is not yet clear which institution will have the lead in the implementation of this complex project Drivers for centralisation The main reason for implementing a CPB seems to be of economic nature (savings to the budget) but also the reduction of corruption and the professionalisation of staff are important expected results. So far, there is no concrete evidence on the effects which centralisation is expected to have in Ukraine. The motivation for the introduction of a centralised system mainly relies on theoretical assumptions and best practice examples from other European countries. According to the MEDT, data on the total purchasing volumes at central level administration and on purchasing volumes in the different fields of procurement is available on the web portal. Data can be easily extracted from there and offers enough information in order to conduct a sound analysis of the potential for savings through centralisation. The MEDT has agreed to carry out this analysis. Level of centralisation and form of the CPB Even though there is a general understanding that a CPB will be established at the level of national administration, there is no official decision on the area in which the CPB should operate. No study has been conducted as to the benefits of centralisation at different administrative levels and no analysis of potential effects has been done so far. It seems that there is a strong preference for the idea of starting centralisation through piloting a CPB in order to experience the possibilities and challenges this system brings. However, preliminary questions on the best organisational and financial form, the products and services to be covered by the CPB, etc. have not yet been analysed, or at least not yet clearly formulated. E-procurement The introduction of e-procurement tools is one of the main priorities of the MEDT at present, but this is not yet seen in connection with the creation of a CPB even though there is evidence at EU level that centralised procurement is a strong and very popular enabler for electronic tools. E-procurement is often understood as being synonymous with e-auctions which is seen as the main tool for combating irregularities in the procurement process. It seems that the complexity of e-procurement 11

12 tools is not well understood by some key stakeholders or that there is a linguistic issue which needs to be clarified. Political involvement The political will to establish a CPB is not yet clear. Generally it can be said that individual personnel of the MEDT are convinced about the need to establish a CPB; but political leadership in this respect is still an open question which needs to be clarified. Even if the MEDT has a certain responsibility in the introduction of a centralised purchasing system (mainly to draft legislation), it is not yet clear who will have the overall responsibility to coordinate the project Legal provisions For the time being, there is no provision concerning centralised purchasing activities or centralised purchasing bodies in the Ukrainian Law on Public Procurement (PPL). The latest amendments of the PPL which were adopted in September 2015 do not include any provisions concerning centralisation. In the draft Public Procurement Reform Strategy, incorporating the EU-Ukraine Association Agreement Road Map there are several requirements concerning the establishment of a CPB in Ukraine. The Strategy addresses a range of legal and policy issues in the public procurement system focusing especially on the approximation of legislation with the EU Directives and related measures to ensure credible and effective implementation. The establishment of a CPB is seen as strategic solution and a main task defined in the Strategy relates to the amendment of the PPL as to certain provisions concerning centralised purchasing body (CPB) which should be compliant with the provisions of the EU Directive. The Strategy also foresees the creation of a pilot CPB followed by additional initiatives. The MEDT is currently preparing a new Draft Law on Public Procurement which may be effective from 1 January This draft only deals with the definition of a CPB and does not include the safe harbour provision 5. During the workshop on presenting recommendations for the establishment of centralised procurement bodies in Ukraine, held in Kiev on 17 September 2015, the representative of the Parliamentary Committee on Economic Policy mentioned the existence of an expert working group dealing with the drafting of amendments to the PPL concerning CPBs. So far, these amendments have not been made public. It seems that currently, both the Parliament and the MEDT are working on amendments to the PPL without coordinating their work Procurement in the Health sector Even though it was not a specific task of the mission, the procurement practices in the health sector deserve special attention. This sector is in general well suited for centralised procurement and in many EU Member States there are special CPBs in place dealing with the purchasing of goods and services in the field of health. In Ukraine, within the Ministry of Health, a certain level of centralisation already exists and it appears that there were some preliminary considerations to create a CPB at this level. 5 Detailed recommendations on amending the PPL are set out in Chapter 3. 12

13 Some recent legislative developments show that procurement in health (procurement of drugs, medical devices and related services) is exempted from the application of the PPL and procurement that processes are to be conducted through so-called specialised procurement institutions which the PPL refers to as: specialised funds, organisations and mechanisms of the United Nations, the International Association providing medicines (International Dispensary Association), Royal British Agency (Crown Agents), Global Mechanism of the medical supply (Global Drug Facility), Partnerships in supply and supply management (Partnership for Supply Chain Management). The procurement of these goods and services is to be conducted according to internal rules and procedures of these organisations. This new provision of the PPL raises a question as to the future role the Ministry of Health in a centralised purchasing system, if its purchasing power were to continue to be outsourced to the specialised procurement institutions. 13

14 3. RECOMMENDATIONS and NEXT STEPS 3.1. RECOMMENDATIONS General recommendations After the elaboration of a national strategy and action plan for the establishment of a CPB, it is important to take a step-by-step approach with realistic objectives and concrete plans. Some major steps need to be defined. The most important and initial step is the setting of the goal. This goal should be the main reason why the CPB was created and it normally is set to meet political expectations (e.g. savings to the budget or reducing corruption, etc.). The reason behind the establishment of such institution is already a clear indicator towards the design of the CPB s structure and of its mission. Another important step is to define the level of centralisation and the mandatory and voluntary users, meaning the contracting authorities which will have to use the services offered by the CPB. As CPBs can operate under different mandates and at different levels, the State may have several CPBs functioning in parallel, each one having different functionalities. The business and financing model is also one of the core decisions which need to be taken in order to make the CPB operational. Benefits and disadvantages of each model need to be carefully analysed. The different models existing at EU level are presented in the document Centralised procurement in the EU at Annex 1 to this Report. The range of products the CPB is offering is also a main element to be defined when setting up a CPB. Usually the CPB covers the procurement of goods and services which were identified as the most suitable for aggregation and standardisation. At the beginning, a CPB may be entrusted with the procurement of very few items and, after a period of time, when positive results are achieved, the portfolio can be increased. The use of e-procurement tools is another important step which needs to be carefully analysed. The most important question in this respect is not if e-procurement tools should be put in place (the obligation in connection with CPBs derives from the new Directive and benefits are well known) but which tools can be implemented (pre-award, post-award) and if they should be out-sourced or operated within the CPB. In order to guarantee a smooth implementation of the project, it is of the utmost importance that all relevant stakeholders are informed and updated on the progress achieved. The relationship with the newly established CPB should be based on mutual trust. Several studies as well as practical experience in the field show that centralised procurement can have positive but also negative impacts; therefore, it is important to deeply analyse these factors. When looking at the positive aspects of centralisation, one of the first and most powerful arguments 14

15 relates to the achievement of savings in terms of better prices and lower transaction costs. As a result of the use of central purchasing techniques, savings of up to 20% have been reported from different EU Member States. By bundling the purchases of widely-used goods and services in large contracts, usually a substantial quantity of discounts is generated which directly leads to reduced acquisition costs for the public sector and which also affects overall public expenditure in a positive way. It can be said that, through large purchasing volumes, CPBs have greater bargaining power than individual Contracting authorities. This power is very important in order to respond to oligopolistic markets. Contracts that are awarded using market aggregation techniques also show a higher participation rate of economic operators - and implicitly a higher degree of competition. A recent study on TED data shows that the number of bidders in a tender of a CPB is twice as high as in a decentralised scenario (12 bidders per tender in 2012 for CPBs, 10 for framework agreements against 5.4 for a typical Contracting authority). Demand aggregation streamlines the public procurement process, and reduces transaction costs: it is estimated that the cost for a CPB to run a tender is about one fifth of that of an individual Contracting authority due to reduced input in terms of staff. Staff training costs are also lower. Centralisation can also allow rationalising purchases, allowing standardisation of products and reducing costs by avoiding the purchase of non-interoperable and non-communicating goods or services. Another important element is the professionalisation of public procurement through centralisation. CPBs are considered to be strong enablers of professionalisation in public procurement especially because they have specialised staff with deep knowledge of legal and procedural aspects, of specific markets as well as of the needs of contracting authorities. When purchasing through a CPB, contracting authorities can concentrate on their main business and don t have to deal with the procurement process. Highly specialised staff is one of the main values of a CPB as they directly contribute to higher legal and contractual certainty as well as to an improved service offered to the contracting authorities. In its brainstorming paper on EU policy on aggregation, the European Commission also mentions the fact that: CPBs detailed knowledge of the rules allows them to take a more managerial or strategic approach to public procurement, moving away from a compliance focus Through specialisation and a managerial approach, CPBs try to close the gap between the private and public sector, taking a quasi-commercial approach towards public procurement. Especially when we are talking about very complex procurement procedures where contracting authorities are lacking experience or technical knowledge, the know-how of a CPB can be of the utmost importance. When acting on behalf of a contracting authority, a CPB can also provide consulting services; for example in the case where the demand of a certain customer cannot be aggregated, and a special procurement procedure is necessary. Besides their advisory role, CPBs can also offer training to other contracting authorities or even to economic operators which are interested to place a bid and need to understand legal and procedural aspects. Centralisation also leads to a higher legal and contractual certainty, reducing the risks of legal challenges. Another important positive element of centralisation is the collection of market intelligence within a CPB. In most cases, this contributes to the creation of an information management system that allows an easy analysis of public procurement specific data used for reporting or audit. 15

16 E-procurement is well suited in supporting centralised purchasing practices and tools because of the possibility it offers to re-use and automatically process data and to minimise information and transaction costs. In addition, economic operators would use one system/platform instead of many potentially different ones. Due to easier control by enforcement authorities (compared to the monitoring thousands of small contracting authorities located across the territory of an entire country), centralised procurement has an important role in reducing corruption. Aggregation of demands can, on the other hand raise some concerns. One of the key arguments against centralisation concerns the rather low chances of SMEs to participate in a procedure due to the large volume. The impact on the structure of supply markets, especially in terms of longer-term dynamics of reduced competition and lock-in of suppliers is also an essential element to be considered when thinking about the effects of centralisation. It has been demonstrated that CPBs' contracts often have a strong influence in setting the market price. In some EU Member States like Austria, contracting authorities have to meet-and-beat the CPB quality ratio. Even though standardisation of goods and services goes hand in hand with bundling the demand, it sometimes hinders any necessary tailoring of public procurement to some specific needs of a contracting authority. Considering the findings of the mission as well as the best practice examples of other European countries, measures on strategic, political, legal and operational level need to be defined in order to be able to successfully establish a CPB. Recommendations on strategic measures While the Action Plan of the draft Public Procurement Reform Strategy/Road-Map foresees a gradual development of centralised procurement until 2020, no concrete strategy on how the requirements will be met has been drafted so far. A strategic line in this respect is absolutely necessary to give coherence to the new approach and to be able to better coordinate each envisaged action. An overall strategy would be very useful in order to draw a clear way from start to destination and avoid straying off the path through spontaneous changes of personnel, legislation or other factors. This strategy should take the form of a paper (e.g. National Strategy on Centralised Procurement) drafted by the main stakeholders and should be agreed upon by all relevant institutions: Cabinet of Ministers, Parliament, MEDT, etc. This paper should clearly state the reason why the Government decided to set up a CPB and which goals it aims to achieve through centralisation and should include a series of concrete measures which are designated to enforce the provisions of the Action Plan. It should also contain a clear distribution of responsibilities of relevant stakeholders and indicate the level on which centralisation is expected to take place. 16

17 As the process of centralisation can take some time and involve different difficult decision making phases, it is important not to lose the focus on the set targets. Therefore, it is extremely useful to be able to rely on clear statistical data which can demonstrate the reason behind the process. Accordingly, it is strongly recommended to conduct a feasibility study including an analysis of saving potentials, purchasing volumes and benchmarking in order to find out which areas of purchasing are better suited for aggregation of demand and which advantages it can bring. Of course, this study should be carried out at the level at which the CPB is intended to operate (e.g. at national level administration). If the data available on the Web Portal turns out not to be sufficient for obtaining reliable results, it is advisable to conduct an in-depth analysis of procurement behaviour at the level of each contracting authority involved. At least the following aspects should be assessed: areas of procurement, yearly procurement volume, main distributors per category group, procurement procedures used, number of review procedures/year, throughput time, number of staff involved in the procedures. This assessment is also very important for a later benchmarking between procedures conducted through a centralised versus procedures under a decentralised system. An important issue to be considered is the fact that the introduction of a CPB can have a considerable impact both on the supplier market as well as on the side of contracting authorities. The study also needs to reflect the possible impacts on the stakeholders and suggest solutions to overcome the identified problems. This study should first lead to the development of a target concept for a CPB, including the definition of processes, resources needed, organisational aspects, evaluation of the impact on stakeholders, the concept of purchase control etc. and subsequently to concrete implementation measures. Experience from other European CPBs shows that, while each has its own expectations, assumptions or strategies, it is of the utmost importance to conduct such a study as the results obtained provide the basis for clear indicators for the mission of the CPB, the areas in which aggregation brings the highest potential, the best financial model to be considered as well as the structure of the organisation. Conducting such a study may involve different experts from the main contracting authorities and absolutely needs strong political will - as otherwise it might be difficult to access all required data without the participation of all involved stakeholders. 17

18 It can also be said that the smoothest transition from a decentralised to a centralised system is through a phased process instead of a big bang. This process may take up to two years, depending on the already available structures and an absolute prerequisite is a constant and strong political will in order to ensure the cooperation of all relevant stakeholders. Recommendations on legal adjustments Generally it can be said that it is important not to overload the PPL with too many provisions on centralisation. As in the legislation of most EU Member States, it is enough to provide for the definition of a CPB and of central procurement activities as well as for the possibility of procuring through a CPB (the safe harbour clause ). In a separate legal act (e.g. secondary legislation like the Government Act) special provisions for the establishment and functioning of a CPB can be included. Several considerations on legal aspects can be found in the Annex. There is a general perception that legal aspects constitute the most important pillar in the setting up of a CPB. The legal framework is indeed a very important element; but at least as important are economic considerations because, in the end, procurement does not only mean applying rules, but also thinking economically. At present, the MEDT is preparing a Draft Law amending the PPL (primarily concerning e-procurement) which may come into effect from 1 January In this draft, a definition of a CPB was included. The Law does not provide for the safe harbour clause and no further definition on centralised purchasing activities are included. The proposal of the MEDT reads as follows: 18

19 Centralised purchasing bodies are legal entities authorized (decided) by Council of Ministers of Ukraine, Council of Ministers of Crimean Autonomous Republic and municipalities as procuring entities responsible for organisation and conduction of procurement procedures and procurements within framework agreements on behalf of procuring entities according to this law. Peculiarities of establishment and activity of centralised purchasing bodies are set by Council of Ministers of Ukraine. Specific features of procurements within framework agreements organised by centralised purchasing bodies are set by Council of Ministers of Ukraine." 6 It is advisable, that provisions concerning CPBs should be included in the new PPL. In particular, the PPL should provide for a definition of Centralised Procurement Body and of central procurement activities and for the possibility of procuring through a CPB. A. Definition of CPB and of central procurement activities: CPBs have, in any case to be defined as contracting authorities. All rights and obligations of a contracting authority automatically also apply to a CPB. In addition, CPBs are able to act as wholesalers by buying, stocking and reselling. Secondly, they should be able to act as intermediaries by awarding contracts, operating dynamic purchasing systems or concluding framework agreements to be used by contracting authorities. Such an intermediary role might in some cases be carried out by conducting the relevant award procedures autonomously, without detailed instructions from the contracting authorities concerned; in other cases, by conducting the relevant award procedures under the instructions of the contracting authorities concerned, on their behalf and for their account. It is up to the legislator to define not only centralised purchasing activities but also ancillary purchasing activities the CPB could provide. This depends on the powers the legislator would like to give to CPBs. Proposed PPL text Central purchasing body means a contracting authority providing centralised purchasing activities and, possibly, ancillary purchasing activities; centralised purchasing activities means activities conducted on a permanent basis, in one of the following forms: (a) the acquisition of supplies and/or services intended for contracting authorities, (b) the award of public contracts or the conclusion of framework agreements for works, supplies or services intended for contracting authorities; ancillary purchasing activities means activities consisting in the provision of support to purchasing activities, in particular in the following forms: (a) technical infrastructure enabling contracting authorities to award public contracts or to conclude framework agreements for works, supplies or services; (n.b. this can be for example 6 Point 33 of Article 1 (definitions) of the Draft Law On Public Procurement (the so-called e-procurement reform). 19

20 an e-procurement solution the CPB is offering to its clients) (b) advice on the conduct or design of public procurement procedures; (n.b. this can be consultancy services outside the usual activity of the CPB) (c) preparation and management of procurement procedures on behalf and for the account of the contracting authority concerned. B. The possibility of procuring through a CPB ( safe harbour clause) The State can provide for the possibility that contracting authorities can use the services of a CPB which can act as wholesaler or also on behalf of the contracting authority. The CPB can act in both ways. There is no provision which limits the action of a CPB to one of the two possibilities. Proposed PPL text and Comments 1. Contracting authorities may acquire supplies and/or services from a central purchasing body offering centralised purchasing activity in the form of acquisition of supplies and/or services. Contracting authorities may acquire works, supplies and services by using contracts awarded by a central purchasing body, by using dynamic purchasing systems operated by a central purchasing body or, by using a framework agreement concluded by a central purchasing body. 1. Where a dynamic purchasing system which is operated by a central purchasing body may be used by other contracting authorities, this shall be mentioned in the call for competition setting up that dynamic purchasing system. Comment: this is a provision which makes sense in case dynamic purchasing systems are foreseen in the PPL. 2. Certain procurements are to be made by having recourse to central purchasing bodies or to one or more specific central purchasing bodies. Comment: this can be taken into consideration in case the legislator provides for the possibility of establishing several CPBs. 4. A contracting authority fulfills its obligations pursuant to the PPL when it acquires supplies or services from a central purchasing body offering a centralised purchasing activity in the form of acquisition of supplies and/or services A contracting authority also fulfills its obligations pursuant to the PPL where it acquires works, supplies or services by using contracts awarded by the central purchasing body, by using dynamic purchasing systems operated by the central purchasing body or, by using a framework agreement concluded by the central purchasing body 6. However, the contracting authority concerned shall be responsible for fulfilling the obligations pursuant to the PPL in respect of the parts it conducts itself, such as: (a) awarding a contract under a dynamic purchasing system, which is operated by a central purchasing 20

21 body; (b) conducting a reopening of competition under a framework agreement that has been concluded by a central purchasing body; (c) determining which of the economic operators, party to the framework agreement, shall perform a given task under a framework agreement that has been concluded by a central purchasing body. Comment: Where the central purchasing body has sole responsibility for the conduct of the procurement procedures, it should also be solely and directly responsible for the legality of the procedures. Where a contracting authority conducts certain parts of the procedure, for instance the re-opening of competition under a framework agreement or the award of individual contracts based on a dynamic purchasing system, it should continue to be responsible for the stages it conducts. 7. All procurement procedures conducted by a central purchasing body shall be performed using electronic means of communication. Comment: This is an option which can be taken into consideration when there is enough infrastructure in place for conducting a full electronic procedure. The requirements on electronic communication need to be defined in a separate article. To what degree electronic procurement can be made mandatory to be used by a CPB should be the subject of additional analysis. Electronic means of communication are particularly well suited to supporting centralised purchasing practices and tools because of the possibilities they offer to re-use and automatically process data and to minimise information and transaction costs. 8. Contracting authorities may, without applying the procedures provided for in the PPL, award a public service contract for the provision of centralised purchasing activities to a central purchasing body. Such public service contracts may also include the provision of ancillary purchasing activities. Recommendations on organisational and operational aspects of a CPB As mentioned above, provisions concerning the establishing and functioning of a specific CPB, should be subject to a special legal act, for example a Government Act. This piece of secondary legislation should provide at least for the following: 1. Establishment of the CPB: it should be specified who is the owner of the CPB and, if relevant, in which proportion. The name of the institution and the official address should also be clearly stated. Another important information to be mentioned is the legal basis on which the institution has been established and which other laws apply to the functioning of the organisation (e.g. legislation on limited companies or administrative law?). This indicates the character of the body and is also an indicator of the activities the CPB is allowed to carry out. 2. The object of the CPB: A provision on the main tasks and main objectives (e.g. public procurement of goods and services with the objective of bundling requirements in order to obtain better prices and to reduce public spending: optimisation of the purchasing conditions of contracting authorities) needs to be included. The definition of the fields in which the CPB is required to be active can be included under this point. This can be defined in the legal act establishing the CPB or, if it is foreseeable that additional fields of activity will be added, the purchasing areas can be defined in a separate legal act that is easier to amend. Definition of tasks as: the collection of demand, the conduct of a procurement process on behalf and on the account of the contracting authorities which 21

22 are allowed to use the services of the CPB should be also added. In addition, provisions on consultancy services for these contracting authorities, the development of a marketing strategy and of a controlling tool, the development of standards together with the contracting authorities can also be defined. As an extra point, a definition of an obligation for the CPB to implement special measures for protecting SMEs (SME strategy on for example obligation to split in lots in certain fields) can be included. 3. Application of the law Here, two definitions would be useful to include: Definition of cases in which this law does not apply (e.g. in the field of procurement of defence or health or in the cases of procurement for special security services needed by the government; to embassies or other such institutions); Definition of who the law is addressing (e.g. the central level administration on a mandatory basis and other contracting authorities on voluntary basis). 4. Obligation to use the CPB The obligation of certain (defined) contracting authorities to use the (defined) services of the CPB as well as possible exceptions to the obligation can be defined under this point (e.g. in case of urgent procurement) but the exceptions should not be the rule and should be communicated to the CPB in a defined period of time. 5. Financing of the CPB A clear provision of how the CPB is financed should be drafted (e.g. from the State budget, for which activities). If the CPB is also acting for non-mandatory contracting authorities and if it is charging them for the services provided, a provision concerning this right should be drafted here. The relations between CPB and non-mandatory customers including the range of charges should not be included here but should be the subject of separate contractual provisions. Financing directly from the State budget is, in the beginning, probably the most suitable and less complicated solution but, in the long run, fees could be gradually introduced for suppliers and/or non-mandatory customers. 6. Representatives of the CPB For reasons of transparency (four eyes principle) it can be provided that two directors or heads of the institution represent the organisation. The following questions should also be addressed under this point: who nominates the director(s)? On which basis? For how long? It is recommended to have an open competition between all interested candidates (civil servants and non-civil servants) as one of the main advantages of a CPB, if organised as an independent body, is access to personnel coming from the private sector. The selection of the best candidate(s) has to be based on an open procedure and on defined, objective criteria. The term of office should not be for more than 5 years (with a possibility to be renewed). It should be assessed if there is a special law that may be applicable when occupying a leading function (e.g. law on civil servants). Hiring of other personnel should be possible by co-opting civil servants and/or hiring people as employees (according to the specific law of employees). 22

23 7. Supervision of the CPB Depending on its legal nature, the CPB can have a board of directors in place. It should be specified that the owner (e.g. the Ministry of Finance through its Minister) has a supervision function of the CPB taking into account the rights of the board of the directors. The relation between Minister and board of directors and Minister and director (s) of the CPB should also be defined (e.g. the obligation of the director(s) to inform the Minister about specific situations). In Ukraine, the Accounting Chamber (exercising control on an annual basis) could have a supervision/control role in respect to the CPB and could act in two ways: controlling if the procedures conducted by the CPB were compliant with the PPL and assessing the efficiency of the CPB. The Accounting Chamber can submit recommendations which need to be taken into consideration/implemented by the CPB. 8. Board of Directors If applicable: a clear definition of the way the board of directors will act. How many members are appointed and by whom? Are they paid for the activities they are caring out? (is there a special law regulating their activity?); to whom do the members report? Here it is important to note that normally the board of directors of CPBs is made up of persons representing the public and private sector. 9. Customer representation in the CPB It is useful to establish a so called board of customers made up of one representative per (mandatory) contracting authority which uses the services of the CPB. This board can meet up to 4 times per year, the board of directors and the director(s) of the CPB should also be invited. The main reason for having this board is the constant mutual information and updating of the activities of the CPB and contracting authorities. In this way, the CPB is able to react to the needs and suggestions of contracting authorities. The rules on the functioning of the board of customers can be a matter to be approved by the board of directors. The director(s) of the CPB should be required to inform the board of customers on the yearly planning of the CPB. 10. Guidelines on the management of the CPB Some main principles for managing the CPB need to be defined. If the CPB is a State-owned company, commercial principles would apply. It can also be stated that the director(s) of the CPB have, within a defined period of time, to draft a management concept that needs to be approved by the management board. This concept should include at least the following provisions: the targets of the CPB, the strategies, the organisation of the departments, planning for personnel and use of material resources as well as a financing plan. An internal audit system should also be put in place. The director(s) should be required to present annually a programme and budget plan for the next year. The yearly budget should be drafted according to the principals of economy, cost effectiveness and potential of rationalisation and normally would include the plans for personnel and material resources. The yearly financial statement (if applicable under the specific Ukrainian law) would need to be submitted to the owner for approval. Other provisions such as those on internal processes and the functioning of the CPB can be regulated in internal guidelines. These guidelines can, for example, include information on the following: 1. Organisation chart 2. Responsabilities within the institution 23

24 3. Signature requirements 4. Most important strategic principles (mission, vision, values) 5. strategy on targeted clients 6. Markets assessments 7. Communication strategy 8. SME Strategy, personnel strategy, legal strategy, finance and controlling strategy 9. The culture of the institution 10. Bodies of the institution 11. Control systems 12. Risk management 13. Anti-corruption measures (strategy) Concluding recommendation In order to deal with the identified challenges, it is highly recommended to move to a centralised purchasing system. A CPB which deals with clearly defined standard goods and services should be implemented. This CPB could function at the national level administration and could take the form of a State Enterprise under the auspices of one of the relevant Ministries. Nonetheless, taking into consideration the regulatory function that the MEDT is performing, it is not advisable to establish a CPB under this Ministry. For the proper functioning of the CPB, it is extremely important that it is granted a separate and distinctive role from that of the public procurement policy maker and regulator. In order to obtain the expected benefits of centralisation, for certain contracting authorities it should be compulsory to use the centralised system. 3.2 NEXT STEPS The following next steps are strongly recommended in order to ensure a sound and well-structured transition from a decentralised to a centralised purchasing system and for the establishment of a CPB: 1. Drafting of a Strategy on Centralised Procurement which clearly states the reason why the Government decided to set up a CPB and which goals it aims to achieve through centralisation. It should include a clear distribution of responsibilities of relevant stakeholders and indicate the level on which centralisation is expected to take place. This Strategy should be in addition to the more general Public Procurement Reform Strategy (Road-Map) and should only address the issue of centralisation. This document should represent a clear commitment by the Government towards cooperative procurement. 2. Conducting a feasibility study including an analysis of saving potentials, purchasing volume and benchmarking. Based on this study, the development of a concept for the establishment of a CPB is needed. This concept should include: the definition of processes, resources needed, organisational aspects, evaluation of the impact on stakeholders, the concept of purchasing 24

25 control; operationalisation of the new organisation, provisions on change management. 3. Legislative changes - The introduction of the definition of a Centralised Procurement Body, centralised purchasing activities and a safe harbour clause in the Law on Public Procurement. 4. Specific CPB secondary legislation - Drafting of secondary legislation dealing with the establishment and functioning of a specific CPB. 25

26 ANNEXES 26

27 ANNEX 1: CENTRALISED PROCUREMENT IN THE EU 1. Introduction Centralised procurement practices are increasingly used in EU Member States as they have proved to be very efficient not only in reducing costs, legal risks and corruption but also in increasing effectiveness, efficiency, the level of professionalisation of staff and the use of e-procurement. This paper will analyse different centralised procurement systems in the EU and will focus on CPB models, on the way they are organised, their decision making structures, their main tasks and their financing model. This analysis will provide a comparative view on existing models and aims to offer a better understanding of the variety of possibilities one can take into consideration when thinking about establishing a CPB. CPBs can operate at different levels of administration: at national, regional or local level and Member States can have several CPBs functioning at different levels, having also different scopes. This paper will concentrate on examples of CPBs operating at national level administration as it seems that they are most relevant for the establishment of a CPB in Ukraine. When thinking about a centralised purchasing system, one of the most significant issues to be defined is the degree of centralisation. 2. CPB solutions in EU Member States The concept of centralised procurement As mentioned in the SIGMA Study on Centralised Purchasing Systems in the EU 7, centralised purchasing is not a concept or practice that is used only in the public sector. Centralisation is implemented also in the private sector where volume bundling is constantly used to reduce purchase costs and achieve savings as a result of economies of scales on the side of the supplier. Unlike the private organisations, the public ones have to design their procurement techniques by taking into consideration a considerable number of legal aspects which often can be interpreted as burdensome but which are absolutely necessary in order to guarantee a fair and transparent procurement process. 7 OECD (2011), Centralised Purchasing Systems in the European Union, SIGMA Papers, No. 47, OECD Publishing. 27

28 Centralised models in place in EU Member States EU Member States can regulate that contracting authorities may purchase works, supplies or services from or through a central purchasing body. Neither the EU Directives nor national legislation provides an obligation to establish CPBs. The foundation of such body is rather an option given to Member States. What a Member State can impose on contracting authorities, is the procurement through a certain CPB. This could be for example the situation when all contracting authorities operating at national level have to purchase from or through a certain CPB. It is important to mention that there is no standard model for the organisation of purchasing bodies in the Member States. Throughout the EU, there are several types of CPBs in place, operating at different levels of the administration and having different tasks and roles. Their form of organisation is mainly dependent on their different mandates, on the respective national legal and administrative structure of the Member States they are operating in, on the size of the Member State and on the different administrative cultures. Most of the Member States have at least one CPB in place and there is evidence that only few don t have yet such organisations in place. This is the case of Romania, Bulgaria (to be established) and Luxembourg. As CPBs can operate under different mandates and at different levels, a Member State may have several CPBs functioning in parallel, each one having different functionalities. For example in Austria, BBG purchases certain goods and services for the national level administration and another CPB, BIG is entitled to purchase in the field of construction works. In Sweden SKL Kommentus operates at the level of local and regional authorities and SIC purchases for central government authorities. The way CPBs can operate, is defined in the EU legislation. According to Directive 2014/24/EU, CPBs can act either as wholesalers (which can buy, stock and resell) or as bodies which award contracts, operate Dynamic Purchasing Systems (DPSs) or conclude framework agreements on behalf of other contracting authorities. The definition for the establishment of a CPB, its scope and mandate, its form of organisation, its financing model or legal status is left to the discretion of each EU Member State. Most of the CPBs at national level administration function as bodies awarding contracts on behalf of other contracting authorities. Very few, like for example UGAP - the French CPB, act as a wholesaler by buying products or services in order to resell them to contracting authorities. The differences between such practices will be addressed later in this paper. Most of the CPBs in the EU which are operating at national level were established by law, some have considerable experience of over 60 years (Iceland (1949), Germany (1951), France (1968)) some being rather new- between 19 and 6 years: Denmark (1994), Italy (1998), Austria (2001), Finland (2003), Portugal (2007). It is important to mention already at this stage that a CPB needs to be defined as a contracting authoritiy as in EU Directive 2014/24/EU i.e. state, regional or local authorities, bodies governed by public law or associations formed by one or more such authorities or one or more such bodies governed by public law (Article 2 (1) and (4) of the Directive). When analysing the CPB landscape in the EU, one can say that most CPBs at central level are owned or 28

29 under the auspices of the respective Ministry of Finance. In Denmark, SKI has, in addition to the other CPBs, a second owner, the Association of Local Governments and in France, UGAP has two owners, the Ministry of Finance and the Ministry of Education. Form of organisation and legal status As mentioned before, choosing the legal personality of a CPB is solely the responsibility of the respective national administration. Across the different Member States it is clear that most of the CPBs have the legal status of publicly-owned limited companies falling under private law, or independent agencies having a structure that is more similar to private companies. Nevertheless, these are not the only organisational forms a CPB may have. Some countries like Germany, Slovenia or Croatia opted for a CPB as a department within a certain Ministry which allows the owner to better control and intervene in the decision making process. It is important to mention that the objective of CPBs organised as limited companies is not to generate profit. They are non-profit institutions acting on behalf of certain contracting authorities with the objective of creating savings to the budget. Such CPBs argue that this organisational form offers the highest degree of flexibility and independency and gives the possibility to concentrate on their main target. They are not as dependent on political changes as a department within a Ministry would be and they have more flexibility in choosing already specialised personnel from the private sector, offering more competitive salaries. CPBs which are organised as limited companies normally have an Advisory Board in place which is involved in decision making concerning the strategy, the business plan the budget of the institution and some cases even the approval of investments. In the case of CPBs functioning as departments of a certain Ministry and where an advisory board is not in place, the decision on the strategy to be followed and on budgeting is normally taken by the owner together with the management. Mandatory/voluntary use of CPBs services and FAs The degree of obligation to use the services of a CPB varies very much within the EU. In some Member States, the obligation to buy certain goods or services through a CPB addresses a certain type of Contracting Authority. In Austria, Spain and Portugal, for example, institutions at central level are obliged by law to purchase through a CPB, for all other contracting authorities it is facultative. In Belgium there is a strictly voluntary use whereas in Germany, where a CPB operates at the level of the Ministry of Interior, all tenders above a certain threshold have to be conducted through this CPB. In some Member States a certain amount of Framework Agreements is obligatory, others are not. A model which is applied in Finland makes it mandatory for procuring entities to use a sub-set of the CPB s framework agreements, but allows the use of other agreements to be voluntary. From the perspective of a contracting authority, a voluntary system offers more flexibility in the decision to use or not use a framework agreement, depending on the results achieved (e.g. savings, quality of product, etc.). A CPB, operating in a voluntary or partially voluntary system is always interested in 29

30 improving its services in order to ensure best results for its customers. To a certain degree, a CPB is exposed to competition in a voluntary landscape. On the other hand, according to a paper of the European Commission 8 there is a danger that in dysfunctional environments nobody will take the CPB seriously if they are not mandatory. If not obliged to use a CPB, Contracting Authorities may find different reasons for awarding contracts based on their own strategies which don t necessarily lead to better purchasing conditions. A nonmandatory system can lead to less demand that can be bundled and thus centralisation would not achieve its goals respectively of standardisation and reduction of costs. The Sigma Study on Centralised Purchasing Systems in the European Union offers an analysis of the mandatory vs. voluntary system:- Proponents of a system whereby procuring entities should be forced, in principle, to use the CPB s services argue that this ensures a cost-efficient public sourcing and increases standardisation among authorities. It may further improve tender prices and terms and would make it easier for the CPB to estimate the expected demand. Both of these factors are likely to strengthen competition for the contracts and produce better prices and other terms. Others argue that such a requirement weakens the incentive of CPBs to be user-friendly and creates a risk of monopolistic behavior. One of the benefits of having a voluntary system, they argue, is that it provides an incentive for CPBs to offer attractive services on competitive terms. If CPBs fail to do so, there will be no demand for their services and their own existence may be at risk. They argue that the main benefit of a voluntary system is that it exposes the CPB to a form of competition, which stimulates it to offer attractive products whereby it creates the most valuefor-money. In other words, there are arguments both for and against making CPB services mandatory. However, the study does not result in a firm conclusion as to whether a voluntary or a compulsory system is best suited to generating savings and economic benefits. 9 In a mandatory system, where contracting authorities are obliged to use the services of a CPB, one of the main disadvantages for a contracting authority could be that its individual needs are not satisfied and the performance of the CPB is rather poor. Staffing and internal organisation of CPBs Although the CPBs throughout the EU have very different sizes and scopes, in their internal form of organisation, they are very similar. They are organised in departments with very specific skills and roles. In most of the CPBs there are procurement and support departments, each of them consisting of specialised staff. The procurement departments are often grouped per procurement category and people working here are highly specialised in the respective field. 8 Brainstorming on the possible development of a EU policy on aggregation, with a focus on Central Purchasing Bodies (CPBs) F64E03DC6AC8A22040D4DED

31 Typical support departments would be: the legal department, human resource, finance and administration, etc. It is interesting to mention that the proportion between the number of lawyers and procurement specialists working in the CPB is differing a lot from one Member State to another. In Austria the BBG counts 5 lawyers out of over 100 employees, whereas in other CPBs half of the employees are legal advisors. Some CPBs do have strong marketing and PR divisions. This is mostly the case in those institutions operating with voluntary customers and where framework agreements need to be advertised. These CPBs obviously allocate more resources to marketing and customer relations than those working with mandatory customers. In the case of UGAP in France, the high number of employees is explained through the fact that they are operating as wholesalers, a model which implies intensive marketing and contract management activities and thus, a correspondingly high number of staff. It can also be observed that stronger resources are assigned in IT department if e-procurement tools are used in the respective CPB. As the Sigma Study correctly states: procurement is more and more becoming a profession in its own right. In order to buy the goods and services needed by the public sector in a cost-efficient way, many different skills are required. For example, because of the highly complex public procurement regulations, good legal skills are needed. It also necessary to have a thorough knowledge of the markets from which purchases are made, which requires sector-specific skills in addition to economic and financial competences. These skills are necessary for both decentralised and centralised procurement. With regard to centralised procurement, even more skills are needed. The key competences needed in a CPB are: Experienced and business-oriented senior management; Specialised product and market skills; Professional procurement and contracting staff; Qualified legal staff; IT and systems analysts; Financing and accounting skills. In terms of number of staff in different CPBs around the EU, the following approximate data can be provided: Country CPB Number of staff France UGAP 1,000 Portugal ESPAP 287 Germany Beschaffungsamt 220 Austria BBG 105 Denmark SKI 75 Finland Hansel 68 31

32 Goods and services covered by CPBs With a few exceptions, the range of items covered by the CPBs includes the following goods and services: ICT products and services Telecommunications Furniture and office equipment and supplies Travel services Mobility Health Fuel and Energy Food and meal vouchers It can be observed that the goods and services covered by the CPBs operating at national level are of common interest and very frequently purchased throughout the public administration. These items also show a high degree of bundling and standardisation potential. In terms of purchasing volumes, generally the largest product area is ICT products. In some countries, the portfolio of the CPB, meaning the area in which it is allowed to conduct procurement procedures for or on behalf of contracting authorities is assigned by a legal act. In the case of BBG, the Austrian CPB, the product families which it covers are assigned by a decree of the Minister of Finance. During the first years after its establishment, BBG was allowed to purchase only in few areas which, after some years were increased, nowadays counting 27 obligatory and 4 optional purchasing groups. In most of the Member States the CPBs at national level administration are covering the area of goods and services, not being involved in the procurement of military goods and services or construction services. The latter two are normally covered by specialised procurement entities, in an either centralised or decentralised way. Financing models The different financing models of the CPBs in the EU can be basically grouped in three categories: 1. Financing entirely and directly through government budget (usually through a lump sum to cover costs) 2. Financing through service fees applied on contracting authorities using CPB services or on the suppliers to the CPB 3. Through a combination of government budget and fees collected from suppliers and/or customers. In this respect, CPBs differ a lot. In France, Denmark, Iceland and Portugal, the operating CPBs are financed entirely by fees which allow them a higher degree of independency from the respective owner Other CPBs like BBG are using a combination between a budget allocated by the Ministry of Finance to 32

33 cover purchases at federal level and fees applied to non-mandatory customers as well as to suppliers. The fee charged to the supplier is covering the service of using the electronic ordering shop in which the economic operator can make available his goods. The average fee, contracting authorities are paying for CPB services in the EU can be estimated at around 1.75% of the purchasing volume (fees between 0.5% and 3%). It can be said that very few CPBs in Europe are financed completely through the government budget and a certain trend towards a fee based financing method can be observed. This is of course due to the constant decrees of government budgets. The SIGMA Study offers a comprehensive analysis of the advantages and disadvantages of the different financing models for CPBs: Generally, service charges have been criticised on several accounts. First, critics argue that this arrangement enables CPBs to make profits, which is not their objective. A second line of criticism is that user charges provide CPBs with weak incentives to reduce costs; if costs increase they can just raise the fees. Third, another potential weakness from the point of view of procuring entities is having the central purchasing body s income dependent on turnover, which might not be an incentive for price optimisation. However, interestingly, funding by service charges remains the dominant financing method. Fourth, it is argued that if user charges are to be used, the procuring entities should pay the charges, not the suppliers. This point of criticism is sometimes emphasised by suppliers. Finally, as the system is practised in several countries (Sweden, Finland and Denmark), with suppliers reporting their invoiced sales under the framework agreements, there is a risk of under-reporting of the actual sales volume. Proponents of user charges argue that CPBs usually do not make large profits. They argue that user charges are set with the aim of breaking even, i.e. fees should be set so that revenues cover costs, including necessary investments. Furthermore, they argue that it is a well-functioning model that has existed and has been proven to work over a long time. Finally, and most importantly, it is argued that user charges provide CPBs with incentives to establish attractive framework agreements that are actually used. If the procuring entities did not use framework agreements to buy the goods and services they needed, the CPBs would not receive any revenues. Regarding the issue of whether user fees should be paid by procuring entities or by suppliers, it is important to understand that, from a basic economic perspective, it does not matter. The statutory incidence of a fee indicates who is legally responsible for paying the fee. Where the user charge is paid by the procuring entities, the statutory incidence is on those entities, and vice versa when the fee is paid by the suppliers. It is well known from microeconomic theory that the statutory incidence generally indicates very little about who really bears the economic burden of a fee. The economic burden is instead determined by how market prices are affected by the introduction of the fee. This is in turn affected by factors of demand and supply in the market, factors that generally differ between markets. In other words, from an economic point of view, whether the fee is paid by procuring entities or suppliers does not matter. This does not mean, however, that the issue might not be important from other aspects, such as whether the procuring entity will actually need to pay service charges that may be debited from its account. There is also another important aspect to be considered, namely, whether the service charge is seen by the procuring entity as being fair or not. Such a fee has the objective of covering the costs of the CPB for awarding and managing framework agreements, which could be seen as a reasonable argument in favour of its fairness. However, if the procuring entity needs to carry out 33

34 a complicated mini-tender procedure, which is not uncommon, it could argue that it should also receive a part of the service fee charged. An alternative funding model is when CPBs are financed directly from government funds. Proponents of this model argue that it eliminates the profit risk and provides better incentives for cost-efficiency. Those who do not like this model argue that it removes the incentive to find the most attractive product areas and framework agreements. Moreover, it runs the risk of under-investment in new technology due to a lack of funds. In summary, several financing models are practiced, each with pros and cons, and they all seem to work. 3. The functioning of a CPB - the example of BBG, the Austrian Federal Procurement Agency Until 2001, public purchasing in Austria was conducted in a decentralised way, each Ministry and subordinated authorities being directly involved in purchasing procedures in an independent way and through its own purchasing department. Through a comprehensive procurement reform in 2001, the Austrian Government decided to improve the efficiency of public procurement and reduce public expenditure. Reducing administration costs, optimising purchasing conditions and getting best value for money were the main targets of this reform project. The solution which was chosen in order to achieve these targets was the establishment of a centralised purchasing body which could guarantee better purchasing conditions through bundling of public demand and conducting joint tenders for framework contracts making them available to the whole administration. Establishing a new organisation with procurement specialists also allowed the Ministries to concentrate on their core functions. The transition process from a completely decentralised to a centralised system was organised in three main steps and lasted approximately three years, from 1999 when the idea was born to 2001 when the Federal Procurement Agency (BBG) was set in place. The first step towards the centralised system was to conduct a study among the different Ministries and subordinated entities in order to analyse the potentials for savings. After obtaining the expected results, the project team moved to the second step, the design of a centralised purchasing body which could offer an optimal solution for the set targets. In addition to these steps, a legal framework was designed and the main tasks and roles of the new body were set. The Federal Government founded Bundesbeschaffung GmbH (Federal Procurement Agency, FPA) in 2001 by the Federal Procurement Agency Act (BBG Law) to provide central procurement services to federal Ministries, in particular to negotiate framework contracts and make them available to the agencies. Its primary tasks are to bundle requirements to obtain better prices and terms from suppliers and to standardise public purchasing to reduce processing costs and legal risks. From the beginning it was clear that only e-enabled services would lead to consistent usage of the framework contracts and would also strengthen the complete audit ability of the procurement process. The e-procurement-solution hence comprises of an electronic publication and notification platform, a desktop purchasing system, a travel booking tool and a data warehouse and analysis tool where the purchase data is saved for analysis and reporting. 34

35 BBG e-procurement map The BBG is a non-profit organisation providing free services to their mandatory clients. Federal Ministries are obliged to order from these contracts - unless they are able to obtain the same product to better conditions. Other public sector organisations like universities, communities, states, state-owned organisations may take advantage of BBG's contracts and services. Delivery and payment is done directly between supplier and requesting public body. Award process in the BBG 35

36 Budget, procurement volume and savings The Ministry of Finance is obliged by law to cover the expenses of the Federal Procurement Agency up to the amount of the approved annual budget, taking in consideration also possible advanced payments from the Federal Government. Since its establishment the BBG bought products and services with an accumulated volume of 7 Billion Euro and saved a total amount of 1.4 Billion Euro. In 2014 the BBG reported procurements of 1.2 Billion Euro and savings of around 17 per cent (237 Million Euro). International activities and trainings Through its Department for International Projects, the BBG is carrying out different international projects but also supports other public entities in the implementation and management of Twinning Projects. The BBG participated in a considerable number of national and EU projects and expert groups, for which it provided extensive and high-level knowledge as well as competent project management, e.g. the PEPPOL Project ( Pan-European Public e-procurement On-Line ) which aims to facilitate and promote e- business between public entities and suppliers across Europe as well as Twinning and Technical Assistance Projects (e.g. in Ukraine, Estonia, Romania and Bulgaria, Croatia) to improve legislation and review systems in the areas of Public Procurement and Concessions. Currently the BBG is implementing and managing a large European project within the Competitiveness and Innovation Framework Programme (CIP) in the area of Public Procurement of Innovative Solutions and is participating in a LSP project called e-sens. The BBG is also a member of the Central Procurement Bodies Network, a body set up of different European Central Procurement Institutions, with the aim of intensifying the cooperation between its Members and reinforcing their common goals at EU-level. One of the BBG s additional tasks is to provide training to the participants of the procurement process. Bidders as well as representatives of contracting authorities are trained in order to assure a sound and transparent procurement environment. Within the BBG Forum the BBG offers a weekly program of trainings, consisting of seminars on procurement law, trainings for procurement officers on the purchasing process and the usage of e-procurement-tools as well as dialogues of international experts on hot spots associated with public procurement. The BBG also organises study visits for delegations consisting of procurement officials from abroad. Such seminars have been organised for delegations from Lebanon, Montenegro, Macedonia, Croatia, Serbia, Romania, Bulgaria, Slovenia, Kenya a.o. 36

37 Training To support professionalisation of procurement in the Austrian system - and among other countries, BBG has developed different training programmes carrying out extensive specialised procurement trainings and capacity building activities. BBG is actively assisting various procurement stakeholders in improving and strengthening their capacities by offering training programs for their staff. The programme offered by BBG is characterised by an inter-disciplinary content and is meant to attract public purchasers with relevant experience in procurement as well as bidders or suppliers that want to familiarise with the bidding procedure. Within the so called BBG Forum, BBG offers about 60 training events per year. It offers a constructive environment for sharing knowledge and good practice, programmes that aim to be practical and applicable as well as training at different levels, in order to match the needs of the stakeholders. On a demand driven basis, BBG offers trainings to meet specific needs of contracting authorities. Tailored skills training help organisations realise the full potential of their purchasing and supply teams. Sometimes off the shelf training is often not enough. For its Contracting Authorities, BBG can therefore tailor the content, delivery, timing and location of the procurement training to address the specific issues the procurement team is facing or to meet particular learning outcomes. For its internal staff, the BBG offers a modern training programme based on competencies. The goal of the BBG is to become the best procurement organisation in Europe, therefore, it is of the utmost importance to guarantee permanent, good structured and innovative training facilities for its staff. Procurement officers learn how they can ensure that they are equipped to explore all aspects of service delivery cost drivers in addition to understanding and interpreting supplier objectives. The Course on Public Procurement consists of two modules, basic and advanced, and is a specially developed programme for internal staff - with a duration of 3 years. It includes, on one hand, basics on buying techniques and economy and, on the other hand, it introduces the procurers into the legal issues of public procurement. The advanced module focuses on social and personal competencies as well as on expanding legal knowledge. Its aim is to train procurement specialists in presentation and negotiation methods as well as in conducting difficult conversations. Exercises on complex procurement strategies are also part of this module. e-procurement The BBG offers a variety of e-procurements solutions and also offers two distinct e-procurement platforms, namely its e-shop on which about products can be purchased and its e-reisen / e-travel platform on which business trips can be booked electronically. 37

38 Furthermore, BBG was a member of the Pan-European Public Procurement Online (PEPPOL) project 10 which aimed to improve the pre-award and post-award procurement process with standardised components. PEPPOL further aimed at enabling European businesses to easily deal electronically with any European public sector buyers in their procurement processes. Some of the benefits of electronic procurement which BBG experienced were also defined by the European Commission in its Green Paper on e-procurement. In this document 11, the Commission names the e-procurement solution of BBG as an example of savings and innovation, such as: Increased accessibility and transparency: by automating and centralising the flow of information about individual tender opportunities, e-procurement can improve the access of businesses to public procurement. Searching for opportunities on-line is much quicker and cheaper than screening individual publications. E-Procurement systems can also be configured to alert suppliers to particular opportunities and provide immediate access to tender documentation. Transparency is also improved as the procurement process is more open, well-documented and communicated. As a result the monitoring and overall efficiency of public procurement improves, opening up markets to more competition and deepening the pool of competing suppliers. Benefits for individual procedures: compared to paper based systems, electronic public procurement can help contracting authorities and economic operators to reduce administrative costs and speed up individual procurement procedures. In the current financial climate, such efficiencies could be very welcome, maximising the potential which can be obtained from constrained resources. E-Procurement systems have also proved very useful in speeding up the expenditure of public procurement budgets. Benefits in terms of more efficient procurement administration: where Central Purchasing Bodies (CPBs) exist, the use of electronic procedures can contribute to centralise costly procurement back-office functions and reap scale economies in procurement administration. The switch to e-procurement also provides a wider opportunity to rationalise and review the procurement process-moving to e-procurement does not have to mean copying in electronic form the paper based procedures which may have existed for many years. E-Procurement can 10 For further information see:

39 be integrated within the other (electronic) activities of an organisation (e.g. inventory control, contract management and audit) ensuring consistency and wider efficiency. Beside the savings by bundling and standardising needs, BBG also achieves tremendous savings in processing costs by automating procurement processes or supporting them by electronic means. Contracting authorities as well as suppliers are supported by BBG with various e-procurement solutions which are used in every tender procedure, such as the publication of tenders and tender award notices, online provision of tender documents, usage standard forms, help-desk services and other important functions. Furthermore complete electronic procedures have been implemented, which include the submission of signed tenders and receipt, storing and opening of tenders, evaluation and award, and contracting, with suitable security and authentication features, and communication. The following table shows some of the features that are provided to contracting authorities and prospects/bidders using the e-tendering platform. The awarded framework agreements and contracts are provided to BBG customers (contracting authorities) in the eordering and einvoicing platform e-shop. The post-award process from raising a purchase requisition, approval workflows, completing the purchase order to order confirmation on supplier side and the submission of an invoice is executed within the e-shop. The following chart provides an overview on the services provided by BBG s e-shop, e.g. catalogue management, interfaces to third party systems and monitoring. 39