Public Procurement. SIGMA Policy Brief No. 3: Introduction. Building a National Procurement System

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1 SIGMA Policy Brief No. 3: Public Procurement Introduction Public procurement, or the governmental purchases of goods and services from the private sector, has grown substantially in recent decades. In most European Union (EU) Member States, procurement purchases are estimated at per cent of GNP, or some per cent of public expenditure, representing many billions of ECU. Public procurement legislation has also increased, and major multinational trade arrangements like the World Trade Organisation s Government Procurement Agreement, and the EU Procurement Directives, set legal obligations for national procurement systems and practices. Countries seeking EU membership must, therefore, establish and maintain procurement systems that meet standards of transparency, and of open, and fair competition. Such standards are designed to create an economically efficient procurement system, promote international trade, and attract national and foreign investment, thereby creating conditions that support economic development. Central and eastern European countries have been working to establish modern public procurement systems from the beginning of their transition to a market economy. Creating such systems is part of the process of forging an efficient, competitive market economy and is necessary for these countries full integration into the international trading community. Building and implementing the system entails significant changes from the days of the command economy when procurement was part of the central planning system. In particular, central and eastern European countries must: Design a legal and administrative framework that facilitates the integration of myriad procurement entities throughout the public sector into a functional and coherent network with high professional standards, and that is consistent with international obligations. Such a framework should define the financial and legal responsibilities of all participants in the procurement process, including suppliers and procurement entities in central and local government. Ensure that government purchasing entities employ trained personnel who understand the need for efficient procurement systems. Creating these systems generates significant training costs. Democracies with advanced market economies and well-developed procurement systems generally commit more resources to procurement training than do central and eastern European countries. Invest heavily in systems which provide adequate access to data and information, and which facilitate professional networking within the public sector. Give suppliers access to training and information that promote their competitiveness, which in turn strengthens the market economy. Design and implement effective mechanisms to curb fraud, waste, abuse and corruption, which threaten public procurement systems in all countries and impede competition. Building a National Procurement System

2 In central and eastern European countries, building a modern procurement system raises significant problems. These arise from the history and culture and traditions of these countries where, in many cases, communist-era traditions linger on in the public service, and where authorities can bypass new legal obligations. Problems are also material, for these countries lack appropriate resources, skills and information. The public sector and suppliers must change their habits and administrative structures to take advantage of the opportunities created by the market economy, whilst building adequate safeguards against corruption. Putting into Practice Principles of Open Competition and Transparency The key and broadly accepted principle underlying a modern public procurement system is open competition unrestricted, universal access to the procurement market. In addition, the procurement process the selection of bidders, tendering procedures, and the award of contracts should be open to public examination and review, thus making it a transparent process. These principles apply to all public sector procurement activities. For practical purposes, the scope of EU Directives is limited to large procurement transactions that are differentiated from smaller transactions by cost thresholds: generally, ECU 200,000 for goods and services and ECU 5 000,000 for major capital works projects. While most procurement transactions in Central and Eastern Europe fall below these thresholds, the benefits of open competition are so important that it should be applied universally, irrespective of the size of the transaction. An open and competitive public procurement contracting procedure begins with the government s description of its requirements and an invitation to suppliers to indicate their interest in the contract and their professional capacity to fulfil it. The government then identifies potential suppliers and invites them to submit bids. The process must also assure that suppliers can, in fact, meet the specifications of product quality and delivery dates, and, in the case of very long-term contracts, can secure continuity of supplies. After the bidding phase, most procurement systems require a public declaration of competitors names and their bid prices and, ultimately, of the successful bidder. One current obstacle to truly open competition is the wide use of buy national policies aimed at supporting local suppliers, and regional and industrial policy goals. The Association Agreements of countries seeking EU membership have allowed such domestic preference provisions, but only for limited periods of time. Indeed, buy national policies can only be considered useful in the very short-term, since they will hinder economic development in the longer term. All countries seeking EU membership should therefore be prepared to phase out these practices. To promote transparency, the procurement process should be made open to public scrutiny. This places a heavy burden on the procurement entity within the line ministry or the local authority to award contracts that use taxpayer s money in the most efficient way possible. The transparency of the process is further reinforced when contract awards, and the overall procurement process itself, is subjected to the scrutiny of national parliaments, external audit bodies, and the media. Defining a Legal and Organisational Framework

3 Managing the process of implementing a new national procurement system requires making the activity a priority and assigning a dedicated team of officials to it. In most countries, a ministry or agency at the heart of government often a newly created public procurement office has played this role. For example: In Slovakia, which in 1994 became the first central and eastern European country to enact specific legislation on public procurement that complied with international obligations, the Ministry of Construction and Public Works is responsible for public procurement policy. In Latvia, a policy department in the Ministry of Economy was initially responsible for procurement policy. The national procurement law which came into effect on 1 January 1997 transferred responsibility for implementing the new procurement law to a new department in the Ministry of Finance. The choice of organisational structure developed for the procurement system varies widely from country to country. No standard approach or model can be recommended and a country will often evolve from a highly centralised to a more decentralised system as public procurement entities in line ministries or local authorities gain experience and expertise. Some centralisation is required, particularly in the early stages, to define national standards and operational rules. Moreover, most countries recognise that central purchasing permits cost savings through volume purchases. In Romania, responsibility for procurement tenders prior to contract awards is seen as part of the overall expenditure management system, as it is in France, and therefore has been assigned to the Ministry of Finance. Hungary has created a central purchasing organisation with a split responsibility. For common use purchases, it is responsible to the Prime Minister; for other items, it is responsible to the Ministry of the Interior. The Public Procurement Committee, the central procurement policy organisation, supported by a Secretariat, reports directly to Parliament. Poland, by contrast, maintains a highly decentralised procurement system. However, a central Public Procurement Office is responsible for developing rules and regulations, creating a government-wide information and publication system, developing a training system, and maintaining system-wide supervisory and management responsibilities. Training Staff Many central and eastern European countries have barely begun to develop strategies to train large numbers of public servants, but must nonetheless immediately train many hundreds, and in some cases thousands, of procurement officers. Rather than training officers for specific tasks, the initial focus may need to be on providing information on the broad structures of the new procurement system. Some countries are training trainers to develop a core of specialists able to conduct bulk training for public and private sector needs country-wide. This training should target both government purchasing as well as suppliers. Useful documentation and support material on training is available on the Internet. The UNCITRAL Model Law on Procurement of Goods, Works and Services and the accompanying guide, as well as the USA General Services Agency are two examples. Information and Statistics: Availability and Dissemination

4 Information is key to a well-designed procurement system. Tender opportunities must be widely and internationally publicised so as to attract adequate numbers of qualified suppliers and ensure transparency. Information should be disseminated to all interested parties to ensure public scrutiny and open access to rules and regulations. Moreover, procurement agencies should gather information and statistics to identify implementation problems and restrict, so far as possible, the potential for corruption. To simplify and speed up the publication process, and to help promote open competition, many countries and multinational organisations are developing electronic on-line publication systems. These are usually computerised databases or bulletin boards that include, among other things, tender notices that can be downloaded by interested parties. EU Member States and other countries have access to this information. In addition, the EU Tenders Electronic Daily (TED) is available on the Internet at Some countries and suppliers have developed on-line catalogues with pricing information and contractual conditions for a broadening range of goods and services. Suppliers can thus expand their service to public sector clients by pre-pricing products at discounted rates. Anti-corruption Measures Public procurement systems should be protected against waste, abuse, fraud and corruption. Many mechanisms can help anticipate and resolve these problems, though these are no easy solutions. For example: National procurement laws in many countries, including some central and eastern European countries, include conflict of interest provisions requiring that officials who could profit from procurement awards remove themselves from this area of work. Ministries in most countries maintain publicly accessible written records of the procurement process. Public access helps maintain transparency, allows for official scrutiny via an audit process, and serves as the official record in cases of judicial or administrative challenge. Specialised training for procurement officials, including training culminating in certification, can strengthen the professionalisation of the procurement system and reduce the potential for corruption. Some countries have established audit and procurement review committees reporting to parliament or the executive so as to ensure the fair and transparent application of procurement regulations. Many countries have introduced codes of ethics for government officials to establish behaviour standards and help educate staff and the general public about acceptable and unacceptable practices. In Poland, for example, a specific code has been designed for employees working in procurement. The WTO is developing a model procurement code of ethics. Internal, or management, control systems should be developed in each organisation responsible for procurement in order to clarify the responsibilities at each level of management and ensure that decisions comply with the law and regulations. These control systems should be externally audited by the national supreme audit institution. Mechanisms for Resolving Disputes

5 The WTO and EU require countries to establish an impartial, professional and open remedial procedure to help address complaints and supervise the procurement process. Responses to this requirement have varied. Hungary, for example, has created an arbitration committee with broad authority to hear complaints and take remedial action, which may include declaring a tender to be invalid or fining parties that lose in arbitration. This body reports directly to the Public Procurement Council. Poland has established a less formal arbitration system, under the authority of the Public Procurement Office, to resolve complaints which the procuring entity cannot resolve. In Slovakia, the Ministry of Construction and Public Works acts as an appeals body when decisions taken by the district offices are challenged. Maintaining the System A public procurement system needs to be properly maintained and supervised by the central agency or public procurement office, and by the professional network of local offices, to ensure that it. continues to achieve good value for money in public expenditure; adapts to changes in a country s public administration and territorial system; is able to meet international obligations under WTO and EU rules; remains fair, open, and transparent; is effective in providing, and being perceived as providing, an impartial complaints review process; addresses problems of fraud and corruption through effective mechanisms for prevention and detection; and takes account of information on international best practices, such as benchmarking techniques which compare the performance of different procurement entities. Further Reading Best Practice Guidelines for Contracting Out Government Services; Public Management Service, OECD, Paris, February Green Paper: Public Procurement in the European Union: Exploring the Way Forward; Communication adopted by the Commission on 27 November 1996 (N.B. This document includes all relevant EU Directives). European Commission, Brussels. Guide to Enactment of UNCITRAL Model Law on Procurement of Goods; World Trade Organisation (WTO), Agreement on Government Procurement (GPA), signed in Marrakech on 15 April 1994, adopted January UNCITRAL, New York. Management Control in Modern Government Administration: Some Comparative Practices; SIGMA Papers: No. 4, SIGMA/OECD, Paris, Public Procurement Manual for Central and Eastern Europe; SIGMA/International Training Centre of the ILO, Paris/Turin, Procurement of Goods: Standard Bidding Documents; World Bank, Washington DC, Procurement of Works: Standard Bidding Documents; World Bank, Washington DC, 1995.

6 Model Law on Procurement of Good, Construction and Services; United Nations Commission on International Trade Law (UNCITRAL), New York, Guidelines : Use of Consultants by World Bank Borrowers and by the World Bank as Executing Agency; World Bank, Washington DC, Procurement Under IBRD Loans and IDA Credits: Guidelines; World Bank, Washington DC, About This Publication The SIGMA launched the Policy Briefs series in August 1997 to make public policy subjects accessible to a wide audience interested in governance in Central and Eastern Europe. The Programme draws upon its extensive international network of experts to write these concise documents, which provide non-specialists and specialists alike with comparative information on important matters affecting citizens in all democracies. SIGMA is a joint initiative of the OECD Centre for Co-operation with the Economies in Transition and the European Union Phare Programme, mostly financed by Phare. SIGMA supports public administration reform efforts in thirteen countries in transition. The Programme offers beneficiary countries access to a network of experienced public administrators, comparative information, and technical knowledge connected with the OECD s Public Management Service (PUMA). Views expressed herein do not represent the official views of the European Commission, OECD Member countries, nor the central and eastern European countries participating in the SIGMA Programme. This document is also available in French, and may be found on the SIGMA Internet home page at: For more information, contact: SIGMA- OECD, 2, rue André-Pascal, Paris Cedex 16, France. Tel: (33.1) Fax: (33.1) sigma.contact@oecd.org. December 1997.