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Gustavo Piga – University of Rome Tor Vergata

THE NEW PROCUREMENT PROCEDURES AND INSTRUMENTS,

Department of Contracts, Malta and OECD/Sigma

Valletta, January 26th

The Italian system for centralised The Italian system for centralised purchasing and electronic procurementpurchasing and electronic procurement

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The electronic developments in US procurement

Survey over 47 US states (1998 vs. 2001)

In Moon (2001), Journal of Public Procurement

Electronic Ordering: from 44,7 to 68,1% of all States;

Purchasing Cards: from 68,1 to 85,1%;

Digital Signature Accepted for Tender Documents: from 0,09% to 14,9%;

Reverse Auction: 10,6% in 2001

E-proc Adoption grows with: Managerial Innovation;

Centralized procurement with a high level of authority;

Size of the State.

Anyway…

It is also true that ICT development has lead public procurement to become more centralized, spending and investing in qualified human resources to manage purchases. Indeed, the new

European Directive introduces both e-proc and central purchasing stations.

Italy is no exception. To the contrary ….

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Total amount of Italian public expenditure for goods and services sums up to about € 100,9 billion, about 15% of overall public spending and 7,7 % of GDP

Rationalization Program on Public Spending Spending for Goods and Services

Central Government17%

Health bodies52%

Local Government

26%

University and other P.A.

5%

Public spending for goods and services, 2003 (%)

CentralGovernment16%

Health bodies42%

LocalGovernment

36%

Public spending for goods and services eligible for the

Program, 2003 (%)

About € 102,3 billion About € 42 billion

University and other P.A.

6%

* Report on needs for the year 2003 and Consip estimate

3.2% of GDP

20% of discount

permanent reduction 0.4% deficit if so desired

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Rationalization Program on Public Spending: the aim of the Program

Define purchasing strategies

Draw up competitive frame contracts for Public Administrations

Promote the use of e-procurement within the Public Administration

Provide purchasing monitoring tools to the Public Administration

Deliver innovative e-procurement models

Service efficiencyand quality

Processsimplification

Cost saving

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The financial act 2000 (December 23, 1999 n.488) laid down the foundations of the “Rationalization Program for Public Spending on Goods and Services”. Article 26 says:

“ The Ministry of Economy and Finance (MEF), according to the regulations currently available regarding suppliers selection, draws up frame contracts with providers. Within the frame contract, the selected providers have to accept any order coming from public administrations.”

Rationalization Program on Public Spending

By means of 2 Ministerial Decrees (February 2000, May 2001), the Ministry entrusted Consip S.p.A. with the development and management of the Program.

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Rationalization Program on Public Spending

The following Financial Acts (2001, 2002, 2003, 2004, 2005, 2006) streamlined the Program scope and the roles of involved actors.Today, according to the current legal framework:

Frame contracts regard goods and services;

All public administrations (e.g. Central Government, municipalities, health agencies, etc.) may purchase within the frame contracts. Alternatively, whenever they run their own tenders, they have to take price and quality of the frame contracts as a benchmark. 2006 Financial Act has contingency plans in case public finances worsen;

Our tenders affect all purchases of the Public Administration, where a Consip frame contract is available, thanks to the benchmarking effect.

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Consip: Task and structure

Consip is a joint-stock company totally and directly owned by the Italian Ministry of Economy and Finance (MEF), and it operates exclusively to serve Public Administrations

Consip’s operations are carried out through two Divisions:

the DSIT (Treasury Information System Division), with about 300 employees, is in charge of managing the Information System of the Ministry of Economy and Finance;

the DARPA (PA On-line Procurement Division), with about 160 employees, is in charge of implementing the Rationalization Program on Public Spending for goods and services.

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Consip: Task and structure - DARPA

Legal Advice Program

management

eProc Systems(IT Platform

management)

Universities

Sourcing(Purchasing strategies)

Healthcare Admin.

Local Authorities

Central Administrations

Industry 1

Industry 2

Industry n

Puchasers

“Marketing” Purchaser side

“Marketing” Supplier side

eProc Strategies

(Marketplace management)

DARPA

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E-Procurement tools

www.acquistinretepa.it

ElectronicShops

Purchases within frame contract (through traditional tender or on-line auctions process)

Direct Purchase

e-Marketplace

Purchases below the Eu threshold

Direct Purchase or RFQ

Many to Many approach

Supplier defined eCatalog

Purchase Scope:- Low cost- Highly fragmented

Above and Below EU Threshold Below EU Threshold

When the good has a rapid obsolescence Consip resorts, if possible, to

ONLINE AUCTIONSAutomatic Technical and economic offer evaluation

Development of Frame contract through electronic system

ASP towards other Administrations

Purchase scope: Large volumes Standardized Low price volatility Demand aggregation Slow and High obsolescence

Many to one approach

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E-Procurement Portal

On-line services

Notices

On-line orders

Marketplace

Tender publication, supplier qualification for Public Marketplace, ....

Opportunity to buy on line using frame contracts conditions

On line access to public Marketplace

Registration Public buyer registration

Specific Market Area

Data and information on “Client market Area” (Central PA, Health bodies, Universities, Municipalities)

Data & News Who we are, what we do, what you can buy, how you can buy, Newsletters, Magazines…

On line auctions On line access to public auctions

Supplier Area Information on e-procurement models, correct way to participate to public tender, ...

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Objectives Strategies

Focus on “state of the art” in supply market Wide range of goods and services Constant assessment of service levels

Direct costs, through: - demand aggregation (economies of scale)- competition among suppliers- product standardization

Indirect costs, through: - on-line bidding and ordering- process simplification- centralization of litigation

To guarantee quality standards in P.A. purchases …

… while reducing

Change Management in the Public Administration Industry dynamics

Sideeffects

Electronic shop Strategy

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Frame contracts : Process simplification

…to the new process of goods and services procurement

Fax / on-lineOrder

... achieving, in addition, administrative procedures reductions for suppliers…

Needs analysis

Goods/ Services delivery

PaymentSupplier selection

Possible litigation

with suppliers

Contract and

tender document

ation

Contract signing

Public Administration activities

From the traditional….

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Electronic shops: Operational model

Contracts reporting

Monitoring tools

NeedsFeedback

Delivery

On-line/fax orderPublic

Administrations

Consip Suppliers

Frame Contracts (public tender)and e-shops activation

Payments

Portal www.acquistinretepa.it

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Electronic shops: Operational model

E-shops represent an open window on the web in which goods and services selected through tenders and frame contracts are available to PA procurement offices registered to the Program

Product Product selection selection

and online and online orderingordering

Traditional Traditional and and

electronic electronic tenderstenders

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Frame Contracts: Some examples of unit cost reduction

70 signed frame contracts and more than 40 product categories by 31/12/05

20% 20%

averageaverage

savingsaving

Goods

Utilities

TLC

Rental Photocopiers

PC Desktop

Desks

Rental Cars

Chairs

PC Laptop

Ecotomography Equipment

Projectors

Diesel for heatingOilLubricantsBiodiesel for heatingElectric power

Fixed line telephonyPAX Switching ethernet networksVideo communication systems

Efficient Efficient degree of degree of

competition?competition?

IndependentlyIndependently certified certified by the National by the National

Statistical Authority Statistical Authority (ISTAT) in 2003 and (ISTAT) in 2003 and

20042004

By 2006 national By 2006 national classification systemclassification system

Did we do well ?

Could we have done

better?

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Split of framework contract in many lots: competition issues (1/2)

Consip started a comprehensive plan of cooperation with the Antitrust Authority. The objective is to make the tenders handled by Consip even more open and accessible to all providers.

This is why, for any tender procedure, Consip asks Antitrust Authority’s advice (via the Ministry of Economy and Finance) concerning the competitiveness of the tender itself.

The degree of competition in a given procurement auctions may depend on the participation requirements, rules regarding enterprises’ groupings, and the number and dimension of lots in which the contract is divided.

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Split of framework contract in many lots: competition issues (2/2)

• Length of contract to avoid lock-in (but mind collusion);

• Participation requirements should be as low as possible and not focus excessively on requests which are only indirectly related to the execution of the contract, allowing alternative “means of proof” for the capacity to fulfil the contractual duties;

• Temporary groupings of enterprises and sub-contracting are a mean to overcome the barriers to entry for enterprises not having the necessary ‘critical mass’ to participate to public tenders; however it should not be allowed in a grouping the presence of two enterprises who could match participation requirements autonomously;

• Increasing the number of lots decreases their size hence facilitates participation of SME and reduce risk of lock-in; on the other hand, more and smaller lots may facilitate collusive market-sharing agreements and render more difficult the exploitation of potential economies of scale;

• “Combinatorial auctions” where package bidding is allowed can be a way to allow the exploitation of possible scale economies while at the same time facilitating participation of SMEs.

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Innovative e-procurement tools: On line auctions

Possible Procurement auction formats: Descending Auction (English Auction): the price starts high and competing bidders cut the price until

no-one is willing to bid any lower. Multiple-Round Auction: multiple round auctions are similar to descending ones; in multiple round the

price does not decrease continuously but round by round with a predefined percentage. A multiple round

auction is the discrete version of the descending auction. Sealed Bid Auctions: bidders submit bids in sealed envelopes; the person submitting the best bid wins

the auction and pays what he bid (pay-as-you-bid) OR the person submitting the best bid wins the

auction but pays only the second best bid (pay-as-the-second-best). Descending-Clock Auction (Japanese): the price decreases continuously in a predetermined period of

time (e.g. 1 hour) in which players do not have to submit bids and they are considered to stay in the

auction until they decide to exit. The prize is awarded to the last bidder remained in the auction. Anglo-Dutch Auction: consists in adding a final sealed-bid round (e.g. only for the two best bids) to a

descending auction, in order to hinder potential collusion generated by dynamic.

The various formats have different advantages and disadvantages in terms of information gathered by the bidders and by the auctioneer, potential collusion, and participation. Some of these format my not be allowed by current directive, albeit useful in same cases

Consip experimented the following auction formats:

Descending, Multiple round with unlimited n. of round, Multiple round with a pre-defined n. of

round, Sealed bid (pay-as-you-bid).

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Does e-proc curb corruption?

Possible formats of corruption:

Modify bid of “favored” bidder to let him/her win: reverse auction keeps all players active until price hits each player’s cost;

Pre-Auction to determine “favored” bidder: with sealed bid tender the purchasing price for the taxpayer is higher as winning firm has to pay the bribe. Wth reverse on-line auction firm wins, not paying bribe, by having taxpayer pay lower price;

After seeing bids, the most advantageous “briber” is approached: on-line auction eliminates this by making bids public.

Good! However keep in mind that…

If on-line auction favors collusion, then sealed bid electronic auction with proper security* reduce possibility of corruption ( see Consip);

Corruption through lower quality of goods and services remains a possibility.

* Public e-Procurement: Common Technical Specifications elaboration using State of the Art and Learning Demonstrators. Framework Contract ENTR/01/58-TOOLSW DG ENTR.

Procurement and corruption Procurement and corruption by Lengwiler e Wolfstetter, in Handbook of Public Procurementedited by Dimitri, Piga e Spagnolo, Cambridge University Press, forthcoming in September 2006

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Does e-proc lower collusion?

Strictly speaking, e-auctions increase transparency.

For example, compared to a sealed-bid tender, in ascending auction economic operators get to see the evaluation of their competitors in real time and are allowed to react to it. This increased transparency is often positively considered by procurers:

“Thanks to electronic tools enterprises make various offers and at the same time see the others’ bids. In this way – already at the psychological level –

competition is increased. This in turn leads to better results and savings for the Public Administration. Bidders are masked with a code, which does not allow

them to know the identity of others during the tender. In this way the Administration tries to avoid collusions” (cited in Magrini, p. 36).

On-line auctions and collusion (1)On-line auctions and collusion (1)

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Collusion in auctions

Ascending auctions remove uncertainty about the value of the good and make firms bid more agressively. But online auctions can increase collusion:

competitors get to see, in real time, if a cartel agreement is being broken by a defector and have the possibility to retaliate with lower prices. Knowing this, there will be no defection and collusion will be self-sustained, causing harm to the Administration;the openness of the format may scare away small firms that anticipate being easily topped by big firms during the auction.

Indeed, current practice seem to show a certain caution among EU procurers to choose the e-auction method even if available. Sealed-bid e-auctions are favored.In a sealed-bid, retaliation can occur only in a successive tender, if there is one, and therefore cartels are less sustainable than in an e-auction.

And ….

“Do Framework Agreements facilitate or hinder collusion?”

On-line auctions and collusion (2)On-line auctions and collusion (2) taken from Albano e Spagnolo, in Handbook of Public Procurementedited by Dimitri, Piga and Spagnolo, Cambridge University Press, forthcoming, September 2006

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Innovative e-procurement tools: Public Administrations’ Marketplace

The Marketplace is a virtual market in which any P.A. can select goods and services offered by several suppliers, for purchases below EU threshold

The Marketplace is open to qualified suppliers (and goods) according to not particularly restrictive selection criteria

The entire process is digital, using digital signature in order to guarantee transactions legally

Public Administratio

n Marketplace

Qualified suppliers selected through a qualification process, starting from the date of publication of the “qualification notice”

Suppliers

Central Government

Universities Local

Government Health bodies

Buying administrations

Mark

et

Qualification notice(public announcement)

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Ordini 9.600

3.117

Articoli180.000

113.207

8.000.000

Transato 29.900.000

Anno 2003 Anno 2004 Anno 2005

Ord

ini e

Arti

coli

(N°)

Val

ore

Tran

sato

(€)

+59% vs 2004

+274% vs 2004

+208% vs 2004

Results

550 registered suppliers (81% SMEs) + ~1.100 Punti attivi registrati

Innovative e-procurement tools: Public Administrations’ Marketplace

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Item Item namenameItem Item namename

Technical specifications Technical specifications (standardized catalogue)(standardized catalogue)Technical specifications Technical specifications

(standardized catalogue)(standardized catalogue)Supplier’s Supplier’s namename

Supplier’s Supplier’s namename

PricePricePricePrice

Innovative e-procurement tools: Public Administrations’ Marketplace

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Innovative e-procurement tools : Public Administrations’ Marketplace - Major advantages

To Public Administrations:

costs and process cutting;

potential broadening of suppliers base;

easy access to selected goods (pre-defined quality standards);

information transparency and ease of comparison among goods;

purchases logging and subsequent expenditure monitoring.

To Suppliers:

selling cost reduction (due to broadening of potential customers base and lower intermediation cost);

higher visibility;

more competitiveness especially in local markets (for small and medium sized enterprises);

B2G introduction, especially for large sized enterprises, in addition to existing B2B and B2C.

WHAT WILL HAPPEN WITH DYNAMIC PURCHASING SYSTEMS?

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Rationalization Program on Public Spending: Program’s results

Define purchasing strategies

Draw up competitive frame contracts for Public Administrations

Promote the use of e-procurement within the Public Administration

Provide purchasing monitoring tools to the Public Administration

Deliver innovative e-procurement models

Service efficiencyand quality

Cost SavingProcess

Simplification

Implementation Performance

Done

Done

Done

Done

Not Done

Very good

Good

Almost good

Almost good

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“Green procurement policies” support represents an additional goal to frame agreements stipulated by Consip

• The tender for the supply of paper to PA has been worked out also with ANPA’s

partnership (National Agency for Environmental Protection) focusing on the definition of

eco-compatibility requirements:

•exclusion of products containing elementary chlorine – ECF – hexavalent chlorine etc..

•Ecolabel, EMAS or ISO 14001 certifications

• The tender on motor vehicles includes a double feeding model (methane petrol or gpl

petrol) as a test to verify the feasibility of a future specific tender on ecological vehicles,

electric vehicles, hybrids (electric-petrol) etc…..according to the recent European regulation

• Tenders for the supply of photocopiers include the collection of disused second-hand

photocopiers according to the present regulation

• Future tenders on the supply of rubbish skips for waste collection will comply with the

present rules as they will include differentiated waste disposal

Green Procurement