Procurement in the time of crises

In an earlier blog, we argued that increased counter-cyclical public spending during crises needs a more efficient system of public procurement. This allows expediting expenditures, thus freeing resources that can be used to help people adversely impacted by crises (for example, by inflationary pressures or sectoral downturns). However, this efficacy is often at the expense of competition, quality, and transparency of procurement.

In previous emergencies, governments have used a variety of mechanisms to address increased demands on procurement systems. Some governments impose temporary stops on standard procurement procedures and encourage the use of direct contracting. Others, especially those with high human capital, increase the level of discretion of public officials. This poses challenges, because even in normal times public procurement can suffer from bid rigging, cost overruns, favoritism toward politically connected bidders, lack of transparency, collusion between politicians and firms, and simply bad choices in the selection of contractors.

Procurement systems that function smoothly and efficiently during normal times have a better chance of responding positively to emergencies.  Therefore, to improve public procurement in the face of increased demand for government services during emergencies, we propose several measures in normal times, including broadening participation by SMEs, more discretion in small contracts, an expansion in the use of framework agreements for large contracts, streamlined registration of suppliers, and more ex-post oversight. These suggestions are based on recent empirical evidence, considering the trade-off between discretion and the possibility of corruption.

Increased SME Participation

During normal times, policies directed towards increasing SME participation in public procurement can broaden the pool of companies available for emergency procurement, preventing the loss of quality and the unpreparedness that characterized COVID-19 procurement. An increase in the number of suppliers also supports government efforts to obtain best value for money.

Governments use a variety of methods to increase SME participation in the procurement market. These vary from bid price preferences (discounting bids by SMEs to make them more competitive with larger firms; for example, in India), to set asides (a designated portion of the procurement budget is reserved for SMEs; for example, in the U.S., the Dominican Republic, Morocco and Kenya), to smaller lot sizes (for example, in the EU), or more flexibility with bid security and performance guarantees (for example, in Australia and Russia). Governments can choose their methods to achieve this depending on legal and regulatory framework, management capacity features, the level of centralization of procurement systems, and sectors of specific focus (for example, healthcare during the COVID-19 pandemic).

Furthermore, governments can increase SME participation by taking ex ante selection a step further by developing of registers of qualified suppliers. This takes care of the vetting work that would otherwise be done at the level of individual contracts, something governments rarely have time to do during emergencies. These registries can be sector specific, extending to healthcare, security and energy-related procurement. Specialized catalogues on emergency-related items can also be considered. For example, Colombia used this technique during the pandemic.

Broader Discretion

Thresholds for direct contracting can be raised even in normal times. Emergencies inevitably lead to tension between quickly addressing needs of citizens and ensuring transparent and efficient spending.  In the wake of the COVID-19 pandemic, many governments reintroduced competitive procedures, while raising thresholds for direct contracting to allow more discretion (and speed) in small purchases.

This is especially relevant in countries with high human capital and low thresholds for direct contracting. Indeed, these thresholds vary tremendously, even in otherwise homogeneously regulated countries such as in the EU (for example, €10,000 in Greece, €40,000 in Italy and Slovenia, and €75,000 in Austria). Some countries in the EU have already steered towards broadening discretion for smaller purchases and purchases below EU thresholds. In 2019, for example, Germany raised the thresholds for discretionary awarding and restricted invitations without competitive participation to €100,000  and €1 million, respectively.

Use of Framework Agreements

Governments may consider easing the use of framework agreements (that is, indefinite time/quantity contracts) with previously registered suppliers. Framework agreements are often regarded as an effective tool for emergency procurement, as they allow for speedy off-the-shelf acquisitions with little loss of time and bureaucratic effort. This was the case in the United States after hurricane Katrina and in more recent crises.

Framework agreements serve as a mechanism to aggregate demand, offering favorable pricing conditions for the public buyer, either because of the pre-established prices—not yet reflecting the spike in demand linked to the emergency—or because of increased buyer power. They also maintain a high level of transparency, helping reduce the risk of abuses of additional discretion that comes with the extensive use of direct and negotiated procedures.

Focus on Output

Beyond these three specific measures, governments can increase monitoring, which is best reoriented towards outputs rather than procedural correctness. Audits and citizen oversight should be strengthened, including using open data.  Further improvements can allow comprehensive oversight at the project level; and also include projects funded by international donors, if applicable. Ukraine, for example, has been working on including internationally- funded reconstructions projects into its electronic procurement platform.

EDITOR’S NOTE: This is the second of a series of blogs on governance-related challenges emerging from the recent crises.