The 9th International Anti-Corruption Conference
A STRATEGY FOR IMPROVING PUBLIC PROCUREMENT
The business operations of government, as controlled by public procurement systems, affect many different elements of society. First are the procuring entities with the responsibility to perform designated missions for the country as a whole and which require material support (e.g. roads, hospitals, desks and educational supplies, etc.). Then there is the business community of actual or potential suppliers to the government. International organisations and external donors of funds for use by a country also form a group with an interest in public procurement since a generally acceptable system could replace their specific procurement rules controlling these expenditures. There are also academic, training and public interest groups, which have important views in how public management institutions are to perform. And the largest interest group is the general public, who are more likely to feel satisfaction when they know that expenditures are being made through the public procurement system which are economical, rational and fair. To give these concerns due consideration and help make changes sustainable in the longer term, it is important to reach out to these groups as part of a general reform process. The extent of outreach is a matter for each government to determine. But generally speaking, a reform program benefits from involving key participants in the early stages of planning the reform programme.
To assist in this effort, a current review of the present system can provide some assessment on what the strengths and weaknesses of the present system are and how these can be addressed in a reform programme.
Developing a baseline of the present system should be the first step in any reform programme.
Annex 1 contains a series of questions, which should be answered as part of this review.
A well-functioning public procurement system must seek value-for-money in meeting the needs of government agencies for goods and services to support public missions. These needs must be reconciled with those of suppliers conducting commercial operations for their own profit when supplying goods and services to government entities. This must be done within the bounds of public policies established to ensure that procurement transactions take appropriate consideration of the public good and political decisions in the allocation of state resources.
An effective public procurement system allows suppliers to provide satisfactory quality, service and price within a timely delivery schedule. The basic tenet of public procurement is straightforward: acquire the right item at the right time, and at the right price, to support government actions. Although the formula is simple - it involves questions of accountability, integrity and value with effects far beyond the actual buyer/seller transactions at its centre. A serious and sustained review of such decisions is needed to properly manage the public procurement function.
The degree of transparency helps to determine the effectiveness of the public procurement system. Transparency, in the context of public procurement, refers to the ability of all interested participants to know and understand the actual means and processes by which contracts are awarded and managed. Transparency is a central characteristic of a sound and efficient public procurement system and is characterised by
In other words, transparency means the same rules apply to all bidders and that these rules are publicised as the basis for procurement decisions prior to their actual use. It is an effective means to identify and correct improper, wasteful--and even corrupt--practices.
Fighting waste and corruption and improving financial accountability are essential elements of good governance, needed to institute effective government policies. No country in the world appears to have escaped improper, wasteful and corrupt practices in public procurement.
Corruption deserves special attention because it works in insidious ways. It tends to undermine the whole fabric of economic and political life. Thus, it is of extreme importance to establish and sustain correct behaviour in all procuring entities. Corruption, as defined by the World Bank1 , is the abuse of public office for private gain. Such behaviour by persons concerned with the procurement process often leads to economic losses for the public. Thus, many lose for the benefit of a few. Often there is some form of collusion between the purchasing and selling entities. Responsible officials on the contracting side request -- or are induced -- to accept gratuities from bidders or contractors to make favourable award decisions. Such influence in the decision-making and executive processes of a country has legal, administrative and economic costs.
Other benefits of an effective transparent public procurement system integrated into improved national budgeting procedures are a more realistic market price structure, and a better control of public expenditures and resources.
Transparent procedures help attract more investment by lowering risk. A transparent procurement system allows competing private enterprises to judge the risk of doing business with the government. They can make more realistic economic investment decisions where government procurement policies are in line with good commercial practice and public accountability requirements.
Market-based systems work best when constructive pressure exists to change and improve pricing, quality, or performance of a product, or to otherwise satisfy customer needs. If a competitor arranges to minimise market pressures by relying on personal contacts, bribes or other means to "influence" the system, both parties are diminished:
The presence of strong institutional support at the top levels of government for administering and monitoring the public procurement process is an essential factor for promoting integrity and proper application of procurement law. This leads to increased efficiency and professional performance in procurement operations.
Public procurement legislation contains rules concerning the process of acquiring goods, works and services by public sector entities. Usually it includes also institutional arrangements required to ensure the proper implementation of these rules. The word "legislation" is used to signify primary legislation in the form of an act of Parliament or subsidiary legislation to any such act in the form of regulations and directives. Such legislation often includes the following topic areas:
The primary purpose of such legislation is often to foster economy and efficiency in the use of public funds - to give value for money. The state and its subsidiary organs are normally obliged under domestic law and various international agreements to transact procurement in a fair, transparent and non-discriminatory manner. A public procurement system, which meets these objectives, will contribute also to the creation of a sound business climate in the country.
Some means of defining entities must be in the public procurement rules. This definition may include central and local government administrations; universities and similar public bodies and corporations or organisations set up by an act of Parliament or legislature. A common provision is to require application of government procurement regulations to the extent that entities use funds appropriated to them under the central government budget. Thus, the scope of coverage is defined by a combination of the entities involved and the source of the funds that an entity uses for purpose of procurement.
Public procurement means the process of acquiring goods, works and services by procuring entities. The process includes purchasing, hiring, leasing or any other contractual means of engaging suppliers in the provision of public services to the public. Concession contracts or activities undertaken as part of privatisation programmes are often included.
One borderline issue of scope a government must decide concerns the question of whether disposal of government property in addition to acquisition should be covered by the public procurement legislation. The reason would be that both of these activities need to be carried out with due regard to economy and efficiency and in accordance with some procedure which is fair, transparent and non- discriminatory.
The essence of public procurement legislation is to define, and enforce, those procedures that are most likely to produce an economic and efficient result, while respecting the public nature of the process and the duty of fairness to the suppliers. Economy in public procurement is not subject to a test similar to that of purchasing in the private sector: namely, good procurement contributes to profits and poor purchasing creates the risk of going bankrupt. Instead, the best way government entities demonstrate that they obtained the best terms available under the circumstances is to make use of competition between all those interested in, and qualified for, supplying the goods or services in question.
Public procurement procedures must therefore be designed to generate maximum competition. This explains the preference for open tendering in most national and international procurement systems. This preference is subject, however, to the need for eliminating competitors who are not qualified and the goal of keeping the procurement process efficient in the sense of adapting procedures to the size and complexity of the contract.
Public procurement legislation for this purpose normally
Having defined the entities required to follow the public procurement procedures, and the content of the procedures, public procurement legislation must also include provisions to ensure proper enforcement of the rules. Procuring entities must be held accountable for the responsibilities assigned to them. This can be done through value-for-money audits concerning the use of public funds. The audits may take place ex-post, or after the fact.
Some mechanism should be available to allow the government to investigate and take action against corrupt practices and, thus, against more serious cases of flouting the public procurement regulations. For maximum effectiveness, this should be applied to on-going public procurement transactions, to include injunctions to stop or correct such transactions. These reviews can also be used to assure conformance to international norms, such as those of the WTO Government Procurement Agreement.
Legislation might provide also for an independent appeals system that would address complaints from aggrieved bidders and would provide remedies against violations of the legislation. It is generally effective to have a procedure by which interested parties can bring complaints, initially, to the head of the procuring entity and, in the second instance, to the responsible manager in government for public procurement to take administrative remedies to correct violations of the regulations.
Often the authority to issue regulations on public procurement rests with the Minister of Finance. A first question to be answered with respect to any proposed reform is whether the existing basis for regulations is sufficient. To deepen and widen the reach of the procurement reforms, a different legal instrument may be needed, such as an act of Parliament. A two-pronged approach may also be undertaken. This would allow reforms to commence with the promulgation of a set of regulations. Then a draft law for enactment by Parliament could be prepared as soon as some experience has been gained in the use of the new regulations.
Because the Minister of Finance is also a procuring entity, several countries have placed their national procurement policy organisation at the level of the Prime Minister or Office of the President. This helps to increase at least the appearance of independence of the organisation.
Public procurement should operate within the public sector to meet the following organisational objectives:
Government procurement objectives will not be achieved simply by developing procurement legislation. Legislation provides the rules. It does not determine procurement policies, procurement strategies or procurement performance.
Assuming government's procurement objectives involve policies on de-centralisation, restructuring and privatisation, the government should:
Individual procuring entities need the authority to undertake the procurement of the goods, services, and works required meeting their responsibilities with the funds appropriated to them.
Officers of the government with delegated procurement authority need to be made accountable for the public procurement decisions taken by them.
To comply with accepted international standards, the contracting, monitoring and auditing roles must be clearly separated. Such a separation of function avoids conflicts of interest, encourages competition and improves value for money spent. The separation of the three roles can help ensure that the process is accountable and is seen to be accountable. This is important for developing trust between the public sector and its suppliers as well as potential donors. A responsible officer within each entity should ensure this requirement is met.
Sustained management advice and assistance to support budgetary considerations in the area of expenditures for public procurement must be provided. This can best be provided through a procurement management and policy office which, for ease of reference, we call the Central Procurement Policy Office. The CPPO could be located within the Ministry of Finance or at a level higher. For example, in Poland and in the United States, this office is at the level of the Council of Ministers and the President, respectively. The head of the unit should be graded at a level that would ensure that CPPO could meet its responsibilities to Ministries and other procuring entities. Potential responsibilities for a CPPO could include:
This function includes the issuance of:
This function includes:
There is a need for a co-ordinated approach to procurement if the government is to achieve best value in its use of public funds. This co-ordination can be provided within a central policy unit which, while recognising individual authority in the procuring entities, works with these entities to:
Within the public sector, many individual procuring entities purchase similar goods and services. If these purchases could be aggregated, it would result in prices that are more competitive, lower operating and maintenance costs and improved service for the procuring entities. It could also encourage domestic manufacturers to invest in plant and equipment.
Procurement responsibilities should remain within the procuring entities but joint contracting should take place where appropriate and beneficial to the parties involved. Experience in other countries has shown that for joint contracting to be successful, procuring entities must work together to rationalise requirements, agree on contract specifications and determine who will be responsible for the contracting process. Experience has also shown that challenges must be overcome for this rationalisation to occur, including:
The CPPO would help meet these challenges through a facilitating role to:
Joint contracts may be in the form of:
For these contract arrangements to operate successfully, the participating procuring entities must be part of the process. This requires their involvement in all contracting activities -- from production of specifications through to contract award and performance monitoring. In practice for each conract, only one entity will be responsible for letting the contract. This will usually but not necessarily be the largest purchaser. Whoever undertakes the process must agree on the contracting decisions with the other participants. For the framework arrangements an estimated quantity of requirements to be purchased during the contract period must be made known to the tenderers. Also, there should be a means for the contract arrangement to provide choice of product or service if this is required by individual procuring entities. The process will not work well if standards are dictated to individual purchasers. Variable prices for different purchase quantities, different geographical locations and different service levels may be established. However, for this arrangement to work, there must be a clear commitment to use the contracts by the participating entities.
All staff with a responsibility for contracting should be trained in public sector professional procurement and its associated activities. This training should include purchasing officers plus legal, financial and technical staff involved in contracting. The responsibility for developing a training and staff development scheme should be situated within the CPPO.
Procuring entities should train and develop professionally qualified staff for public sector procurement. To do this, it may be necessary to:
Maximise the use of existing resources, possibly by developing a specialised multi-disciplinary contracting team that could provide professional advice and assistance to individual procuring entities for major contracts. The responsibility for the contracting process, the contract award and the contract performance would remain with the procuring entity. It would be a central function to co-ordinate this process.
Employ external consultants to advise and assist with the contracting process. The selection of consultants for this work could be undertaken by means of competitive tenders in accordance with the procurement legislation. Help in this process would be available from the central advisory function. To help individual procuring entities undertake this process, the central policy unit could issue guidance on best practice in contracting for consultants.
To obtain best value, quality and service, it is good procurement policy to encourage the most competitive and able suppliers to tender for your contracts. To achieve this objective, the CPPO and procuring entities should emphasise:
A constituent part of any function must be the collection and management of information. Among the data that procuring entities should provide routinely are (a) the number and monetary value of contracts awarded during the year (or for a shorter period of time); and, (b) the extent of competition, and the types of articles purchased.
This data can then be made part of an annual report to the Government on trends in public procurement.
There is a need to maintain a database of suppliers who have been disqualified by procuring entities so that all procuring entities have access to this information as part of their supplier assessment procedures.
A general lack of regularity and discipline in a government procurement system attests to the inadequate professionalism in the workforce as a whole. As an economy continues to grow, the items and services it buys can be expected to become more complex. If procurement functions are to adequately support this growth, the procurement workforce must:
Make more informed judgements about what is available in national and global markets
Possess knowledge of best domestic and internationally accepted procurement and contract management practices
Implement global and national business practices within the government procurement system
In effect, the procurement workforce must become professional in the art of global and national business management.
A good first step in professionalising the workforce is for the government to adopt a code of ethical conduct, not only for those who make purchases, but also for all its employees. Corruption has extended to those who receive goods and services and those who use them. Some aspect of the procurement system affects each and every employee in the public sector. A cultural change is usually needed to make the business culture compatible with recognised international guidelines for ethical business behaviour. A code of ethics is a rally point for such a change, and would include the following:
Ethical Principles--general statements indicating a professional approach, for example: Avoid even the appearance of a conflict of interest.
Ethical Rules--these typically take the form of "do's and don'ts" Examples are: Do seek wide participation from industry to fulfil government needs. Do not try to influence an award to your brother for a potential government tender (even if you really think he is the best competitor). Do not accept substantial gifts or favours to yourself or to members of your family.
Practice Principles--general statements about how to achieve what is intended for the good of the user or public (Avoid any involvement in government tenders with companies in which you or your immediate family has a financial interest. Insist that suppliers fulfil their contractual obligations).
Practice Rules--very specific guidance related to professional practice (Such as the possession of minor public stock offerings in a company does not constitute a financial interest, but significant possession of public stock offerings does constitute a financial interest). In cases where there might be differences of opinion as to whether a financial interest is significant, employees must consult with a representative of the appropriate advisory office and comply with the decision provided.
New-employee orientations should include an explanation of any ethical codes adopted by the government. When a code is first introduced or changed, all current employees should be given a briefing on the details of new codes or changed content. Some countries require that employees be briefed at regular intervals (once a year, for example), and that they certify that they have read and understand the ethical codes.
A model code of ethics is provided below:
Code Of Business Ethics
Employees shall never use their authority or office for personal gain and shall seek to uphold and enhance the reputation of the government at home and abroad by:
Declaration of Interest. Employees shall reveal any personal interest that may impinge or might reasonably be deemed by others to impinge on an employee's business dealings with industry
Confidentiality and Accuracy of Information. Employees shall respect the confidentiality of information received in the course of business dealings and shall never use such information for personal gain. Information given by employees in the course of business dealings shall be true and fair and never designed to mislead.
Competition. Employees shall avoid any business arrangement that might, in the long term, prevent the effective operation of fair competition.
Business Gifts. Employees shall not accept business gifts from current or potential government suppliers unless such gifts are of a very small intrinsic value, such as a calendar or pen.
Hospitality. Employees shall refrain from any business hospitality that might be viewed by others as having an influence in making a government business decision as the result of accepting that hospitality.
Note that some of these steps overlap in time. They are listed in the order that they should probably be initiated.
Step 1: Focus responsibility for the procurement workforce. One way to do this is to establish a professional development sub- organisation unit such as the one proposed for a Central Procurement Policy Office (CPPO) in Chapter 4. Designate responsibility for public procurement systems, procurement workforce training, and the monitoring of both the system and the appropriate implementation of workforce training and career development.
Step 2. Identify professional performance standards and internationally accepted certification requirements. Adapt standards from international models. There are several such international standards to draw upon. The International Trade Centre UNCTAD/WTO is in the process of consolidating those standards within a series of procurement training modules that are designed for national tailoring, considering the realities of existing public systems and resources. A description of the International Trade Centre UNCTAD/WTO training modules is available from ITC.
Step 3. Identify members of a training "provider network". It is essential to obtain the input of interested public organisations, parastatals and non-governmental organisations that may have an interest. These organisations might participate in Steps 2, 3, 4, 5 and 8. The government should seek as wide participation as possible. Members of any procurement association, university or other academic institution, and local training providers should participate. Wide participation by such organisations should have the following results:
Step 4. Establish and co-ordinate nation-wide plans for training. Provide training based on tailored national standards established as part of Step 2. It is important in the development of this training to:
Progression of professionals within the workforce should rely on evidence that the individual has attained the skills necessary for functioning at each successive level through the successful completion of a curriculum of core courses that embody those skills. There should be a series of core courses based on the main functional responsibilities of each target audience. For example, an accounting officer would not have the same series of core courses as a buyer.
In addition to variations due to skill level needs, procuring entities should be able to apply variations needed to accommodate specialised areas of procurement that require unique considerations--for example, contracting for public works. When appropriate levels and variations are applied to each professional, an individual's professional career management plan emerges.
Step 5. Write or tailor course materials, encouraging participation by training network members. There are two essential phases:
Designing the Course. Design work includes setting course objectives, matching previously identified standards to the objectives, assigning a skill level (knowledge, comprehension, application or analysis) appropriate to the target participating audience. It is essential that the design provide for the participant to have an active role in each unit of the course. Active participation has long been recognised as an important key ingredient for learning.
Developing or Tailoring Course Materials. Existing class materials, such as those currently in use at educational institutions, may not always be relevant, even if they address the general subject area of the course. Some questions to investigate in deciding whether existing material is pertinent include:
Step 6. Distribute final course material to all members of the training network. Do not limit distribution to those who participated in development during the first five steps of the program. Ensure particularly that all potential sources of training are on the distribution list: educational institutions that provide business-related training, commercially available business trainers, and professional business associations. Readily available materials may encourage them to:
Step 7. Identify financial resources for training. Improvements in the skills of the procurement workforce result in cost savings to the organisation. Consequently, the program theoretically should pay for itself after it is underway. In the short term, however, there are two potential sources of funding:
Internal Budget Resources. Reallocation of existing training funds is the immediate resource. Budgeting under a new procurement workforce improvement fund in next year's budget is another resource.
Donor Resources. The fact that some donors have already expressed an interest indicates that donors are a likely resource for this program. The plan developed under Step 4 should be an effective tool for soliciting funds from potential donors.
Step 8. Monitor success of the training program. The ultimate question is: Are established standards being met? To answer that question completely, evaluations must analyse three different levels of results:
Immediate Results. These results should always be examined. Evaluation of the results of current training provides information as to whether or not any elements of content or delivery need revision. A successful program will evidence changes in skills, knowledge, or attitudes, depending on the original course objectives. Results can be documented through:
Successful completion of in-class exercises or homework. Because exercises are devised to strengthen skills associated with the objectives of each lesson (fulfilling standards), exercises measure results real time as the course is being presented.
Examinations/tests. One effective method is to administer a short pre-test and compare those results with the results of end-of-course tests. Both examinations should be structured to test skills at the level indicated in the course objectives.
Anonymous end-of-course evaluations by student participants. Evaluations should be structured through the use of a standard questionnaire to focus student attention separately on the course materials, the instructor or facilitator, as well as overall satisfaction. The questionnaire should anticipate lengthy additional comments in each area. These evaluations are particularly valuable when there are other indications that course objectives are not being met. They should never be used as the only evaluation technique for immediate training results.
Mid Term Results. These results are reflected in on-the-job behaviour. Therefore, the assessment involves monitoring the student's work performance. Consequently, the student's supervisor usually does it. It is helpful to provide guidelines and standard forms to supervisors to structure those evaluations.
Long-term Results. These results reflect changes in the functioning of the organisation because of the training. Typically, these results are more difficult to assess because variables other than the training (efficiency programs, workforce reductions, and so forth) may have had an impact.
In a rapidly evolving information age, the potential of electronic commerce has captured the attention of governments, businesses and consumers. The many advances in technology together with the relaxing of barriers to global trade have created an unprecedented area of opportunity. The developments in this area will have a substantial impact on growth and development for companies of all sizes, regardless of industry sector, global experience, or technological know how.
In commerce, goods and services are provided for money, and information needed to conduct such business is generally recorded as paper transactions (e.g. Request for Quotes, Purchase Orders, Invoices, Checks, etc.). Electronic Commerce (EC) is not a new concept, but it is now a key reason for fundamental change. This is especially true in the government to business and business to business market. Business-to-business EC is expected to grow dramatically in both the United States and Europe in the coming years, according to a pair of reports. A report by the Yankee Group has found that Business-to-Business EC will grow at a rate of about 30 times the growth of the GDP of most European countries. The transaction volume will grow from $138 billion in 1999 to more than $541 billion in 2003. In Europe, according to Visa International, the Business-to-Business purchase volume is estimated to increase to $176 billion by 2003, up from $7.15 billion in 1998. The services and manufacturing sectors will be the largest users of Business-to-Business EC in Europe followed by government, education, financial services, and retail trade.
EC is used to describe a new approach to commerce, which improves acquisition processes. EC is the exchange of business information with the assistance of technologies such as the Internet, Electronic Data Interchange (EDI), electronic mail (e-mail) and electronic funds transfer (EFT). Electronic commerce provides a new mode of conducting commercial transactions and trade promotion activities and will have fundamental implications on the way in which business transactions and trade are carried out. It will alter the relations among firms, between importers and exporters as well as between producers and consumers. Trade in numerous goods and services through electronic commerce will be much more efficient than trade using traditional means.
At the most basic level, EC is the quick, paperless exchange of critical business information by electronic means. In general, electronic commerce occurs when organisations or companies conduct business by replacing the standard paper transactions by electronic transfers of information. It takes the form of documents, as in purchase orders or letters of credit, or information, as in cargo inventories and product catalogues or in less tangible, and integral functions such as customer service and supplier relationships.
EC makes possible increased sales, productivity, distribution, and attention to customers as well as reduced operating costs, lead times, inventories and errors. It offers blanket availability in the global marketplace without regard to distance or time zone. It can be customised to an individual or company culture, language, preferences, and requirements. For the majority of routine but critical business exchanges, EC simplifies international trade. EC reduces costs. These efficiencies are then passed on to customers and trading partners.
EC has enterprise-wide impact, forcing a new perspective both on established business processes and on finding and retaining new customers. The impact crosses department and functional lines. It is this dynamic, pervasive quality that promises to forever change the way that governments and companies do business.
Electronic commerce may occur using proprietary systems, through general communication systems such as the Internet, or through a standardised structure called Electronic Data Interchange (EDI). EDI was developed over 30 years and is the computer-to-computer electronic transfer of business information in a public standard format (in North America using the ANSI X12 standard and EDIFACT in Europe, from the United Nations Economic Commission). EDI delivers a hot of benefits for companies that can afford the up-front expense of becoming EDI- enabled. Most stem from a single key starting point: data input. Because data is entered just once, errors are kept to a minimum, and the entire process is streamlined, saving paper and time and improving accuracy and order fulfilment for customers. In addition to data entry, other labour-intensive manual processing tasks, such as typing invoices, sealing envelopes, and affixing postage, are dramatically reduced or eliminated. People are employed more effectively, increasing productivity. Inventories are used more efficiently because EDI provides speedier, more accurate information on both the customer and supplier sides, reducing inventory costs, and lead times. In the long run, the investment in EDI delivers dramatic cost savings as well as the opportunity to do business within a wider, more global EDI-enabled trading community.
EDI has short falls. Although EDI has proved itself for a large range of EDI-capable industries and companies, the fact remains that EDI technology is inaccessible to the vast majority (approximately 80%) of the world's trading partners. Up-front costs and complicated implementations are most often the reasons given why EDI is not used, especially for midsize and smaller companies. Until recently, a large universe of business opportunities was out of reach for most mid-sized and smaller companies.
The advent of the Internet as a global tool for collecting, disseminating and exchanging information is making a tremendous impact.
EC on the Internet reaches far beyond EDI. It places its emphasis on the concepts of openness and interactivity while emphasising the World Wide Web's all-inclusive nature. The goals of EC are to enable low- cost availability to small and large companies alike, and to enhance connectivity and unlimited access to world-wide trading partners twenty-four hours a day. Ultimately, EC is designed with the flexibility to work with other software and to interface across an entire enterprise, while allowing dynamic, responsive, and immediate communication between customers and suppliers.
Recent developments in global network technology and graphic-based Internet applications facilitate the transmission of many different types of data in a fast and relatively inexpensive way. The Internet offers a low cost alternative to existing networks and traditional ways of producing, transmitting and using information. It will affect trade through electronic commerce and will change the way in which a number of human activities are done through providing the point for convergence between telephony, data transmission and broadcasting. The Internet is a tool that can expand intellectual activity world- wide and provides an opportunity for greater sharing of knowledge. It can lead to a fairer distribution of information, one of the primary resources of the next century. This environment provides the potential of huge benefits and lower barriers to entry provided that the right approach is followed both at the national and international levels.
Large industrial corporations have used electronic commerce for many years, but recently electronic commerce innovations have exploded. Electronic commerce supports streamlining of business processes. Many progressive purchasing departments have a goal of moving procurement transactions from traditional paper-based systems to electronic processing wherever possible. These transactions include solicitation and award documents as well as payment for goods and services. Using electronic commerce, the entire purchasing process can be completely electronically.
In general, there are five primary participants in the purchasing process in the private sector, or with the Government:
Traditionally, the interactions between each of these participants have been recorded in paper form. The old methods of commerce are swamped with paper and the process is necessarily slowed by the need to transfer paper between organisations, to file it, to verify it, etc. Of particular significance is the use of the "signature" to ensure the legal enforceability of commercial transactions.
The procurement technology environment is in a state of transition. Organisations are moving from an outmoded paper-based infrastructure of limited standalone personal computers (PCs) to a future-oriented, flexible environment that provides facsimile transmissions, bulletin boards, purchase cards, electronic catalogues, electronic funds transfer (EFT), and computer-to-computer communications using the Internet and electronic mail (e-mail).
Electronic Commerce means businesses communicate with each other electronically. Purchasing entities communicate with Vendors/Suppliers, Vendors communicate with Purchasing, and both the Purchasing entities and Vendors communicate with the Financial Institutions.
The phenomenal growth in Electronic Commerce is in using the Internet to simulate the retail environment (e.g. retail stores, catalogue merchants, and electronic malls). Some organisations exist only in the Internet (e.g. Amazon.com "The biggest bookshop in the world does not have any physical shops").
The advantages for the introduction of electronic commerce into procurement are numerous; some are set forth in the UNCITRAL2 Model Law. The benefits for the purchaser include:
From the private sector perspective, benefits of electronic commerce in public procurement include:
For example: In a February 19, 1999 presentation to the WTO Committee on Trade and Development, Michele d'Auray the Executive Director of the Canadian Electronic Commerce Task Force talked about the cost of sending a 42 page document from Ottawa to Tokyo.
This example illustrates the fact that use of the Internet to send the 42-page document was 720 times faster and 260 times cheaper.
The UNCITRAL Model Law has set guiding principles for implementing electronic commerce. These guiding principles are valid for both the public and the private sectors.
The UNCITRAL Model Law states that far ranging improvement in procurement performance involves more than improving the procedures followed in the acquisition phase of the procurement cycle. It means addressing also the need for effective procurement planning before the acquisition process, and effective contract administration capability following the entry into force of a procurement contract.
The components of this aspect of improving procurement systems include, in particular:
A good first step for many countries to prepare to engage in electronic commerce is to standardise the procurement of low value, high volume items and enable the development of management information. To take advantage of this in a controlled manner, a pilot program could be developed to accommodate the following actions:
1. Develop an electronic procurement request form
A three-part electronic form should be developed.
Part 1 would contain a description of needed goods or services (to be completed by requester). It would ask for data input for the following pieces of information:
Part 1 would also provide instructions to:
Part 2 would contain a budget review (to be completed by the accounting official), containing the following instructions:
Part 3 would ask for data information from the buyer (to be completed by the buyer) after acquiring goods or services in accordance with applicable procedures. Instructions for this part require the buyer to:
2. Develop an Implementation Plan
The success of a new process implementation largely depends on a thorough, well-conceived implementation plan. This plan should be at a task level of detail, with responsibilities and dependencies clearly identified. A pilot - or limited - implementation is recommended. This could be accomplished by identifying a capable project manager to work with selected procurement entities for testing this electronic commerce enhanced process. Upon successfully demonstrating this process, it could be used in a wider number of procurement entities.
If properly conceived as part of the pilot program, benefits could include:
Several developed countries have taken steps recently to revise their public procurement systems to improve their efficiency. The federal government of the United States began a program to Reinvent Government in 1994. One of its first tasks was to reform the laws of the public procurement system to make it more efficient. Likewise, the United Kingdom began a study in 1998 called Efficiency in Civil Government that has resulted in several improvements for government. The government of France is developing recommendations that will also improve the efficiency of its public procurement system. In all these cases, billions of dollars have been, or are expected to be, saved through improvement actions.
In this regard, there are lessons from the private sector, where the procurement function helps companies to respond quickly to market changes. Effective procurement can lead to significant cost reduction in the private sector. As an example, the typical cost structure of a manufacturing firm is for every dollar earned, around 60 cents is spent on purchased materials, 15 cents on labour, 15 cents in overhead activities, and 10 cents in profit. If, through better management of the purchasing function the cost of purchased materials were reduced by 10%, it would make a saving of 6 cents on every dollar. The result would be a 6% reduction in the total cost of the finished product. The company could make use of this saving by either reducing the sales price by 6% to compete more effectively in world markets or it could increase the company's profit from 10 cents to 16 cents: a full 60% increase! To achieve the same level of profit without reducing costs, sales would have to increase by the same 60%!
For governments, such efficiencies can directly translate into the acquisition of additional goods and services to meet national needs, funding of higher priority programs, or even reduced taxes on the public, which aid development.
However, as with any effective initiative, people are needed to translate management goals and policies into reality. This will require more attention to developing procurement professionals. Throughout the world, future demands on the procurement workforce are expected to be even more critical than they are today. In the developing world, as its economy grows, its procurement requirements can be expected to become more complex. If procurement is to adequately support this growth, the procurement workforce must be able to make more informed judgements about the best items available in national and global markets to satisfy requirements within the government's procurement system. In effect, the procurement workforce must become professionals in the art of global and national business management.
With a forward-looking and well-reasoned plan, and the professional workforce to carry it out, public procurement systems can be a source of greater value for all countries.
Notes and References
1996 UNCITRAL Model Law on Electronic Commerce adopted by the UN Commission at its twenty-ninth session dedicated to assisting all states to enhance their legislation governing the use of alternatives to paper based methods of communication and storage of information.
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