Jeff TaylorOperations Services and Financial Management Department

Asian Development Bank

Outsourcing Procurement in the Public Sector, A Case Study

Introduction

• Project design will generally include procurement capacity and risk assessments

• Sizeable amounts of MDB lending has been dedicated to capacity development

• Question to consider:– Do executing agencies have the capacity to

manage procurement?– Can the private sector undertake procurement?

Do executing agencies have the capacity to manage procurement?

• Is actual capacity insufficient to meet procurement needs?

• What are the costs of maintaining or building procurement capacity?

• Does the agency have the financial resources to invest in the procurement function?

• Is delivery of procurement a core mandate?• Are the transactions repeatable?

Can the private sector undertake procurement?

• Does the law allow it?• Is there an existing domestic market?• Long term or transactional agreements?• Full outsourcing (Agency) or partial?• Costs and fee structure (percentage; target

pricing; success fees etc.)• Risks – dependency; lack of control; quality

etc.

Procurement Agents in the Public Sector

• Less of an agency (outsourced role) more advisory/consultancy

• Public procurement regulations (and MDB policies) can constrain the potential benefits

• Shorter term relationships that deliver less value

• Focus on the agents fee and not transactional benefits and value creation

Procurement Agents in ADB Projects

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

1

Receipt of Draft Bidding Documents and Specific Notice and Acknowledgement by ADB

2Review and comments of Specific Notice/IFB

3Documents sent to COSO & OGC

4Comments received from COSO & OGC

5ADB Approval for Bidding Documents

6Advertised in Local Newspaper

7 Bidding Documents Issued

8Issuance of Bid Documents to Bid Submission Date

9 Bid Closing/Opening Date

10 Bid Evaluation

11ADB Approval or Non-concurrence

12 Contract Signing Date

Average Time Taken for ICB Single-Stage-One Envelope Bidding ProcessProcurement Activities

145 Days

ADB

Executing Agency

Bidders

"Day" means calendar day

ADB Experience

Procurement Agents in ADB Projects

ADB Experience• Weak procurement capacity harms projects

Why Does East Asia Complete Evaluations twice as fast?

• China’s Use of Procurement Agents

• Functions of PAs:a. Decision making and consultation.

PAs provide professional advice on the relevant laws, the market and suppliers

b. Coordination. PAs coordinate the transactions and relations among all involved

c. Administrative function. PAs handle all the administrative tasks involved in the public procurement activity, including importation and tax relief requirements

Source: Foreign Capital & Technical Import Center, Ministry of Railways, PRC

China’s Market-Based Model

• Advantages of Procurement Agents:1. Minimizes information asymmetry2. Reduces legal risks3. Professionalism4. Contributes to advancement of new and international

practices• Accreditation of Procurement Agents• Impact of a regulated fee structure (CBTA estimates)

– Value of PRC’s tendering market (2012): US$2 Trillion– Gross procurement industry revenue 0.01%– Gross profit 11% of revenue

Centralized Procurement Agency

• Consip, Italy– From 50,000 purchasing entities to single a

centralized agency– Public spend for goods/services accounts for 8% of

GDP (US$162 billion)– 40% spent on generic goods– Public agencies that buy from Consip save around

28% of purchase price

Centralized Procurement Agency• Korea’s Public Procurement Service

Source: Public Procurement Service, Republic of Korea (2011)

Source: Ministry of Strategy and Finance, Republic of Korea (2011)

Centralized Procurement Agency• Korea’s Public Procurement Service

Source: Public Procurement Service, Republic of Korea (2011)

Advantages Disadvantages

Centralized Procurement • Economies of scale• Accumulated expertise and data• Focused monitoring for transparency

and traceability• Effective use of government

procurement as economic policy tool

• Complex and longer procurement processes

• Limited choices for the procuring entity

Decentralized Procurement

• Freer choices for the procuring entity• Shorter process time

• Lower professionalization • Lesser standardization• Loose monitoring – risk of moral

hazard

Centralized Procurement Agency• Philippines’ Procurement Service

Source: Procurement Service, Department of Budget and Management, Philippines (2012)

Philippines’ System

• Agency-to-agency, like the centralized approach of PS-DBM

• Outsourced procurement of non-commonly used goods and works to private or public agencies– Allowed by IRR of RA 9184. Guidelines to be

issued• Procurement management

Conclusion

• Public procurement can:– Around 8-20% of GDP– As high as 30% of total public expenditure

• Leakages through fraud, abuse and waste can be 20-50% of spending (WB and OECD)

• Ex.: Percentage of difference between highest and lowest prices of similar goods in UK:Price Range % Variation

Toner Cartridge (per cartridge)

£41 to £89 117

Electricity (day rate kWh) 4.8p to 8.3p 73

Box of 5x500 sheet A4 (80 g/m²)

£6.95 to £14.95 115

Post-it notes (pack of 12) £4.41 to £10.55 139

Source: National Audit Office, UK

Conclusion

• Advantage of Procurement Agent will depend heavily on reputation and ability to tap markets – increases confidence of market (esp. international firms) and competitiveness

• Savings generated by successful procurement exercise increases impact of ODA projects– Use figure of 20% of spend lost through leakages, but

assume conservative estimate of 15% potential savings– Juxtapose with ADB’s 2011 procurement portfolio of

around US$10.7 B: estimated savings of US$1.6 B (roughly ADB’s annual lending program for East Asia region