Public Procurement in Developing Countries: Market Opportunities Through Electronic a report by Wayne A Wittig Senior Adviser on Public Sector Procurement, International Trade Centre United Nations Conference on Trade and Development/World Trade Organization (UNCTAD/WTO) The International Trade Centre s (ITC s) mandate within the UN system is to help promote and develop the trade of developing countries and economies in transition. While most of its work focuses on exports, it also assists in improving international purchasing and supplies management. In the private sector, this can lead to greater competitiveness and export readiness. In public procurement, improved techniques can also indirectly affect exports, for instance by: ensuring that needed infrastructure projects are completed on time and within budget; improving administrative services related to trade; establishing a launch market base for small and medium enterprises (SMEs) to help them later expand into export markets; and creating reciprocal export opportunities within regional trading groups and also globally by opening up the country s public procurement marketplace. In the course of ITC s work, a range of important issues have arisen regularly that need to be addressed appropriately by each country. One of the more challenging has been to answer the question as to how e-commerce can be applied to public sector procurement and what it might mean to local suppliers if the Internet was used more fully to attract external sources. e- can reduce transaction costs for suppliers. This is possible through more effective management of operations by procuring entities. For example, eliminating or reducing the time and labour involved in the repetitive typing of data, mailing, telephoning, manual filing and photocopying, automated payment procedures, simplified purchasing procedures (request for quotations) and automated collection of procurement data and reporting contribute to cutting costs in the private and public supply chain. Increased competition and better value can result from the wider diffusion of information about procurement opportunities, increased access for SMEs using similar technologies, access to catalogues and eased use of government-wide contract arrangements for commonly used items. ITC provides assistance through work conducted jointly with local staff and local consultancy expertise. ITC is developing a range of technical tools intended both to support its technical co-operation projects and to serve as important resources for beneficiary countries. These include guides covering topics such as developing SME access to public-sector procurement and applying e-commerce to the public sector. e- and Public Procurement In a rapidly evolving information age, the potential of e-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 unprecedented opportunities for business expansion across borders. 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. Whether or not this can translate into specific growth opportunities for a developing country exporter within the huge but segmented international public procurement marketplace will depend on: the skill of its government in balancing the promotion of new technology for domestic suppliers with domestic absorption capacities; the scope of regional and international agreements applicable to the country; and the entrepreneurial skills and motivation of the firm. An active e-commerce programme in public procurement can help develop suppliers into global competitors. By introducing new technology solutions in the government-to-business marketplace, the government acts as an incubator to help build demand for state-of-the-art Wayne Wittig is Senior Adviser on Public Sector Procurement, International Trade Centre United Nations Conference on Trade and Development/World Trade Organization (UNCTAD/WTO). Prior to joining the International Trade Centre, he was a career procurement official in the US Federal Government. His responsibilities ranged from contract specialist to a Deputy Associate Administrator in the Office of Federal Procurement Policy (OFPP) in the Office of Management and Budget, Executive Office of the President. While at OFPP, he led the Procurement Team of the Vice President s National Performance Review (NPR) from April September 1993 to develop a programme for government-wide acquisition reform. He also developed a programme on public procurement for the Organisation for Economic Co-operation and Development (OECD) to establish open public procurement systems in Central and Eastern Europe, working with the governments of Poland, Hungary and the Czech Republic. He is a Certified Professional Contracts Manager and a Fellow of National Contracts Management Association. He has an MBA (International Business) from Temple University, where he also did undergraduate work. 135
technology. The status of being state of the art is relative to the local level of technology in the business sector. Thus, in one country, the use of e-mail could be state of the art, while in another it is making binding contracts over the Internet. However, government intervention through procurement policies must be balanced by the capacity of domestic sellers to make the required changes and remain to compete in the national public procurement market. Failure to do this will restrict public procurement opportunities to relatively few firms. Such limited competition normally leads to increased prices to the government (absent increased competition from abroad), while it reduces the number of domestic suppliers participating in the business of government. In a country with a vocal private sector, the political response by the technologicallydisadvantaged suppliers could result in changes in government or changes in law to eliminate the disadvantages for the local suppliers. Reducing Transaction Costs The traditional focus on the use of e-commerce in public procurement has been to lower transaction costs for the public buyer and increase competition to add value to national budgets. The greatest value is added by using technology to create new ways of doing things, instead of just doing the same old thing electronically. Revising or streamlining the process can merely involve internal changes, such as moving the purchase request through fewer people in the review process via electronic means to gain approval before a contract is awarded, or it can involve external changes like requiring suppliers to only communicate electronically. Such streamlining can save significant sums by eliminating tasks and associated resources. After the initial investment in the technology, this leads to lower transaction costs due to fewer burdens on suppliers and more transparency of public operations through more widely accessible computer networks. 138 The USA provides an illustrative example of the problems that can occur. The first attempt by the US government to implement an electronic procurement system the Federal Acquisition Computer Network (FACNET) was a failure because it was a closed or proprietary system. A 1993 US government review predicted that adopting e-commerce for small purchases could save the government US$500 million a year. The US government then mandated the creation and use of FACNET for purchases between US$2,500 and US$100,000. Two years later, less than 2% of all federal procurements in the specified price range were accomplished through FACNET, and over 75% of the procurements were actually below the US$2,500 threshold. Barely 1% of all government contractors registered in the FACNET database. The system failed because it was proprietary. In order to use it, firms had to invest in technology and software that would only work with FACNET. By contrast, open systems like the existing revised US federal system allow users to format data once and gain access to other systems. The US government has also implemented a project designed specifically to assist SMEs. In 1997, The US Small Business Administration developed PRO- Net with 200,000-plus small firms in the database. PRO-Net is an Internet-based electronic gateway to information for and about small businesses, and is provided to users free of charge. PRO-Net provides profiles to federal and state agencies, federal prime contractors and others who may be seeking US small business sources as prime contractors and subcontractors. The system allows participating firms to continually update their profiles with current information. A single-point-of-entry system is best to minimise investment for suppliers and maximise competition. Public sector and corporate procurement officers benefit as these offices enter their tender and other opportunities from their desktop computers to be automatically distributed to all SMEs. Such an ability to match opportunities to suppliers electronically could contribute substantially to enabling more SMEs to benefit from procurement opportunities. South Africa currently has a number of e-commerce systems in existence, each with its own advantages and limitations. There are indications that many SMEs have difficulty in accessing procurement opportunities presented through electronic media in the various systems. A single-point-of-entry system could help with such problems. Public Procurement Market Segments Market opportunities exist in both the national and international segments of public procurement. National Public Procurement Markets How big is the total public procurement marketplace? This is a difficult question to answer with any certainty because statistics are not maintained in an easily integrated fashion. Anecdotally, we know that the market is quite large. The EU estimates that the public procurement marketplace at all levels of government in Member States involves about US$850 billion annually. The USA spends about US$200 billion annually at the
Public Procurement in Developing Countries federal level while another US$400 billion is estimated to be spent at the state and local level. Determining the level of procurement is often inexact at best. Many governments do not report such statistics. Public procurement is often decentralised among many ministries and, increasingly as authority is devolved from the centre of government, between central and sub-central levels of government. Based on a study conducted by ITC, the size of central government purchases varies between 5% and 8% of gross domestic product (GDP) for most industrialised countries. For the Middle East and Africa, the magnitude of central government purchases ranges from between 9% and 13% of GDP. Applying this work just to sub-sahara Africa, we estimate that the total public procurement base ranges between US$30 to US$43 billion, with South Africa accounting for from US$11 billion to US$16 billion of this amount. We have no statistics on the level of trade among developing countries and thus do not know to what extent these national markets are open to exporters from other developing countries. Eligibility for developing country suppliers to compete on the national public procurement level varies by country and by their trading relationships. Regional agreements or customs unions often provide for member countries to compete for public procurement contract opportunities. However, the extent to which exporters obtain contracts under these arrangements is probably not very great. We say this based on the experience of one of the most successful custom unions in history, the European Union. In its 1997 review of public procurement, the EU reported that: The share of imports for public contracts in Europe remains modest: for direct cross-frontier business, they have risen from 1.4% in 1987 to 3% in 1995; and for purchases made through importers or local subsidiaries, they have increased from 4% in 1987 to 7% in 1995. 1 The World Trade Organization (WTO) has three initiatives underway (below) that focus on public 1. Green Paper: Public Procurement In The European Union: Exploring The Way Forward, Communication adopted by the Commission on 27th November 1996 on the proposal of Mr Monti. A VAILABLE N OW The official business and technology briefing for the Forum on Electronic for Transition Economies in the Digital Age, 19 20 June 2000, Palais des Nations, Geneva Organised by the Committee for Trade, Industry and Enterprise Development United Nations Economic Commission for Europe. Fax us on +(44) 020 7452 5050 for the attention of Tina Price and we will send you an order form. The business and technology briefing for the Forum on Electronic for Transition Economies in the Digital Age, 19 20 June 2000, Palais des Nations, Geneva Organised by the Committee for Trade, Industry and Enterprise Development United Nations Economic Commission for Europe $95 ( 60) each (includes postage and packaging) (10% discount for five or more copies) Includes exclusive CD-ROM Cardinal Tower, 12 Farringdon Road, London EC1M 3NN Tel: +44 20 7452 5000, Fax: +44 20 7452 5035 e-mail: ecommerce@wmrc.com
procurement that could help open more opportunities to exporters from developing countries. Government Procurement Agreement The WTO Government Procurement Agreement (GPA) is a voluntary agreement to extend mostfavoured-nation and national treatment rules to government purchases of specified government agencies. These agencies are required to make their purchases (which exceed specified threshold limits) by inviting tenders open to participation of suppliers from other signatory countries. A separate action of accession is needed to join the GPA, which involves negotiations with all signatories to determine coverage of the Agreement. At present, the only developing countries/areas that have acceded to the GPA are Singapore, Hong Kong (China) and the Republic of Korea. There are provisions for special and differential treatment for developing countries that could allow exclusion of certain products or services from the rule of national treatment for which developing countries wish to continue to extend price preferences. Under Article XXIV.7 (b), the GPA members are seeking to improve the Agreement and achieve the greatest possible extension of its coverage with regard to the Special and Differential Treatment for Developing Countries under Article V of the Agreement. Working Group on Transparency in Government Procurement The Singapore WTO Ministerial Conference of December 1996 decided to establish a Working Group on Transparency in Government Procurement to conduct a study that could lead to the development of elements to include in an appropriate agreement on the subject of transparency. The Working Group has held several meetings to accomplish this task and produce its report. This report could signal a new phase of work on the elements of transparency in public procurement and how they should be applied by WTO member states. General Agreement on Trade in Services Article XIII of the General Agreement on Trade in Services (GATS) requires that there be multilateral negotiations on government procurement in services under the agreement within two years of its effective date, or 2000. Since the procurement of services is a fast-growing area of public procurement in many countries, any change under GATS could have a significant effect in many countries. International Public Procurement Markets In many developing countries, up to 90% of bidding opportunities are associated with international agency project procurement. The World Bank reports that: The average annual lending commitments from International Bank for Reconstruction and Development (IBRD) and International Development Agency (IDA) of US$20 billion to US$25 billion generate upward of US$50 billion a year in total project investments worldwide. Recipient countries use these funds to purchase goods and equipment, construct civil works, and obtain consultant services needed for projects. Each project can involve many separate contracts and business opportunities for suppliers, contractors and consultants worldwide. Some 40,000 contracts are awarded each year to private firms. 2 While the World Bank is the largest lender for developing countries, other regional banks such as the African Development Bank, European Bank for Reconstruction and Development, the Asian Development Bank and the Inter-American Development Bank provide additional money spent under projects funded by loans or grants to the country. In addition, UN agencies spend about US$2 billion each year acquiring the goods and services needed to support its operations. Information on local procurement opportunities funded by international agency projects and loans is available through a UN bi-weekly tabloid called Development Business that is available by subscription. Development Business carries information on business opportunities generated through the World Bank, regional development banks and other development agencies. For those with access to the Internet, the UN launched the United Nations Development Business website (http://www.devbusiness.com) in January 1999 that provides most of this information electronically. The World Bank Procurement Group also has a page on the World Bank s website (http://www.worldbank.org/html/opr/procure/co ntents.html) containing subscription information to Development Business, full texts of the Bank s procurement guidelines, general information on procurement, a list of available Standard Bidding Documents and schedules for the Business Briefings in Washington and Paris. Identifying Government-to-business Opportunities In the more technologically advanced economies, governments can reduce the transaction costs 140 2. World Bank website at http://www.worldbank.org/html/opr/procure/contents.html
Public Procurement in Developing Countries associated with gathering information. Even when detailed bid information is published in newspapers and trade journals, it is often not readily accessible by SMEs. It is beyond the capacity of many SMEs to undertake the time-consuming and expensive examination of various sources of information. Electronic dissemination to support governmentto-business (G2B) transactions, either through the Internet or by fax, is far more efficient. businesses, not just those with staff dedicated to government relations. Additional information on procurement opportunities can be found through any good search engine on the Internet. For convenience, some selected websites are offered below for information (where you will have access, amongst other things to the Tenders Electronics Daily website): The appropriateness of this approach depends on the level of technological penetration in a given country. On a national level, electronic procurement systems are used by governments in the most developed countries as one would expect; however, the systems are also beginning to appear in the more advanced developing countries, such as Chile and Mexico. African Development Bank European Bank for Reconstruction and Development, Asian Development Bank Inter-American Development Bank European Union http://www.afdb.org/opportunities/business.html http://www.ebrd.com/english/procure/index.htm http://www.adb.org/business/opportunities/ http://www.iadb.org/exr/english/business_opp /business_opportunities.htm http://simap.eu.int/en/pub/src/welcome.htm Moving to greater use of digital and electronic dissemination of information is an essential reform in the way government does business. It allows the government to reach more businesses with more information at less cost to both business and government. It also makes the government more open and accessible to all businesses, not just those with staff dedicated to government relations. Business Opportunities information is also available from the following countries: Australia: Transigo Canada: MERX India: India invest United States of America South Africa http://www.transigo.net.au http://www.merx.cebra.com http://www.india-invest.com/tender.htm http://www.arnet.gov/fedbusopps/ http://www.saol.co.za/ The move towards electronic and digital dissemination, bidding and registration also has a secondary benefit for the SME sector, in that it increases the use of technology. In the longer term, this has the potential to make SMEs more competitive locally and internationally. Within Europe, the European Electronic Public Procurement System (ELPRO) is piloting regional procurement information partnerships and business information networks targeted at SMEs on a number of sites. They include a range of free and paid services, such as fax-on-demand services, electronic data interchange and Internet services, to demonstrate ways of establishing SME support networks in Europe. This is intended to enable procuring entities to generate support services for local SMEs and, at the same time, capture the efficiency benefits of electronic procurement for themselves. The ELPRO example from the EU and the Pro- Net example from the USA are not unique. Most industrialised nations have a programme similar in design, if not in scope. Moving to greater use of digital and electronic dissemination of information is an essential reform to the way government does business. It allows the government to reach more businesses with more information at less cost to both businesses and the government. It also makes the government more open and accessible to all Conclusion The public procurement marketplace is a huge, but largely untapped, pool of potential sales to public buyers for SMEs in developing countries. e- is being used more and more between government and business in developed, and some developing, countries to reduce transaction costs for both buyers and sellers. However, the ability of exporters to tap into this market is limited mainly by their Internet literacy and the trading agreements accepted by their national governments. More receptive public marketplaces for expanding trade are likely to be international agencies and public procurement entities of member states within regional trading groups. Governments can help improve the sales success of their exporters in this market by making reciprocal trade and fair access to public procurement markets key considerations in negotiations of international agreements. In addition, in providing meaningful training in the use of e-commerce and the application of international procurement principles, governments ensure that their national public procurement markets promote techniques suitable to their national technological infrastructure and apply international transparent procurement procedures. 141