The Challenges of Public Procurement Reforms

Annalisa Castelli, Gustavo Piga, Stéphane Saussier, Tünde Tátrai, Annalisa Castelli, Gustavo Piga, Stéphane Saussier, Tünde Tátrai

• Publisher: Routledge
• Year: 2020
• Print ISBN:
  9780367902674
• eBook ISBN:
  9781000173116
• Topic: Economics
• Subtopic: Economic Theory
• Index: Economics

Public procurement affects a substantial share of world trade flows, amounting to 1000 billion euros per year. In the EU, the public purchase of works, goods and services has been estimated to account on average for 16 percent of GDP. The novelty of this book is that it focuses on the new European Union Directives approved in 2014 by the EU Parliament.

The book consists of original contributions related to four specific themes of interest to the procurers' day-to-day role in modern public purchasing organizations – both economists and lawyers – allowing for relevant exchanges of views and "real time" interaction. The four sections which characterize the book are Life-cycle Costing in Public Procurement; Calculating Costs and Savings of Public Procurement; Corruption and Probity in Public Procurement and Public Procurement and International Trade Agreements: CETA, TTIP and beyond. These themes have been chosen for their current relevance in relation to the new European Public Procurement Directives and beyond. The original format features, as is the case with the first three volumes, an introductory exchange between leading academics and practitioners, from differing disciplines. It offers a series of sequential interactions between economists, lawyers and technical experts who supplement one another, so as to enrich the liveliness of the debate and improve the mutual understanding between the various professions.

This essential guide will be of interest to policymakers, academics, students and researchers, as well as practitioners working in the field of EU public procurement.

Part I

Life-cycle costing in public procurement

The new European Directive on Public Procurement opened the door to the use of award criteria designed to keep into account innovation, environmental and social issues in the process of determining the assignment of public contracts, also with the introduction of “life-cycle costing” (LCC) as mentioned in Article 67 and clearly defined in Article 68.

This explicit provision by law enhanced an interesting debate on the appropriateness of the integration of LCC parameters into public policies that still have the “most economically advantageous tender” as the leading light to ensure the best value for money.

Life-cycle costing moves beyond the simple purchasing price, including many other important costs distributed along the entire life of the procured good or service.

The implementation of this approach naturally raises several questions to be answered and challenges to be solved. Moreover, capacity building, especially designed tools, digital platforms and expertise, are needed to apply LCC in a proper way.

This first chapter of the book thus focuses on the desirability of this LCC approach within the realm of those available for the public expenditure processes of evaluation and selection of suppliers and also on its effective role as a sustainable public procurement tool.

The two debaters, Stéphane Saussier and Christopher H. Bovis, put on the table their main pros and cons on Articles 67 and 68 of the EU Directive, discussing the several different perspectives and highlighting the importance and difficulty of the development of a common and harmonized methodology among Member States.

The two contributions that follow are instead intended to focus the analysis with different analytical perspectives. Dragos and Neamtu review the broader concept of “life-cycle thinking” (LCT) both in private businesses and in the public sector, reasoning on its incorporation into legal definitions. On the other side Adell Querol, Schaefer and Esquerrà i Roig look at the same topic considering LCC as an economic tool which may or may not support green public procurement and that, to lead to a complementarity between the two and to avoid LCC being a competing rather than a complementary tool, a mixed approach should be followed.

1Life-cycle costing in public procurement

Colloquium

Stéphane Saussier and Christopher H. Bovis

Opening remarks – Stéphane Saussier

How to organize the award of public procurement contracts efficiently is a major preoccupation for economists. Should we focus on price only? Should we introduce other criteria? Should we risk introducing discretionary power for public procurers? The new European Directive on public procurement clearly open the room for more criteria linked to innovation and environmental and social issues. It also suggests that the best offer may be selected on the basis of life-cycle costing.

Moving beyond price criteria

Life-cycle costing (LCC) can be defined as an economic assessment considering all agreed projected significant and relevant cost flows over a period of analysis expressed in monetary value.

The European Directive 2014/24/EU on Public Procurement gives credit to LCC. In Article 67, specifying contract award criteria, it is stated that:

The most economically advantageous tender from the point of view of the contracting authority shall be identified on the basis of the price or cost, using a cost-effectiveness approach, such as life-cycle costing […]. It may include the best price-quality ratio, which shall be assessed on the basis of criteria, including qualitative, environmental and/or social aspects, linked to the subject-matter of the public contract in question.

The same Directive in Article 68 gives a precise definition of LCC:

Life Cycle Costing shall to the extent relevant cover parts or all the following costs over the life cycle of a product, service or works:

(a)costs, borne by the contracting authority or other users, such as:

•costs relating to acquisition,

•costs of use, such as consumption of energy and other resources,

•maintenance costs,

•end of life costs, such as collection and recycling costs.

(b)costs imputed to environmental externalities linked to the product, service or works during its life cycle, provided their monetary value can be determined and verified; such costs may include the cost of emissions of greenhouse gases and of other pollutant emissions and other climate change mitigation costs.

Both direct costs and indirect costs shall be included in the LCC calculation. In the context of sustainable public procurement (SPP), the use of LCC is essential to move beyond considering only the purchase price of a good or service. Green and socially preferable assets may carry considerably higher purchasing price tags than their less sustainable substitutes. The idea is that the purchase price does not reflect the financial and non-financial gains that are offered by environmentally and socially preferable assets as they accrue during the operations and use phases of the asset life cycle.

At what cost?

It has long been recognized by economists that price should not be the only criteria to award contracts (Bajari et al., 2009). However, economists also highlight the risks associated with giving more discretionary power to public procurers.

The economic literature suggests that buyers deliberately choose to engage in award procedures that are opening up room for their discretionary power for efficiency reasons. The primary reason for introducing discretion (for example through negotiation) is that award procedures based on price auctions lead to inefficient outcomes if the good or service to be procured is technically complex and/or barely contractible (Goldberg, 1977; Bajari and Tadelis, 2001; Bajari et al., 2009). Negotiation either facilitates the dialogue between the parties, thereby reducing contractual incompleteness (Tadelis, 2011; Bajari et al., 2014), or eases the implementation of relational contracts (Calzolari and Spagnolo, 2009). In such cases, auctions without any negotiation prove to be inefficient due to the inability of the buyer to specify the contract. Several empirical studies confirmed that negotiation can be attractive when ex ante information from contractors is needed to make the contractual design as complete as possible (Decarolis, 2014; Coviello et al., 2018).

However, the economic literature also suggests that public procurers’ discretion may be detrimentally used to favor a bidder during the award phase (Moore and Staropoli, 2018) in order to follow private agenda or due to corruption. This is probably in order to limit public procurer’s discretion that Article 68 of the European Directive specifies that

Where contracting authorities assess the costs using a life-cycle costing approach, they shall indicate in the procurement documents the data to be provided by the tenderers and the method which the contracting authority will use to determine the life-cycle costs on the basis of those data.

(a)it is based on objectively verifiable and non-discriminatory criteria. In particular, where it has not been established for repeated or continuous application, it shall not unduly favour or disadvantage certain economic operators;

(b)it is accessible to all interested parties;

(c)the data required can be provided with reasonable effort by normally diligent economic operators, including economic operators from third countries party to the GPA or other international agreements by which the Union is bound.

Although the Directive provides for a definition of LCC (together with a list of cost items to be included in the calculation), no clear explanation on how this calculation can be performed is given. Many points need to be clarified before an extensive application of the LCC by public procurers can take place, including how externalities can be monetized. Some costs might be difficult to anticipate, like renegotiations that might occur during the execution stage of the contract.

Where do we stand?

Because there is no clear methodology and no easy way to use LCC without any risk of being challenged and accused of distorting award procedures, it appears that it is rarely used by public procurers. The results of a survey carried out on a sample of 119 public administrations from different countries (Nucci et al., 2016), clearly show that if green public procurement practices are commonly applied by public administrations, this is not the case of LCC, which still remains very limited due to some barriers such as

•lack of information on costs

•lack of reliable data sources for the evaluation of external and internal costs

•lack of competence and knowledge to accurately assess and verify information submitted by bidders in response to criteria (Nucci et al., 2016).

Opening remarks – Christopher H. Bovis

Is life-cycle costing a quantitative rather than a qualitative award criterion?

The new public procurement directives significantly alter the process of tender awarding, through assigning a relevant importance to life-cycle costing.

A new contract award criterion has been introduced in Article 67, “… the most economically advantageous tender from the point of view of the contracting authority shall be identified on the basis of the price or cost, using a cost-effectiveness approach, such as life-cycle costing …”

Life cycle means all consecutive and/or interlinked stages – including research and development to be carried out, production, trading and its conditions, transport, use and maintenance – throughout the existence of a product or a works or the provision of a service, from raw material acquisition or generation of resources to disposal, clearance and end of service or utilization.

Life-cycle costing is a tool to evaluate the costs of a good or service, taking into account not just price (the upfront cost, usually incorporating production costs) but all costs which will accrue with operation and maintenance and finally disposal. When externalities are included, life-cycle costing becomes “an environmentally relevant methodology.”

Life-cycle costing is portrayed as a key instrument in fostering innovation and achieving the goals of sustainable development laid down in the Europe 2020 Strategy.

The origins of life-cycle costing

The reason behind life-cycle costing is to make hidden costs and externalities visible during the procurement process and particularly the tender evaluation stage. Hidden costs are costs that affect the contracting party. Externalities are costs that affect a party who did not choose to incur them. The objective is to internalize an externality, so that costs will affect mainly parties who actually chose to incur them.

An externality is often related to environmentally related costs, which are fairl...

Table of contents

• Cover
• Half Title
• Series Information
• Title Page
• Copyright Page
• Contents
• List of figures
• List of tables
• List of contributors
• Preface
• Foreword: The OECD’s work on Public Procurement: Reshaping the global agenda
• Part I Life-cycle costing in public procurement
• Part II Calculating costs and savings of public procurement
• Part III Corruption and probity in public procurement
• Part IV Public procurement and international trade agreements: CETA, TTIP and beyond
• Index