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The LCS-URBACT Procurement study
A report on the feasibility of targeting public procurement policies and methods to promote territorial economic growth and social cohesion: France & Germany
The LCS- URBACT feasibility study on public procurement concludes that affirmative local government procurement policies can promote territorial economic growth and social cohesion Providing 80% of all jobs and most local economic growth, businesses with fewer than 50 employees are the lifeblood of urban economies. Yet current local government procurement policies and methods often exclude this pool of local talent and provide no support for this dynamic sector. City managers’ lack of understanding of the potential for an affirmative procurement policy for creating and supporting jobs is responsible for a virtual hemorrhage of public monies that could be injected in the local small business economy.
Most managers believe that public procurement law makes this unavoidable. They are wrong. LCS Project research demonstrates that local government can empower public procurement professionals to promote territorial economic growth and social cohesion through better management of the global procurement process, increased staff professionalism and affirmative small-business friendly policies and procedures. These changes enable qualified businesses with fewer than 50 employees - often excluded by current procedures - to respond to competitive tenders and to win.
Such policies stimulate competition; they increase the quality of purchases and lower overall procurement costs. They respect current legislation. Over time they improve regional markets for goods and services, because when integrated with outreach, training and other business-support programs and backed by adequate information systems, these policies can promote the professionalism of small businesses and expand their ability to win new private and public clients. The same methods and systems support other local economic and social development goals, including promoting sustainable development, the reduction of long-term unemployment, and urban planning objectives of many sorts. The data needed to manage this global procurement function is also needed to manage territorial economic development overall.
A new generation of public procurement managers understands the problems and is eager to create solutions. By more professional management of the global procurement process and by partnering among cities within economic regions, local governments can create policies and methods to empower Procurement Units so that they can promote equitable growth through expansion of the small business economy, with increased social cohesion and new jobs
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The LCS Project develops practical policy options for equitable growth, actionable by local governments and subject to governance by their citizens.
1This is a summary report on an exploratory LCS-URBACT Procurement study on public procurement policies in 5 French and German cities.
1 The theoretical basis for the study was provided by KHNET, Inc., whose staff also conducted the current feasibility study. This research informed 2007 – 2013 URBACT program decisions. It is available at www.khnetonline.com.
In addition to public procurement, LCS focuses on 4 other local government services: Local services and amenities; Regulatory design and enforcement; Public information services and Governance.
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Methods
The study was conducted from March through December, 2007, with the collaboration of procurement directors from 5 European local governments in France and Germany. The French city of Roubaix participated in the study entirely at its own expense. Part of the cost of participation of the other local governments was subsidized by the European Commission’s URBACT program: The regional local government of Greater Lyon and the cities of Saint Etienne and in Germany, the cities of Rostock (URBACT Lead City) and Leipzig.
2The goal of the LCS procurement study was to ascertain the feasibility of affirmative, economically- and socially-targeted procurement policies and methods. Procurement directors from the network retained the following definitions:
We use the term “affirmative” to indicate proactive methods and policies designed to meet the needs of a supplier sector targeted by a territorial economic development plan;
We consider “economic and social” those small-business friendly procurement policies that help low- and high-tech businesses employing fewer than 50 people win competitive public tenders:
- These businesses represent an investor group that is most likely to invest in at-risk areas, - They are most likely to be locally-owned,
- They are most likely to include members of ‘social’ and minority groups.
- Small businesses provide the majority of jobs.
We define as “feasible” those changes in procurement policy that produce net financial gain for local governments and measurable economic and social gains for their local territory, while respecting three conditions:
- No modification of current procurement regulations
- No modification of local government attributions or organization
- Active support from local procurement professionals and elected officials.
The inter-city and intra-city seminars were valuable for the study for two reasons:
1. Poor public data. As public authorities do not maintain adequate data for analysis, we were able to use consensus among procurement experts to establish credible estimates. As an example, while many cities can show that up to 60% of tenders go to small businesses (less than 250 employees), they have no way of knowing what percentage of small businesses (<50 FTE) respond to their tenders, how many win tenders nor of these, how many are local.
32. The need to reveal the large margins of initiative within the procurement process: Bringing together procurement managers with radically different practices, but who believe they all apply the same regulations precisely, eyes are opened. The seminars reveal the very large margins of initiative possible in well-managed procurement.
1. The current situation: Procurement is a key lever for territorial development, too often ignored by local administrations
2 The procurement feasibility study is an operational complement to several URBACT and other networks, including EcoFinNet, Europolis as well as work on procurement and sustainable development conducted through Euro-cities.
3 Public data in France does not distinguish between a small business with 2 employees and one with 250. German prequalification data is similarly weak, and in addition excludes companies who do not pay to join. Such data cannot be used for outreach to businesses with fewer than 50 employees. Procurement managers cannot use it to identify potential suppliers from this target group who do not bid, nor why their tenders fail.
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According to Europe’s Eurocities network of large cities, public procurement by local governments throughout Europe in 2000 amounted to over 2 trillion Euros. What may be the largest budget item of local government outside wages is essentially unmanaged in terms of its huge impacts on territorial economic and social development. While the European Union has made efforts to open large tenders to International competition, and in spite of recent decisions to mandate sustainable development, it still is safe to bet that in no single European economic basin are these enormous sums of money spent with any oversight as their economic, environmental or social impact.
For historical reasons the management of procurement has been limited to reducing legal risks (ensuring compliance with codes and avoiding corruption); to obtaining competitive prices and quality and to responding quickly to operational needs. In order to reduce delays procurement has been decentralized, but without centralizing the data necessary to manage buyers, measure quality and cost-over-time of products and services or supervise compliance with social policies. As much as 40% of all municipal procurement escapes any supervision by professional procurement experts. In spite of efforts by local procurement experts to use every opportunity to improve tenders, expand competition, opportunities for oversight are often limited to contract reviews, data is insufficient to analyze the quality of market response to tenders.
Because of these limitations, in most cities public procurement experts cannot develop the professional specializations enabling them to support policy. As a result elected officials have no clue as to whether procurement practice supports or hinders the economic development policies they develop, whether procurement supports economic growth, social cohesion and sustainable territorial development. Cities and their economic basins do not have a single, unified view of procurement nor of territorial suppliers markets.
Rapid economic and social gains are possible
Given this point of departure, local governments can expect quick and large economic and social gains from more-professional procurement departments. The group of experts in our study agreed that a target of <15% average savings on the overall procurement expenditures of local governments is reasonable over several years.
Internal cost savings: One example: At the level of the “Communauté Urbaine” the full internal cost of a failed tender is approximately 40 000 Euros.
4The 5 cities in our panel had failure rates ranging from 2% to 30% of all tenders.
Lower prices: Private-sector benchmarks indicate that internal savings are small compared to lower prices that come from improved competition. It is possible to evaluate these savings against current benchmarks given adequate data, but the cost of doing this in each city far exceeded the study budget
Social gains: Meaningful estimates of increased response by, and awards to, SME’s of under 50 employees can only be made using data that is currently unavailable to cities and thus to this study. The LCS expert panel did not object to an assertion that a starting hypothesis might be that less than 10% of number of current tenders might be won by <50 FTE small businesses under more professional management of the procurement process as a whole. International experience demonstrates considerable success in promoting minority owned small businesses and employment through the use of public procurement methods similar to those proposed here.
4 A failed tender is declared when too few adequate responses are received to a call for tender. A “Communauté Urbaine” is a regional local government uniting cities within a larger territorial or economic region, its tenders are generally larger than most municipal tenders.
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Current tender procedures exclude competent local small businesses
Few, and poor quality responses to tenders correspond to poorly designed tenders including lot size and/or poor outreach to potential suppliers. Larger companies have specialized tender units, which lower the cost of winning bids, without supplying better products and services. Competent small local businesses frequently abandon bidding altogether after their bids are eliminated not for reasons of cost or capacity to respond, only for reasons of non-compliance with bidding procedures. This is an example of
“small-supplier fatigue” that reduces competition for tenders, raises prices for cities. These problems are well known to buyers, but as the global procurement function has no unified management, they are unable to impose system-wide solutions on line managers.
5Case-by-case remedies may let one small business win one bid, but not for the sector as a whole.
Social and economic gains are linked
That current tender procedures and outreach generate insufficient competition can be seen from the weak responses to tenders, and this notably from local <50 FTE small businesses. Few cities track the “small- supplier fatigue” that results from poor management of the global procurement process. Yet it drives up prices, as it excludes precisely the small businesses that correspond to the economic and social development goals of cities. In addition, the lack of territorial coordination among public procurement officials ( no common procedures, no shared data on suppliers, no coordination in planning tenders) means frequent competition among them for the same short list of local suppliers. This in turn means delays and along with the cyclical nature of public spending, creates boom-bust cycles notably in building trades (making investment difficult, even dangerous for small entrepreneurs that do bid for tender). This further raises supply costs.
Lack of outreach
Local governments supply their buyers with little operationally useful information on local supplier markets. What local information buyers have access to is often insufficiently up to date, and is not usable in pre-selection of potential new suppliers.
6As a result, for a buyer to find a new supplier requires extra effort on the part of procurement staff: meetings, calling colleagues, publicity. And to expand the list of known suppliers it is necessary for buyers to constantly test new suppliers. But in addition to the extra effort, testing new suppliers involves risk. To take these risks requires management policy. For without strong management support, trying new suppliers is a risk many buyers don’t take.
Existing social and environmental mandates are underused due to lack of City implication.
Current national laws and European regulations allow considerable leeway in imposing social criteria in bidding: Anti-discrimination, long term employment, sustainable development, diverse standards of urbanism. Some of these are pass-through, and can be imposed on private suppliers. As these require some courage to impose on suppliers, most local governments exert no pressure on buyers to use them to capacity. Two promising exceptions to this dim picture: French Départements can require suppliers to hire long-term unemployed with letters of understanding (clauses d’insertion) and do so to save unemployment and welfare payments. Sustainable development mandates are having widely diverse
5 The procurement quality program of Greater Lyon, by analyzing the procurement process in detail discovered that many of these incomplete bids could be saved by counseling bidders and simplifying procedures. Other
procurement officials were convinced – incorrectly - that such affirmative intervention was prohibited by law.
6 French buyers do not report using data from local regional Public Information Agencies nor from Chambers of commerce. German buyers do benefit from a pre-qualified list of suppliers, the cost of this system excludes some smaller suppliers, and in practice use of new suppliers has regularly been considered a professional fault among some supervising authorities in German Laender.
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impacts on local economies: carbon, renewable energies, and especially green building standards mandated through permitting and through new and rehab construction tenders.
2. Recommendations for short-term results
Relatively rapid improvements can be obtained by better management of the global procurement process, including improved professional skills for buyers in 6 areas (below), organization and reporting to establish adequate oversight of the global procurement process, harmonized procedures and better coordination among regional public procurement departments.
IMPROVING THE PROFESSIONALISM AND THE ORGANIZATION OF THE GLOBAL PROCUREMENT PROCESS
THE PROCUREMENT PROCESS
(Activities regulated under European and national procurement rules)
☺
Advertising strategies
Process optimization
Identification of needs.
Specifications, tender terms and
clauses
Supplier evaluation
Bid evaluation Evaluation of supplier execution and
delivery
6 key professional skill areas for buyers Recommended actions include:
Simplifying and improving procedures and benchmark costs, quality, supplier response (review the quality of global procurement processes),
Oversight of the global procurement process
Fully applying opportunities for socially and economically preferential tender terms (Contract terms and letters of understanding for social enterprises, employment, sustainable development, urbanism),
Improving outreach and education to small businesses and with local professional organizations
Coordinating and harmonizing methods among procurement departments within a territorial basin.
Potential short-term economic and social gains through procurement policy
The following short-term financial and social gains can be realized with adequate management of the global procurement process and reasonable territorial coordination among public procurement departments:
Reducing overall procurement budgets (a <15% target)
through more competition in bids
through better tenders and clauses
through better evaluation of suppliers
through lifetime cost-of-use evaluation of offers
through buyer coordination and improved lead time in tenders
Reduction of long-term unemployment & discrimination
thousands of jobs for the long-term unemployed (France)
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reduction in job discrimination (UK, Scandinavia)
open procurement markets to bids from new and minority businesses
Making better use of territorial supply markets
Designing business-friendly procedures and tenders
Correcting the reasons for small business absence from the bidding process in order to increase responses from qualified local suppliers and improve competition
Freeing public funds for social programs
3. Important mid-range improvements in territorial economic and social development can come from integrated management
Given the advantages, it is difficult to understand why most local governments have not already
“empowered” procurement to contribute to regional economic and social development. Professional, empowered procurement has every reason to collaborate with other city departments charged with promoting economic and social development. Global management of the procurement process requires an operational understanding of territorial suppliers markets in order to increase sustainably their capacity to bid and to supply better quality goods and services sustainably. These suppliers’ markets precisely correspond to the economic basins which local and regional governments’ economic development and social units are charged with developing.
The need for management integration seems obvious. It is principally hindered by the lack of recognition on the part of City Administrators of the role that procurement can play, and therefore their lack of support (empowerment) for integrating procurement criteria and goals into the programs and management of other public authorities. Once done, it can contribute substantially to optimize territorial economic and social development. In this way preferential programs to help local business can be integrated into public procurement department resources without violating National or European regulations. This external support for procurement can take 4 major forms:
OPERATIONAL UNDERSTANDING OF LOCAL SUPPLIERS’ MARKETS
SUPPORT FROM PUBLIC PROGRAMS (Activities unregulated by procurement laws)
Assess the territorial marketplace
Structure ongoing communication with suppliers and other
SMEs
“Organize a dialogue with the private
sector”
Information Systems 1. Procurement process and systems
2. The territorial Marketplace
Partnerships and networks among
territorial purchasing departments
Key areas of external support for global procurement management
Integrate procurement expertise into small business promotion programs
To promote better competition in tenders at a regional level requires active programs to identify, rate and
educate potential bidders: this is fully within the purview of the procurement mission. Laws prevent
procurement officials from preferentially promoting local small suppliers, but preferential policies are
fully within the purview of other public programs. Procurement experts should therefore actively
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