amina: episode 003.

economics of e-procurement.

thanks to copenhagen consensus for compliling the data. legends.

electronic procurement (e-GP) will be an optimal strategy to tackle the corruption beast.

cool. but how?

• it lowers the bidding and transaction costs for firms. this attracts more firms to the market, which stimulates competition and mitigates the high prices associated with single bidders.
• the automation of certain functions reduces the potential for bribery and graft that exists with human interaction.
• the digital fingerprint that is left from operating the system increases accountability in decision-making.
• the transparent nature of the technology facilitates audit and monitoring functions and significantly lowers the cost of doing so.
• red flags can be automated given the authorities (and sometimes even companies and citizens’) advance warning of a problem that can be investigated and fixed before things go seriously wrong.

real-world example:

open data e-GP reforms in Moldova resulted in:

• 15.4% savings on medical procurement transactions worth US$60 million
• 19% savings on the HIV/AIDS program procurement budget…
• including 95% savings on key antiretroviral drugs when switching to a low-cost alternative dose. (source)

the average reduction of prices is approximately 6.75% for the purchasign of goods in e-procurement method.

ok, now, for the economics.

does this make sense? 💰

this is what would go down:

• a comprehensive review of the whole public procurement system, procurement processes, procurement regulations, procurement market evolution, and whole-of-government reform processes.
• an evaluation of readiness must be undertaken for at least five elements: leadership, functionality, technical design and standards, private sector activation, infrastructure, and web services.
• legal and regulatory reform. for example, under egyptian procurement law, tender announcements had to be published in two widespread newspapers. it had to be amended to include the internet. likewise, supplier bids were identified by supplier stamps and can now be identified by e-signature.
• user-centered research and design both of the procurement system and of the ‛business logic’ of how to plan, award, & implement contracts effectively in a digital environment.
• mapping of the data, data standards, and decision-making across the procurement process, a publication policy of what data to share, with whom, and when, & the performance indicators to be tracked internally & externally.
• a reorganization of back-office functions to deliver an improved, digitized business process: ordering, payments, catalog maintenance, among other functions to ensure clarity of the procedure & responsibilities.
• the acquisition & configuration of the specific technological & the data support skills needed for e-GP implementation.
• user engagement, training, and outreach across the e-GP implementation process.

to set all this up, it would take three years.

these three years would be divided into two parts.

the ‘planning’ + ‘design and build’ phases incur investment costs. these costs are modeled over a 29-month period;

11.1 for ‘planning’.

18 for ‘design & build.’

then comes a pilot stage of approxmiately 29 months.

example: vietnam’s e-GP system using open source programming platform, database, & open standard architecture can be bought for between $1.2 — $1.5 million.

example: italy’s e-GP system cost 10.4 million euros in 2002, and it was four years before the system reached full operability. (source)

the total unadjusted cost of e-GP, over 12 years, is $22.3 million, which includes anticipated annual cost increases of 2%.

^that factor can adjust sue to software choices, business model, and customization.

cost-benefit ratio: should we for local govs? 📈

according to copenhagen consensus…

results are highly sensitive to parameters relating to:

• effect size (the impact of e-GP)
• the percentage of procurement that goes through the e-GP system
• the length of the implementation phases
• the size of the country’s economy.

the lowest quintile of low-income countries includes:

• somalia
• sierra leone
• burundi
• liberia

these countries can expect a benefit-cost ratio of 8 versus the average of 39.

the lowest quintile of lower middle-income countries includes:

• cambodia
• senegal
• el salvador
• honduras

these countries can expect a benefit-cost ratio of 64 against the average of 319.

cool, but what are the risks? 📋

just the most pressing adjustments for an e-GP system would be:

• requiring a change in the management culture and practices of public administration.
• resistance of managers
• culture/tendency of paper-based documentation
• the gap in absorption of ICT, digital technology, and data use across countries, the private sector, among others.

ICT → information and communications technology.

so how do we implement it with a higher probability of success?

1. a strong legal and regulatory framework.
2. investment in staff and management training.
3. independent oversight/audit of government expenditures.
4. development assistance channeled via national procurement systems.
5. technology-ready & receptive private sector, with supportive infrastructure.

digging deeper:

1. the correlation between transparency laws and practice is 0.67. laws improve outcomes when public sector capacity is low, and regulation of procurement helps in developing countries.
2. in 2011 for ghana, osei-tutu attributed low compliance with procedures such as notifying successful bidders, publicizing contract awards, notifying unsuccessful bidders, using internal notice boards to display procurement information and the use of standard tender documents to inadequate capacity of procurement personnel.
3. an independent complaints mechanism can deter procurement officials from requesting kickbacks as a condition for awarding contracts.

example: road building in Afghanistan found that new roads were of significantly higher quality and more durable in neighborhoods where the community had training and support to monitor the implementation of the project and where there were channels for the community to engage with the contractors and local government.

4. a sizable portion of development programs are externally funded. development partners often require specialized procedures…placing additional pressure on the existing government capacity.

5. to see if we are ready for e-GP… test the general receptiveness of firms. it will show the countries’ readiness to e-GP. start with the launch of e-filing and e-payment of taxes systems.

but e-GP doesn’t make it all the way.

the final barrier to implementation is a political choice.

why?

because there may be incentives left at stake.

examples:

the refusal or delay in e-GP adoption is linked to vested interests in:

• keeping manual + paper-based systems
• their connections to political representatives

and the longer the implementation period…

the lower the political benefits (and hence incentive) for public officials.

CJ

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