Gustavo Piga – University of Rome Tor Vergata THE NEW PROCUREMENT PROCEDURES AND INSTRUMENTS,

1. The Italian system for centralised purchasing and electronic procurement Gustavo Piga – University of Rome Tor Vergata THE NEW PROCUREMENT PROCEDURES AND INSTRUMENTS, Department of Contracts, Malta and OECD/Sigma Valletta, January 26th

2. The electronic developments in US procurement • Electronic Ordering: from 44,7 to 68,1% of all States; • Purchasing Cards: from 68,1 to 85,1%; • Digital Signature Accepted for Tender Documents: from 0,09% to 14,9%; • Reverse Auction: 10,6% in 2001 E-proc Adoption grows with: • Managerial Innovation; • Centralized procurement with a high level of authority; • Size of the State. Anyway… It is also true that ICT development has lead public procurement to become more centralized, spending and investing in qualified human resources to manage purchases. Indeed, the new European Directive introduces both e-proc and central purchasing stations. Italy is no exception. To the contrary …. Survey over 47 US states (1998 vs. 2001) In Moon (2001), Journal of Public Procurement

3. Rationalization Program on Public Spending Spending for Goods and Services Total amount of Italian public expenditure for goods and services sums up to about € 100,9 billion, about 15% of overall public spending and 7,7 % of GDP Public spending for goods and services, 2003 (%) Public spending for goods and services eligible for the Program, 2003 (%) University and other P.A. 5% University and other P.A. 6% CentralGovernment 16% Central Government 17% Local Government 26% LocalGovernment 36% Health bodies 42% Health bodies 52% About € 102,3 billion About € 42 billion 3.2% of GDP 20% of discount permanent reduction 0.4% deficit if so desired * Report on needs for the year 2003 and Consip estimate

4. Rationalization Program on Public Spending: the aim of the Program • Define purchasing strategies • Draw up competitive frame contracts for Public Administrations • Promote the use of e-procurement within the Public Administration • Provide purchasing monitoring tools to the Public Administration • Deliver innovative e-procurement models Service efficiency and quality Processsimplification Cost saving

5. Rationalization Program on Public Spending The financial act 2000 (December 23, 1999 n.488) laid down the foundations of the “Rationalization Program for Public Spending on Goods and Services”. Article 26 says: “ The Ministry of Economy and Finance (MEF), according to the regulations currently available regarding suppliers selection, draws up frame contracts with providers. Within the frame contract, the selected providers have to accept any order coming from public administrations.” By means of 2 Ministerial Decrees (February 2000, May 2001), the Ministry entrusted Consip S.p.A. with the development and management of the Program.

6. Rationalization Program on Public Spending • The following Financial Acts (2001, 2002, 2003, 2004, 2005, 2006) streamlined the Program scope and the roles of involved actors. • Today, according to the current legal framework: • Frame contracts regard goods and services; • All public administrations (e.g. Central Government, municipalities, health agencies, etc.) may purchase within the frame contracts. Alternatively, whenever they run their own tenders, they have to take price and quality of the frame contracts as a benchmark. 2006 Financial Act has contingency plans in case public finances worsen; • Our tenders affect all purchases of the Public Administration, where a Consip frame contract is available, thanks to the benchmarking effect.

7. Consip: Task and structure Consip is a joint-stock company totally and directly owned by the Italian Ministry of Economy and Finance (MEF), and it operates exclusively to serve Public Administrations Consip’s operations are carried out through two Divisions: • the DSIT (Treasury Information System Division), with about 300 employees, is in charge of managing the Information System of the Ministry of Economy and Finance; • the DARPA (PA On-line Procurement Division), with about 160 employees, is in charge of implementing the RationalizationProgram on Public Spending for goods and services.

8. DARPA Legal Advice Program management Puchasers Sourcing (Purchasing strategies) eProc Strategies (Marketplace management) eProc Systems (IT Platform management) “Marketing” Supplier side “Marketing” Purchaser side Universities Industry 1 Healthcare Admin. Industry 2 Local Authorities Central Administrations Industry n Consip: Task and structure - DARPA

9. E-Procurement tools www.acquistinretepa.it Electronic Shops e-Marketplace • Purchases below the Eu threshold • Direct Purchase or RFQ • Many to Many approach • Supplier defined eCatalog • Purchase Scope: • Low cost • Highly fragmented • Purchases within frame contract (through traditional tender or on-line auctions process) • Direct Purchase • Many to one approach • Purchase scope: • Large volumes • Standardized • Low price volatility • Demand aggregation • Slow and High obsolescence When the good has a rapid obsolescence Consip resorts, if possible, to ONLINE AUCTIONS Automatic Technical and economic offer evaluation ASP towards other Administrations Development of Frame contract through electronic system Below EU Threshold Above and Below EU Threshold

10. E-Procurement Portal On-line services Registration Public buyer registration Data & News Who we are, what we do, what you can buy, how you can buy, Newsletters, Magazines… Notices Tender publication, supplier qualification for Public Marketplace, .... On-line orders Opportunity to buy on line using frame contracts conditions Marketplace On line access to public Marketplace On line auctions On line access to public auctions Supplier Area Information on e-procurement models, correct way to participate to public tender, ... Specific Market Area Data and information on “Client market Area” (Central PA, Health bodies, Universities, Municipalities)

11. Electronic shop Strategy Objectives Strategies To guarantee quality standards in P.A. purchases … • Focus on “state of the art” in supply market • Wide range of goods and services • Constant assessment of service levels • Direct costs, through: • demand aggregation (economies of scale) • competition among suppliers • product standardization • Indirect costs, through: • on-line bidding and ordering • process simplification • centralization of litigation … while reducing Side effects Change Management in the Public Administration Industry dynamics

12. Frame contracts : Process simplification From the traditional…. …to the new process of goods and services procurement Public Administration activities Goods/ Services delivery Payment Needs analysis Contract and tender documentation Supplier selection Possible litigation with suppliers Contract signing Fax / on-line Order ... achieving, in addition, administrative procedures reductions for suppliers…

13. Electronic shops: Operational model Portal www.acquistinretepa.it Frame Contracts (public tender) and e-shops activation Consip Suppliers Contracts reporting Needs Feedback Monitoring tools On-line/fax order Public Administrations Delivery Payments

14. Traditional and electronic tenders Product selection and online ordering Electronic shops: Operational model E-shops represent an open window on the web in which goods and services selected through tenders and frame contracts are available to PA procurement offices registered to the Program

15. Goods Rental Photocopiers PC Desktop Desks Rental Cars Chairs PC Laptop Ecotomography Equipment Projectors Could we have done better? 20% average saving Efficient degree of competition? Diesel for heating Oil Lubricants Biodiesel for heating Electric power Did we do well ? Utilities Independentlycertified by the National Statistical Authority (ISTAT) in 2003 and 2004 By 2006 national classification system TLC Fixedline telephony PAX Switching ethernet networks Video communication systems Frame Contracts: Some examples of unit cost reduction 70 signed frame contracts and more than 40 product categories by 31/12/05

16. Split of framework contract in many lots: competition issues (1/2) • Consip started a comprehensive plan of cooperation with the Antitrust Authority. The objective is to make the tenders handled by Consip even more open and accessible to all providers. • This is why, for any tender procedure, Consip asks Antitrust Authority’s advice (via the Ministry of Economy and Finance) concerning the competitiveness of the tender itself. • The degree of competition in a given procurement auctions may depend on the participation requirements, rules regarding enterprises’ groupings, and the number and dimension of lots in which the contract is divided.

17. Split of framework contract in many lots: competition issues (2/2) • Length of contract to avoid lock-in (but mind collusion); • Participation requirements should be as low as possible and not focus excessively on requests which are only indirectly related to the execution of the contract, allowing alternative “means of proof” for the capacity to fulfil the contractual duties; • Temporary groupings of enterprises and sub-contracting are a mean to overcome the barriers to entry for enterprises not having the necessary ‘critical mass’ to participate to public tenders; however it should not be allowed in a grouping the presence of two enterprises who could match participation requirements autonomously; • Increasing the number of lots decreases their size hence facilitates participation of SME and reduce risk of lock-in; on the other hand, more and smaller lots may facilitate collusive market-sharing agreements and render more difficult the exploitation of potential economies of scale; • “Combinatorial auctions” where package bidding is allowed can be a way to allow the exploitation of possible scale economies while at the same time facilitating participation of SMEs.

18. Innovative e-procurement tools: On line auctions Possible Procurement auction formats: • Descending Auction (English Auction): the price starts high and competing bidders cut the price until no-one is willing to bid any lower. • Multiple-Round Auction: multiple round auctions are similar to descending ones; in multiple round the price does not decrease continuously but round by round with a predefined percentage. A multiple round auction is the discrete version of the descending auction. • Sealed Bid Auctions: bidders submit bids in sealed envelopes; the person submitting the best bid wins the auction and pays what he bid (pay-as-you-bid) OR the person submitting the best bid wins the auction but pays only the second best bid (pay-as-the-second-best). • Descending-Clock Auction (Japanese): the price decreases continuously in a predetermined period of time (e.g. 1 hour) in which players do not have to submit bids and they are considered to stay in the auction until they decide to exit. The prize is awarded to the last bidder remained in the auction. • Anglo-Dutch Auction:consists in adding a final sealed-bid round (e.g. only for the two best bids) to a descending auction, in order to hinder potential collusion generated by dynamic. The various formats have different advantages and disadvantages in terms of information gathered by the bidders and by the auctioneer, potential collusion, and participation. Some of these format my not be allowed by current directive, albeit useful in same cases Consip experimented the following auction formats: Descending, Multiple round with unlimited n. of round, Multiple round with a pre-defined n. of round, Sealed bid (pay-as-you-bid).

19. Does e-proc curb corruption? Procurement and corruption by Lengwiler e Wolfstetter, in Handbook of Public Procurementedited by Dimitri, Piga e Spagnolo, Cambridge University Press, forthcoming in September 2006 • Possible formats of corruption: • Modify bid of “favored” bidder to let him/her win: reverse auction keeps all players active until price hits each player’s cost; • Pre-Auction to determine “favored” bidder: with sealed bid tender the purchasing price for the taxpayer is higher as winning firm has to pay the bribe. Wth reverse on-line auction firm wins, not paying bribe, by having taxpayer pay lower price; • After seeing bids, the most advantageous “briber” is approached: on-line auction eliminates this by making bids public. • Good! However keep in mind that… • If on-line auction favors collusion, then sealed bidelectronic auction with proper security* reduce possibility of corruption ( see Consip); • Corruption through lower quality of goods and services remains a possibility. • * Public e-Procurement: Common Technical Specifications elaboration using State of the Art and Learning Demonstrators. Framework Contract ENTR/01/58-TOOLSW DG ENTR.

20. Does e-proc lower collusion? On-line auctions and collusion (1) • Strictly speaking, e-auctions increase transparency. • For example, compared to a sealed-bid tender, in ascending auction economic operators get to see the evaluation of their competitors in real time and are allowed to react to it. This increased transparency is often positively considered by procurers: • “Thanks to electronic tools enterprises make various offers and at the same time see the others’ bids. In this way – already at the psychological level – competition is increased. This in turn leads to better results and savings for the Public Administration. Bidders are masked with a code, which does not allow them to know the identity of others during the tender. In this way the Administration tries to avoid collusions” (cited in Magrini, p. 36).

21. Collusion in auctions On-line auctions and collusion (2)taken from Albano e Spagnolo, in Handbook of Public Procurementedited by Dimitri, Piga and Spagnolo, Cambridge University Press, forthcoming, September 2006 • Ascending auctions remove uncertainty about the value of the good and make firms bid more agressively. But online auctions can increase collusion: • competitors get to see, in real time, if a cartel agreement is being broken by a defector and have the possibility to retaliate with lower prices. Knowing this, there will be no defection and collusion will be self-sustained, causing harm to the Administration; • the openness of the format may scare away small firms that anticipate being easily topped by big firms during the auction. Indeed, current practice seem to show a certain caution among EU procurers to choose the e-auction method even if available. Sealed-bid e-auctions are favored. In a sealed-bid, retaliation can occur only in a successive tender, if there is one, and therefore cartels are less sustainable than in an e-auction. And …. • “Do Framework Agreements facilitate or hinder collusion?”

22. Innovative e-procurement tools: Public Administrations’ Marketplace • The Marketplace is a virtual market in which any P.A. can select goods and services offered by several suppliers, for purchases below EU threshold • The Marketplace is open to qualified suppliers (and goods) according to not particularly restrictive selection criteria • The entire process is digital, using digital signature in order to guarantee transactions legally Qualification notice (public announcement) Buying administrations Suppliers Qualified suppliers selected through a qualification process, starting from the date of publication of the “qualification notice” Public Administration Marketplace • Central Government • Universities • Local Government • Health bodies Market

23. Innovative e-procurement tools: Public Administrations’ Marketplace Results • +59% vs 2004 • +274% vs 2004 • +208% vs 2004 550 registered suppliers (81% SMEs) + ~1.100 Punti attivi registrati

24. Item name Technical specifications (standardized catalogue) Supplier’s name Price Innovative e-procurement tools: Public Administrations’ Marketplace

25. Innovative e-procurement tools : Public Administrations’ Marketplace - Major advantages To Public Administrations: • costs and process cutting; • potential broadening of suppliers base; • easy access to selected goods (pre-defined quality standards); • information transparency and ease of comparison among goods; • purchases logging and subsequent expenditure monitoring. To Suppliers: • selling cost reduction (due to broadening of potential customers base and lower intermediation cost); • higher visibility; • more competitiveness especially in local markets (for small and medium sized enterprises); • B2G introduction, especially for large sized enterprises, in addition to existing B2B and B2C. WHAT WILL HAPPEN WITH DYNAMIC PURCHASING SYSTEMS?

26. Implementation Performance • Define purchasing strategies • Draw up competitive frame contracts for Public Administrations • Promote the use of e-procurement within the Public Administration • Provide purchasing monitoring tools to the Public Administration • Deliver innovative e-procurement models Done Very good Done Good Done Almost good Not Done Almost good Done Service efficiency and quality Cost Saving Process Simplification Rationalization Program on Public Spending: Program’s results

27. Back-Up

28. Green Procurement “Green procurement policies” support represents an additional goal to frame agreements stipulated by Consip • The tender for the supply of paper to PA has been worked out also with ANPA’s partnership (National Agency for Environmental Protection) focusing on the definition of eco-compatibility requirements: • exclusion of products containing elementary chlorine – ECF – hexavalent chlorine etc.. • Ecolabel, EMAS or ISO 14001 certifications • The tender on motor vehicles includes a double feeding model (methane petrol or gpl petrol) as a test to verify the feasibility of a future specific tender on ecological vehicles, electric vehicles, hybrids (electric-petrol) etc…..according to the recent European regulation • Tenders for the supply of photocopiers include the collection of disused second-hand photocopiers according to the present regulation • Future tenders on the supply of rubbish skips for waste collection will comply with the present rules as they will include differentiated waste disposal