This chapter describes the significant role public procurement plays in the economic system and in citizen well-being, linking it to the policy challenges Germany is facing. Public procurement can be crucial in affecting all dimensions of well-being, including the economic, environmental, social and human aspects. Some countries have been able to attain first results in measuring possible impact of public procurement on these different dimensions of well-being by tracking how procurement can support overarching policy goals. Germany could maximise the impact of public procurement and help secure citizen well-being by designing and relying on a rigorous impact measurement framework.
Public Procurement in Germany
Strategic Dimensions for Well-being and Growth
OECD Public Governance Reviews
1. The impact of public procurement in Germany: Economic effects and beyond
Abstract
The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.
Public policies influence a country’s’ economy and development. Understanding how and to what extent these policies work is key to creating positive economic and social outcomes for citizens. The OECD Recommendation of the Council on Regulatory Policy and Governance emphasises the importance of monitoring policies. It recommends that evaluations should be quantitative wherever possible and consider all types of results that stem from implemented policies (OECD, 2012[1]).
In OECD countries, an average of 29% of total government expenditures is spent through public procurement, representing 12% of GDP. Public procurement is a critical policy area that can ensure the sound management of public finances while maximising impact for citizens. A 1% saving in procurement expenditures might represent EUR 43 billion per year in OECD countries (OECD, 2017[2]).
However, the economic impact of public procurement is not limited to savings generated from efficient and effective procedures. Rather, the opportunities that can be created through the proper use of public procurement should also be considered when designing its strategic approaches or measuring impact. Where it is used strategically, public procurement can lead to improvements in health care, education, innovation, firm-level growth, job opportunities, social inclusion and the quality and integrity of public institutions. Measuring the effectiveness of procurement policies can only boost the benefits that can be achieved.
The 2015 OECD Recommendation of the Council on Public Procurement includes a principle on evaluation: adherents to the recommendation should assess the effectiveness of reforms by evaluating both individual procurements and the overall system, including at different levels of government (see Box 1.1).
Box 1.1. OECD Recommendation of the Council on Public Procurement principle on evaluation
The Council:
X. RECOMMENDS that Adherents drive performance improvements through evaluation of the effectiveness of the public procurement system from individual procurements to the system as a whole, at all levels of government where feasible and appropriate.
To this end, Adherents should:
i) Assess periodically and consistently the results of the procurement process. Public procurement systems should collect consistent, up-to-date and reliable information and use data on prior procurements, particularly regarding price and overall costs, in structuring new needs assessments, as they provide a valuable source of insight and could guide future procurement decisions.
ii) Develop indicators to measure performance, effectiveness and savings of the public procurement system for benchmarking and to support strategic policy making on public procurement.
Source: (OECD, 2015[3]), OECD Recommendation of the Council on Public Procurement.
In the context of regulatory impact assessments (RIA), the OECD recommends conducting analyses based on forecasts (“ex ante”, i.e. before issuing a new regulation), and analyses based on results (“ex post”, i.e. analyses that monitor a regulation’s performance) (Coglianese, 2012[4]). Regulatory impact assessments provide more meaningful insights if they are supplemented by a set of specific indicators that monitor the results of all aspects of an individual policy. The following criteria are commonly used when analysing different regulatory options (Coglianese, 2012[4]):
Impact and effectiveness: to what extent would the proposals address the problem?
Cost-effectiveness: what is the unit cost of the analysed options?
Net benefits and efficiency: which option will lead to the highest net benefits?
Distributional fairness: which option will provide the fairest distribution of benefits?
Reduced to its most basic elements, an impact assessment of public procurement should be performed in two steps. First, the linkages between public procurement and socio-economic development should be clearly identified and described using qualitative analysis. Second, the impact of public procurement on each of the above mentioned criteria should be measured and translated into concrete benefits at an aggregate level, if possible, using quantitative analysis. The benefits measured may be socio-economic, environmental or others.
In practice, however, attempts by countries and academics have often demonstrated that comprehensive and stringent analyses of the overall economic impact of public procurement is a difficult endeavour. This is because isolating public procurement’s impact from the impact of all public services remains an immense challenge, due to a lack of reliable data and the difficulty of developing a standardised framework or approach.
In order to provide a workable analysis, this chapter provides a lens for analysing and understanding public procurement’s impact. To do so, the chapter uses the OECD Framework for Measuring Well-Being and Progress as a reference to consider the areas of citizen well-being that are impacted by public procurement. The chapter then uses country case studies to demonstrate how well-being can be measured according to each of the framework’s areas: economic capital, natural capital, social capital and human capital (explained further below in this chapter).
The several types of procurement analysis discussed in this chapter can be brought together in a measurement framework. These different types of analysis include criteria-driven analysis based on forecasts and results, qualitative and quantitative analysis and analysis rooted in citizen well-being. A measurement framework combining these distinct analyses should measure activity at the central level in the short-term, while also demonstrating a longer-term commitment to understanding the impact of procurement activity at a more granular level.
1.1. Measuring multi-dimensional policy impacting
1.1.1. Measuring Germany’s success in public procurement must go beyond traditional economic indicators to incorporate broader considerations such as well-being
Monitoring the performance of public policies is important. This is especially important in policy areas that relate to the state of a country’s economy, which is closely linked to the well-being of its citizens. Therefore, measuring the impact of economic policies and regulations is a critical activity. In recent years, Germany has developed a number of initiatives to analyse the impact of regulations. One of the most important institutions in this context is the German Regulatory Control Council (Normenkontrollrat, NKR). The work of the NKR is in line with international best practice for conducting regulatory impact assessments. Germany conducts both analyses based on forecasts (ex ante) and analyses based on results (ex post) of laws and regulations in different domains (OECD, 2015[5]). At the same time, Germany appears to focus more on ex ante analysis of possible costs and benefits of laws (Gesetzesfolgenabschätzung). For example, Germany’s Federal Environmental Agency (Umweltbundesamt) published a detailed guidance document in 2014 to enable lawmakers to conduct an analysis of the environmental effects of a new law or regulation (Porsch et al., 2014[6]).
A 2013 study commissioned by the NKR found that Germany could place more focus on the analysis of benefits rather than the (financial) costs of regulations when studying public policies (Tiessen et al., 2013[7]). In order to achieve this, Germany could build on existing experience in assessing the impact of policies. These general experiences could be transferred to the area of public procurement specifically, and could be matched with additional tools and strategies to allow for an analysis that is as comprehensive as possible. Several international organisations, such as the World Bank and the European Union, but also many countries including Germany, have systematised the use of different tools to understand the impact of a given policy or intervention.
Governments utilise various methods to monitor economic performance. One of the most popular indicators to describe the overall state of an economy is Gross Domestic Product (GDP). . The rate at which a country’s GDP grows is often taken as an indicator for the speed of a country’s economic progress. Real income per household provides an additional perspective for gauging the economic situation of citizens more precisely. This concept provides a more granular view of the prosperity of citizens – which reaches beyond the insights taken from tracking an entire country’s GDP (Ribarsky, 2017[8]). While these measures are useful, governments are beginning to realise that traditional economic indicators do not tell the whole story.
The well-being of citizens depends partly on their wealth, but it is also influenced by other factors such as health status, education levels, the physical environment they live in and their ability to participate in society. The OECD Framework for Measuring Well-Being and Progress offers a framework for monitoring progress and prosperity in a broader sense. This means considering a wide range of factors. As OECD describes it, “well-being is multidimensional, covering aspects of life ranging from civic engagement to housing, from household income to work-life balance, and from skills to health status” (OECD, 2015[9]).
Compared with other OECD countries, Germany performs well on OECD well-being measures such as household disposable income, employment rate, labour market security and personal security (see Figure 1.1). Nevertheless, Germany is located in the bottom third of performers in several aspects of natural capital (environmental factors) and human capital (those associated with health) (Annex 1.A).
Figure 1.1. Germany’s current level of average well-being: Comparative strengths and weaknesses
Note: This chart shows Germany’s relative strengths and weaknesses in well-being when compared with other OECD countries. For both positive and negative indicators longer bars always indicate better outcomes (i.e. higher well-being), whereas shorter bars always indicate worse outcomes (lower well-being).
Source: (OECD, 2017[10]), How's Life? 2017: Measuring Well-Being.
The framework considers both people’s current well-being (as assessed through 11 dimensions displayed in Figure 1.1), and resources and risks for future well-being. Future well-being is measured via the four dimensions of natural, human, social and economic capital (OECD, 2015[9]). The delayed impact of public procurement procedures in delivering public services means that procurement can help improve the future well-being of citizens in a sustainable manner. Procurement affects public service delivery in many different ways because public procurement is a cross-cutting topic that touches many sectors at once. Since the goods, services and works governments ultimately procure differ in terms of inputs and final products for citizens, public services stemming from procurement can also vary widely. Therefore, the assessment of the impact of public procurement must be measured against the four areas that provide the necessary resources for future well-being: natural, human, social and economic capital (see Figure 1.2). A focus on these four types of capital is also consistent with the approach that is being adopted by other countries, like New Zealand (The Treasury New Zealand, n.d.[11]).
Figure 1.2. Evolution of the well-being framework
Source: (OECD, 2017[10]), How's Life? 2017: Measuring Well-Being.
1.1.2. Procurement impacts the way governments contribute to the well-being of citizens
A government’s role in driving well-being is not simply to remove barriers to opportunities, but to build a platform that provides more inclusive forms of growth. In so doing, the government can help ensure that individuals have the social, educational, and health capacity to actively participate in the country’s development. At the same time, social, educational and health capacity influence citizens’ productivity in economic terms: a healthy person with a higher education will produce more value in the same time than somebody in bad health with a lower skill set.
While most existing work on productivity has focused on the productivity of companies or factor inputs (the resources used to generate outcomes) in the private sector, there is great value in better understanding the productivity of the government. Given government's important role in the provision of goods and services, as well as its substantial contribution to overall socio-economic development and citizen well-being, government productivity is an important topic of study.
Public sector productivity has a significant impact on the performance of national economies and societal well-being. First and foremost, the public sector is a major direct provider of goods and services. On average, government production costs represent 21.9% of GDP among OECD countries. In 2015, OECD governments’ output represented a gross value added of 12.3% of GDP. Governments are the main and sometimes only providers of key goods and services to citizens. These goods and services include education, health, social services, transportation and infrastructure. In fact, in several sectors, governments purchase most of the sector’s services; the governments of OECD countries are responsible for on average 70% of final consumption expenditure on health goods and services, as well as for 84% of final consumption expenditure on education as recorded in national accounts (OECD, 2017[2]).
Given that the use of public procurement procedures is mandated for a large proportion of government spending, these procedures can be a key lever for increasing the efficiency and effectiveness of government spending. In Germany, public procurement accounts for an even larger share of spending, representing close to 35% of government expenditure and 15% of GDP (see Figure 1.3). Given these figures, public procurement should be considered one of the key activities in the economies of OECD countries and in Germany in particular (OECD, 2017[12]).
Figure 1.3. General government procurement spending as a percentage of GDP and total government expenditures in 2007, 2009 and 2015
Note: Data for Australia are based on a combination of government finance statistics and National Accounts data provided by the Australian Bureau of Statistics. Data for Chile are not available. Data for Turkey are not included in the OECD average because of missing time series. Data for Costa Rica, Russia and South Africa are for 2014 rather than 2015. A large share of general government procurement in the Netherlands is spent on social transfers in kind via market producers – this relatively high level could be due, in part, to the country’s system of scholastic grants as well as the country’s mandatory health insurance system whereby the government subsidises individuals’ purchase of coverage from private providers.
Source: (OECD, 2017[12]), Government at a Glance 2017 based on OECD National Accounts Statistics (database).
The scale of government spending among OECD countries means that public procurement is a tool for economic development. However, one of procurement’s fundamental objectives is to achieve value for money – that is, to either purchase more and better goods, works and services for the same amount of spending or to reduce government spending, making a more effective allocation of resources. According to classical economic models, lower government spending may slow down economic growth. As research demonstrates however, the actual extent to which government spending leads to growth is heavily dependent on whether spending can be said to be productive. Productive spending affects economic growth positively (e.g. investment in infrastructure and education can raise human and physical capital stock and, in turn, increase long-term growth) (Barro, 1990[13]; Kneller, Bleaney and Gemmell, 1999[14]). Therefore, a reduction in public spending will not necessarily affect economic growth negatively.
Many studies have attempted to identify, track and measure the impact of public procurement. Traditionally, assessing public procurement’s impact has been associated with evaluating its financial impact. In the context of implementing austerity measures, trying to quantify the savings achieved through smart public procurement has been popular with governments. This is especially true among OECD countries. As stated prior, a 1% saving in procurement expenditure might represent EUR 43 billion per year savings in OECD countries (OECD, 2017[2]). Most recently, a study by the consulting firm McKinsey & Company found that governments could save USD 3.3 trillion by 2021 if public spending was better managed and if governments followed the practices of the best-performing countries. This would essentially cover financing needs for public services that cannot be covered by tax revenue today. In the area of health care, studies have found that by increasing the efficiency of spending among the 42 countries that generate 80% of global GDP (i.e. improving to the level of the best-performing country), healthy life expectancy of their population would be increased by 1.4 years. This result can be translated into an additional 12 billion healthy life years for the citizens of these countries – with no increase in per capita spending on health care (McKinsey Center for Government, 2017[15]).
At the same time, the link between public procurement and the economy of a country has to be considered in light of various factors. For example, as mentioned above, the value achieved from public procurement in many countries can directly impact the health of citizens, which in turn affects a plethora of issues, including their ability to contribute to economic development. The professionalism and integrity with which public procurers manage tender processes and contracts influence the overall reputation of the civil service, which in turn affects citizens’ trust in their government. This may also influence the overall investment climate in a country. With regards to the environment, strategic public procurement can reduce carbon dioxide CO2 (emissions, thereby contributing to the safeguarding of natural resources on which future health and well-being depend.
Public procurement processes tend to follow a specific cycle based on legislative requirements, administrative processes and budget timelines. Legislation generally requires that public procurement be conducted through a fair and transparent process that uses competition to decrease the cost and increase the quality of the goods and services that the government needs. For the most part, a procurement process is initiated once a government has already established the priorities and budgets that will dictate the goods and services it will buy. Therefore, procurement’s influence typically only begins at the point where a procurement strategy is developed to meet the government’s needs. This classical approach is not allowing for a complete understanding of procurement’s possible outreach and impact, even if procurement stakeholders have now for long realised its potential.
In its simplest form, procurement delivers value for money by generating competition amongst suppliers in order to drive down unit prices. The concept of value has evolved, however, from strictly financial and cost-driven considerations to a broader spectrum of value. Figure 1.4 illustrates many of the approaches used in public procurement when managing categories of goods and services (referred to as “category management”). Category management can help contribute to optimal value realisation in the different procurement phases, and can also determine how that value is measured.
Figure 1.4. Procurement value contribution and performance measurement throughout the procurement cycle
Source: Authors’ illustration.
1.1.3. Measuring the broad and diverse impact of public procurement policies is complex; Germany, like most other OECD countries, must overcome barriers to effective measurement
Measuring the effectiveness and efficiency of public spending is a challenge, partly because the characteristics of an effective or efficient public sector are not easy to define. Procurement is an operational activity that seeks to facilitate the delivery of public services, and it can be measured according to its success and efficiency in delivering the required goods or services. At the same time, public procurement policy seeks to bring about more strategic, long-term benefits, which are harder to measure.
Beyond direct effects, a comprehensive assessment of efficiency and effectiveness should include indirect effects stemming from public spending. However, it is challenging to determine the effects that can be legitimately attributed to a given policy. It is also difficult to determine which indirect effects might be too far removed. As discussed above, monitoring of public policies in Germany is limited. As such, Germany does not measure procurement activity at a comprehensive national or system-wide level.
With a manageable amount of effort, countries can use a carefully chosen combination of monitoring tools to provide an adequate amount of insight into the impact of public procurement. It is important, however, that countries identify the tools that work in their contexts. Countries should then select an approach for bringing these tools together into a holistic framework.
To monitor public procurement effectively, Germany – like many other countries – must overcome a number of barriers. Attributing the effects of an individual policy to a broader system like the overall economy can prove challenging – particularly when conducting quantitative impact analysis. An economic system is highly complex and affected by many factors that prevent policy makers from observing or predicting causality. There are several reasons for this:
One effect might offset another.
The result that is attributed to one policy might in fact be the result of another policy – or the result of chance.
The work mechanisms behind certain policies may differ across countries according to their level of economic development.
The definition of the desired outcome might vary across societal groups.
Regulations bringing negative economic outcomes may simultaneously induce significant benefits for society.
The major challenges with measuring public procurement’s impact are summarised below.
Attribution and causality of impact
The effects of public procurement are particularly difficult to disentangle. Usually, the results are an outcome of a number of policies and not just a result of public procurement strategies – both at an individual project level and aggregated level. In addition, some effects occur after the procurement process is carried out. Finally, some effects are intangible by nature.
Often, public procurers strive to achieve the best value for money. In a traditional sense, this means paying the lowest price for the best (technical) value of a good, work or service. Where this is the case, savings delivered by the effective use of procurement can be channelled towards other government outcomes. Academic studies have attempted to link cost savings in public spending generated by procurement to concrete economic improvements such as GDP growth, gains in employment and increased consumption. One example for such a model is the QUEST III model, which has been used by the European Commission to indicate effects of changes in spending on the economy in the euro area. The model suggests that savings generated through procurement might enable governments to decrease income tax rates, and, in turn, boost GDP, employment and consumption (Vogel, 2009[16]). However, this analysis does not assess the impact of public procurement itself. Rather, it develops scenarios in which savings in public procurement could be reallocated to other policy areas.
Public procurement is a delivery mechanism for some of the inputs (i.e. goods and services bought by governments) required to generate governments’ outputs (including but not limited to public services like education and health). There is an ongoing debate as to where exactly the impact of public services for citizens originates and, as a consequence, how impact should be measured: Is it the government activity (i.e. the process of conducting public procurement) that have the most impact and that should be measured? Or is it the purchased items that provide the results upon which impact should be measured? While the debate is important, it can be argued that such a distinction does not influence policy makers’ understanding of the impact of public procurement as a whole.
For example, how should governments measure the impact of improved telecommunications? One option is to study telecommunications’ ability to increase productivity. It could be argued that the resulting increase in productivity has only been possible because of the specific public procurement strategies that identified certain goods or services as the best value options for delivering the outcome of improved telecommunications. In this scenario, public procurement should be seen as an enabler, without which the benefits of the purchased inputs would not have materialised. On the other hand, public procurement deals both with purchasing activities per se and with the goods, services and works it acquires for public outcomes. The quality of the services public procurement delivers should therefore be measured by the effects procurement has on the experience of the immediate consumer of the procured goods or services, but also the end consumer, the citizen, whose "well-being", as discussed prior, is vital. A holistic view of impact that takes into account the entire public supply chain (i.e. the chain that extends from the initial supplier via procurement to the consumer and then to the citizen), would be better suited to evaluating impact throughout the entire system. At present, however, this approach is quite new and still being developed (Eßig and Batran, 2006[17]).
Availability of data
Often, governments do not hold the data required to make a valid assessment of the efficiency and effectiveness of public spending. Where it does exist, the quality might not be sufficient to draw robust conclusions. This may be because data collection is not always founded on a clear and consistent methodology.
Availability of high-quality data is an issue for governments, particularly in the area of public procurement. This frequently prevents reliable impact assessments from being undertaken. In addition, there is often no standardised approach for collecting and using the data that is used across the entire procurement system. Furthermore, often no common methodology exists across several systems to allow for international comparisons. Here, diverging definitions of data and public procurement are at the heart of the prevalent challenge to compare and contrast results that come from differing methodologies. Finally, time lags in implementation are common during the procurement process. Because of this, a thorough assessment methodology should be applied throughout the different stages of the procurement cycle.
As further discussed in Chapter 4, due to limitations with e-procurement systems in Germany, there is currently no mechanism to automatically collect and transmit procurement data. Contracting authorities are currently required to submit data manually, until the necessary infrastructure is in place. A template in Excel format is sent to contracting authorities on an annual basis to facilitate data collection. According to OECD interviews with stakeholders, response rates (particularly at the Länder-level, i.e. the level of the states) to the data requests have been low. As a result, the dataset on procurement activity across Germany is incomplete and potentially inaccurate (as discussed further in Chapter 4).
Policies can enable or hinder the collection of public procurement data. This is particularly clear in the European Union (EU), where an EU-wide legal framework requires stringent data collection. The consistent legal framework in place in the EU should theoretically allow for cross-country comparisons. However, different interpretations regarding implementation of these rules can hinder this goal.
Without a rigorous legal framework and a consistent approach to data gathering, countries forego an important opportunity to increase the performance of their procurement systems. Concrete opportunities for improvement might not be visible because a lack of quality data does not allow for meaningful monitoring. For overall policymaking and strategic decision-making, this lack of data analysis means that decisions have to be based on qualitative evidence. While insights based on qualitative evidence can provide a reasonable basis for decision-making, quantitative evidence – when collated rigorously – would provide a more comprehensive analysis. Systemic data collection would enhance the ability of countries to assess the indirect impacts or trade-offs resulting from policies.
1.2. Understanding procurement’s impact on well-being and generating socio-economic benefits in Germany
The current challenges facing Germany are reflected in its comparative performance on the OECD well-being dimensions that are susceptible to the influence of strategic public procurement. For example, challenges include an aging society with increasingly costly healthcare needs, air quality in cities and rising rent prices. Procurement has a role to play in all of these areas, providing means to improving overall citizen health status, air quality and housing affordability. However, an empirical assessment of public procurement’s impact on well-being requires reliable sources of data and an appropriate methodology.
A measurement of public procurement’s impact in general can be structured through the forward-looking aspects of the OECD Framework for Measuring Well-Being and Progress. First, this chapter conceptualises how the framework can serve as an analytical lens. Second, each of the forward-looking aspects of the well-being framework are considered with regards to public procurement and Germany’s performance. This chapter examines both, and also provides examples from other countries that have successfully measured aspects of public procurement’s impact.
The OECD Framework for Measuring Well-Being and Progress covers the factors beyond economic growth on which public procurement can have the most impact. This approach allows for the comprehensive identification of the channels through which public procurement may be used to influence the economy, the environment and society. The Well-Being Framework (see Figure 1.5) can therefore be used to approximate the impact that public procurement has on the four types of capital that contribute to sustainable well-being over time (economic, natural, human and social capital). The size and use of public procurement should be measured first at a disaggregate level, and then at an aggregate level as part of a comprehensive framework. Measurement must consider the well-being benefits that are generated from procurement activity.
Figure 1.5. Public procurement and sustainable well-being over time
Source: Authors’ illustration.
Regional strategic goals, as defined in existing documents like the Europe 2020 Strategy (Box 1.2) reflect these elements of well-being. Public procurement can therefore be one of the channels through which these goals are achieved.
Box 1.2. Europe 2020 strategy
The Europe 2020 strategy is the EU's agenda for growth and jobs, emphasising smart, sustainable and inclusive growth. It aims to overcome the structural weaknesses in European economies, improve the region’s competitiveness and productivity, and build up a sustainable social market economy by achieving the following set of targets:
Employment
75% of people aged 20–64 to be in work
Research and development (R&D)
3% of the EU's GDP to be invested in R&D
Climate change and energy
greenhouse gas emissions 20% lower than 1990 levels
20% of energy coming from renewables
20% increase in energy efficiency
Education
rates of early school leavers below 10%
at least 40% of people aged 30–34 having completed higher education
Poverty and social exclusion
at least 20 million fewer people in – or at risk of – poverty and social exclusion.
Employment is related to both human and economic capital, but it can also have social implications, as an increase in employment contributes to social inclusion. Research and development is an investment in economic capital. Climate change and energy are two facets of how natural capital is managed. Income poverty can either deplete or limit the accumulation of economic capital at the individual and household level, while social exclusion can be a risk factor for social capital. All of these areas can be improved through the effective use of public procurement.
Source: European Commission (2010), Europe 2020: A strategy for smart, sustainable and inclusive growth.
The following qualitative description of the possible linkages between public procurement and the four areas of capital underpinning well-being provides an indication of how public procurement can be used as a strategic tool for improving citizens’ lives.
Economic capital refers to the produced capital (tangible and non-tangible) and financial assets that provide individuals with material living conditions. Economic capital can be shaped by the quality of public spending and development (e.g. non-price competitiveness, firm-level productivity, SME development, public investment and innovations). All of these factors contribute to economic development in different ways (such as stocks, flows or risk factors).
Public procurement can stimulate companies to be more competitive, productive and innovative, and, in turn, companies can provide employment and income for citizens. Often, countries focus on developing small and medium-sized enterprises or fostering innovation through procurement. Public procurement can enable the effective use of economic resources by supporting wealth creation throughout the economy.
Natural capital refers to individual assets like energy, water and land resources, as well as broader ecosystems (i.e. the joint functioning of or interactions among different environmental assets, as seen in forests, soil, aquatic environments and the atmosphere). Natural capital can be used directly as an input to economic production. It also offers several benefits to the economy, when the environment is effectively managed (e.g. clean air, safe water or green areas). In turn, these benefits also contribute to well-being. For example, improvements in the quality of life and health status of individuals can support higher labour market participation, resulting in further well-being and economic gains.
Through green public procurement, governments can reduce their own environmental impact while at the same time creating a demand for environmentally friendly solutions. This, in turn, can help disseminate green solutions or make them economically viable. Beyond this interaction with economic capital, green public procurement can have a positive effect on human capital, for example by decreasing the negative effects of low air quality. Public procurement can contribute to the appropriate use and management of natural resources through green procurement.
Human capital refers to the skills, competencies and health statuses of citizens. Governments’ role in fostering this capital is to provide individuals with access to high-quality education, training and lifelong learning opportunities, and health care systems. Education, skills, and health are aspects of people’s well-being in their own right. In addition, increased life expectancy, improvements in public health and increasing the skill-levels of the workforce all contribute to both well-being and economic growth through higher (and higher quality) labour market participation. Moreover, easy access to (high-quality) education can influence work ethic in a society, as well as citizen attitudes towards public policies (like public service or tax compliance).
Public investment provides individuals with better access to educational and medical facilities, and increases the quality of public services in these areas. Efficient and effective public procurement in the health sector contributes to higher quality healthcare and better medical equipment, which in turn leads to higher life expectancy (and higher levels of citizens living longer in good health). These gains could be translated into lower healthcare expenses and higher labour force participation, which lead directly to economic gains. Similarly, the effective procurement of educational infrastructure and resources can support a country’s education system. Public procurement can contribute to the development of human resources throughout society.
Social capital includes trust (both in public institutions specifically, and trust among citizens, more generally), as well as social networks, cooperative norms and aspects of governance. In addition, acts of civic engagement (e.g. volunteering and voting) can be considered as investments (inflows) into the stock of social capital. Social resources maintain the environment in which other capitals can flourish. For example, investment in social resources can provide a predictable business climate, enable collective action to promote the efficient allocation of resources, stimulate the production of public goods (such as personal security) and induce the preservation of shared assets (such as ecosystems). Increasing social capital is especially relevant with respect to integrity and transparency of public procurement institutions. For example, through e-procurement, governments can increase the transparency of public spending and ensure broad access to prospective suppliers. Public procurement can contribute to social resources through good governance, and by supporting trust in public institutions.
The aforementioned dimensions of sustainable well-being are not independent of each other. Promoting interaction between them can cause synergy effects. For example, targeted public investment may improve the environment or increase social inclusion, as well as the quality of education. Therefore, one activity involving the use of public procurement may contribute to inclusive growth and future well-being in multiple domains.
Many countries have attempted to assess public procurement’s impact on each of the areas of capital in isolation. Within each area, numerous public procurement indicators exist, which can help countries evaluate procurement’s contribution to well-being. The following sections of Chapter 1 analyse economic, natural, human and social capital in the German context, exploring available and relevant data. Examples from other countries complement this analysis to demonstrate how the impact of public procurement in each of the four areas can be measured.
1.2.1. Economic capital
Public procurement in Germany represents an estimated 15% of GDP. This is equivalent to goods, works and services worth approximately EUR 500 billion (OECD, 2015[18]), procured through 2.4 million procedures per year. Public procurement spending represents 34% of total government expenditure in Germany. The German public procurement system is also highly decentralised, as almost 78% of public procurement takes place at the sub-central level.
The German public procurement market is large and represents a relatively large share of government spending. Because of this, the country has potential to significantly increase well-being by increasing the efficiency of its procurement system. However, the high degree of decentralisation in Germany poses challenges that have to be accounted for (see Chapter 3), including challenges related to the collection of procurement-related data.
Countries around the world have increasingly realised that the value of a product is not just expressed by the purchase price. Procurement officials are now taking a more holistic approach, trying to increase value as opposed to just driving down cost. In this context, as mentioned above, concepts such as category management, where procurements are managed in product groups, and life cycle costing, where costs across the entire life cycle of the product are considered, have added necessary complexity to the way in which the cost or value of a product or service is calculated. Box 1.3 illustrates a system to calculate savings as developed by New Zealand.
Box 1.3. Calculating savings from All-of-Government contracts in New Zealand
All of Government (AoG) contracts exploit the collective purchasing power of the New Zealand government by establishing single supply agreements for the supply of selected common goods and services. Before initiating a tender, the feasibility and benefits that can be derived from any AoG contract are investigated by New Zealand’s central purchasing body, New Zealand Government Procurement (NZGP).
Savings from AoG contracts are reported to the cabinet, along with a rolling forecast of expected savings from existing and emerging AoG contracts. The basis for the savings methodology is the calculation of the price difference between what an individual contracting authority could realistically expect to pay to a supplier (the baseline market price) and the benefits of an aggregated AoG contract price for the same item. Suppliers provide data with a total savings amount calculated according to the value of spending in the contract.
When establishing a new AoG category or reviewing an existing AoG category, the baseline market price is determined for each product group as part of the market analysis process. They are ascertained from a number of sources that may include a Request For Information (RFI) process, a review of existing contracted rates, general experience and knowledge in the market, and discussions with suppliers.
To better reflect the price discounts being achieved in the market, NZGP placed contracting authorities into tiers using different parameters according to the product or service. For example, the IT Hardware category may determine agency size according to number of employees, and the Motor Vehicles category may determine agency size based on the size of their fleet.
The savings methodology gives indicative savings only. Some types of saving or other forms of value are not reported, such as:
avoidance of the cost of tendering
pricing certainty
standard terms and conditions
reduction in legal service fees
consolidated invoicing
enhanced reporting
ease of process and transitioning
ability to escalate performance and supply issues for resolution.
Source: (New Zealand Government Procurement, 2015[19]), Standard reporting methodologies: All-of-Government contracts.
Academic studies have shown that innovative companies grow faster and are more productive, which leads to higher employment and output growth. The public sector can use public procurement as a demand-side instrument to support innovation. Using government spending as a source of demand has many benefits. It allows suppliers to bear higher entry costs and create a critical mass for the production of innovative products that ensure such ventures are profitable. Because of this, government spending as a source of demand can link innovation to larger scale production (Geroski, 1990[20]).
In an international comparison, Germany fares well on innovation indicators. The Global Competitiveness Index 2017-18, produced by the World Economic Forum, ranked Germany fifth out of 137 countries on the indicators of innovation and creating a fertile business ecosystem (World Economic Forum, 2017[21]). Germany also has the fourth highest research and development (R&D) expenditure of OECD countries, amounting to USD 104.4 billion in 2016 (OECD, 2018[22]). A brief list of international socio-economic performance indicators is presented in Annex 1.B.
A measurement system driven by statistical needs can assist with the preparation and interpretation of basic government expenditure figures. It can also help address questions of how much support governments should provide for R&D and innovation activities. The data can be made publicly available through data repositories to ensure competition, transparency and openness of procurement processes. Making data publicly available also helps countries comply with the prevailing requirements set by policies, and by national and international legislation (Appelt and Galindo-Rueda, 2016[23]). The case of the US government, in Box 1.4, demonstrates that analysis of relevant datasets can support decision-making on policies and investments, enabling governments to take more meaningful policy decisions that lead to greater impact.
Box 1.4. Measuring the impact of procurement on innovation in the United States
The US government conducted an assessment of defence-related public procurement data from the National Archives and Records Administration (NARA) in order to assess the impact of spending on innovation procurement. To conduct the analysis, the US used data from procurement activity over an extended time period (1996-2003).
The analysis involved a comparison between suppliers, including those that: 1) had previously been involved in the public procurement system, but had not been successful; and 2) those that had been successful. The data included the amount of spending that all companies had dedicated to R&D activity, as well as the impact government contracts had on these companies’ overall revenues. Finally, analysts studied connections between these firms’, requests for new patents and past obligations with regards to patents.
The resulting analysis showed that companies previously involved in the public procurement system were twice as likely to report R&D expenditure as firms that did not receive a contract from the US Federal Government. Furthermore, the R&D expenses of businesses that had supplied to the government increased by 0.2% if the value of government contracts in the previous year had increased by 10%. However, the largest increase of company-sponsored R&D activity was brought about by contracts that were not specifically for R&D activity, namely those that were tendered through normal defence-related procurement.
Source: (Appelt and Galindo-Rueda, 2016[23]), Measuring the Link between Public Procurement and Innovation, http://dx.doi.org/10.1787/5jlvc7sl1w7h-en.
Countries can stimulate innovation by increasing the participation of SMEs in public procurement activity. Increased participation of SMEs in public procurement is another area of procurement policy with substantial economic impact (Wright, Westhead and Ucbasaran, 2010[24]). Its impact in Germany is particularly prominent, as the German economy is dominated by SMEs, which generate more than half of GDP and provide over half of all jobs in the country (BMWi, n.d.[25]). The development of SMEs therefore contributes to human and social capital by generating job opportunities. This, in turn, helps develop people’s knowledge and skills, and can lead to improvements in social inclusion.
SMEs make up a high proportion of businesses across a number of economic dimensions in Germany. For example, 99.6% of companies in Germany are SMEs; 82% of trainees gain their experience with SMEs; and nearly 59% of the workforce is employed by SMEs (BMWi, 2017[26]). SMEs also account for a much larger proportion (48%) of the value of contracts awarded through public procurement in Germany than the European average (29%). The high proportion of contracts awarded to SMEs demonstrates the significance of their role in the national economy and in delivering goods and services to government (European Commission, 2016[27]).
Firms that win more government contracts through procurement auctions experience significant increases in growth that persist well beyond the length of the contract. Winning at least one contract in a given quarter increases firm growth by a sizable 2.2 percentage points over the quarter (Ferraz, Finan and Szerman, 2015[28]). New and growing small businesses spur economic growth by stimulating innovation, prompting existing businesses to increase their productivity and contributing to job creation (Wright, Westhead and Ucbasaran, 2010[24]). Therefore, increasing the participation of SMEs in the procurement system can stimulate economic growth.
Germany generally has a business-friendly environment and a favourable anti-trust framework, as measured by the Product Market Regulation indicators (an internationally-comparable set of indicators that measure the degree to which policies promote or inhibit competition in areas of the product market where competition is viable) (OECD, n.d.[29]). As discussed in the OECD’s study, SMEs in Public Procurement: Practices and Strategies for Shared Benefits, recognising SMEs’ contributions to employment, productivity and innovation, among others, countries exert efforts to provide an environment conducive for their growth. In so doing, countries can fully exploit the potential of SMEs to promote economic prosperity and citizen well-being. These efforts include hard and soft elements of the business environment, including the institutional and regulatory framework, access to markets, access to resources and entrepreneurial culture (OECD, 2018[30]).
This study found that countries focus on different areas when assessing the effectiveness of the policies and strategies supporting SMEs in public procurement, while the share of contracts awarded to SMEs represents the most common indicator. For example, the Irish government established a strategy to increase the participation of SMEs in government tenders. In order to monitor the success of the strategy and track relevant data points, they increased their data collection and analytical capabilities, as described in Box 1.5.
Box 1.5. Building a platform to conduct SME analysis in Ireland
The High-Level Group on SME Access to Public Procurement was established by the Irish Office of Government Procurement (OGP) to focus on policies and strategies that support SMEs to do business with public sector procurers. In order to monitor the progress of the strategy to increase SME participation in public procurement, it is important to have a reliable benchmark against which to measure, as well as a robust system for collating data on an ongoing basis.
In late 2014, the OGP commenced a programme to collect and analyse detailed non-salary expenditure from the public service. There were many publicly funded bodies, including schools, hospitals, uniformed services and large central government departments to collect data from. The project involved gathering data from 64 public service bodies and the analysis of thousands of account codes relating to almost four million payment transactions. These 64 public service bodies were prioritised according to the level of procurement expenditure in their sectors. The project team had to enrich (i.e. cleanse), categorise and analyse data so as to provide a reliable dataset and robust evidence base for the many stakeholders who had an interest in identifying where taxpayer funds were being spent in relation to government procurement. OGP classified and included over 35 000 suppliers in the analysed spending data.
While data collection was not complete, it served as a launch pad for future reporting rounds. By using a robust methodology data were still representative of spending across the whole public service.
In March 2015, the OGP published the “Public Service Spend and Tendering Analysis” for 2013. The OGP intends to produce an annual report of analysed expenditure and tendering activity each year. The initial analysis indicated that:
93% (EUR 2.559 billion) of analysed spending was won within Ireland (of which EUR 1.67 billion was with Irish SMEs).
7% (EUR 183 million) of the value of the analysed public service spending was with suppliers located outside the Republic of Ireland.
Source: (Office of Government Procurement, 2015[31]), High Level Group on SME Access to Public Procurement: Progress Report.
The approach taken by the Irish government can only be successful where there is access to sufficient data on public procurement activity. Where this is not possible, countries must identify other ways to assess impacts. Due to a lack of a centralised picture of procurement spending across the government, the New Zealand government developed a comprehensive business survey to gauge the success of procurement policies (see Box 1.6).
Box 1.6. Surveying the business community for insights in New Zealand
The New Zealand government holds limited information related to the procurement activity of contracting authorities. As a result, in 2014 New Zealand Government Procurement (NZGP) developed an annual business survey to understand businesses’ experiences of government procurement.
The survey was provided to all businesses registered on the national e-procurement platform. It was also openly available to businesses on the NZGP website. Over 2 000 business participated in 2017.
The survey asked businesses about their experiences with government procurement across the entire life cycle – from initial market engagement and innovation through to contract and relationship management. As a result of the survey, NZGP now undertakes improvement initiatives each year. Findings from the 2017 survey showed changes since previous surveys, such as:
Contract management continued to improve, with businesses rating their contract managers’ performances more positively in every competency when compared to 2016.
There has been improvement in the majority of measures that can be directly compared with the 2016 survey.
Since 2014, the percentage of businesses saying they would not recommend the government as a customer has decreased.
Smaller businesses were still generally more negative about government procurement than their larger counterparts.
Source: (New Zealand Government Procurement, 2017[32]), New Zealand Government Procurement Business Survey 2017.
1.2.2. Environmental capital
Public procurement contributes to natural capital through the diligent use and management of natural resources. For example, green public procurement refers to the purchasing of environmentally friendly goods, services and works (European Commission, n.d.[33]). If the purchasing power of public authorities is used to procure green products, it can contribute to sustainable consumption and production.
This is an important policy area for Germany, particularly as the country aims to become greenhouse gas neutral by 2050 due to its commitments to the Paris Agreement (Federal Ministry for the Environment, Nature Conservation and Nuclear Safety, 2017[34]). This will be a significant transition for an industrialised nation that has the highest total CO2 emissions in Europe. In Germany, environmental policies have been regarded as a burden on economic activity for a long time. Now, it is increasingly argued that well-designed environmental policies can encourage innovation and bring about gains in profitability and productivity. Furthermore, some observers think that these gains can outweigh the costs of implementing the policies (Kozluk and Zipperer, 2014[35]).
Measuring the impact of green public procurement is challenging due to the intangible and complex nature of the effects and consequences. Environmental considerations encompass a broad range of policy areas, such as the use of clean energy, water quality (including seas and rivers), reduction of pollution (resulting in health improvements) and minimising CO2 emissions.
To implement green procurement, countries are increasingly using life-cycle costing (LCC) in an effort to change the way in which the value of a product or service is quantified so that these values incorporate environmental considerations. While up-front costs for green products may be higher, guidance from the European Commission encourages an assessment of a product or service to consider the purchase price as just one of the cost elements in the whole process of purchasing, owning and disposing of a good or service. That means considering all the costs that will be incurred during the lifetime of the product, work or service, including:
purchase price and all associated costs (delivery, installation, insurance and more)
operating costs, including energy, fuel and water use, spares, and maintenance
end-of-life costs (such as decommissioning or disposal) or residual value (i.e. revenue from sale of product)
the costs for society of specific environmental impacts, such as those linked to climate change or acidification of soil or water through the application of a specific methodology. (European Commission, 2016[36]).
Initially, life-cycle costing was used as an economic tool, with the aim of analysing past, present and future costs in order to choose the most cost-effective option. Life-cycle costing can now be used to incorporate environmental externalities (or indirect costs) as a direct cost into the value chain.
There are a number of barriers to life-cycle costing being used universally and consistently, as identified by a study by the International Institute for Sustainable Development (IISD). Procurers around the world are adopting a wide variety of approaches, formats and cost breakdown structures in their life-cycle costing analyses, due to different contexts and legislation. One of the main issues arising is that most procurers report that they did not follow a rigorous methodology when using life-cycle costing (Perera and Morton, 2009[37]).
However, there are examples of life-cycle costing being used in a standardised way to develop quantitative measurement. The study by the IISD also found that life-cycle costing is only feasible in the case of selected goods and services. This explains why the quantitative measurement of improvements from green procurement has only been achieved in specific categories. Conducting a meaningful quantitative assessment requires a comparison between the financial and environmental aspects of green versus non-green products. The city of Vienna, for example, established a programme that identified a number of areas in which improvements could be monitored quantitatively, with an ultimate focus on improving the lives of the city’s inhabitants (see Box 1.7).
Box 1.7. Quantitative measurement of lifestyle improvements in Vienna
The ÖkoKauf Wien (EcoBuy Vienna) is a programme established by the Vienna City Administration. The programme aims to purchase goods and services according to ecological considerations in order to positively influence the quality of life of the city’s inhabitants.
The City of Vienna required suppliers to produce high-quality products and meet standards of environmental friendliness, usability, efficiency, quality and occupational safety. Data on the application of green criteria allowed the City of Vienna to carry out both a qualitative and quantitative assessment of the programme’s effectiveness. The impact assessment indicated a significant improvement in terms of ecological, social and economic sustainability measured by a set of indicators. The city then grouped those results within three procurement categories:
eco-friendly working in Vienna (procurement of environmentally friendly products like electrical and office equipment, paper, cleaning agents and vehicles)
eco-friendly buildings in Vienna (procurement of modern, resource-efficient building technologies)
eco-friendly living in Vienna (procurement of regional and organic food for kindergartens, schools, hospitals and retirements homes).
Benefits generated by the ÖkoKauf Wien programme are of both a qualitative and quantitative nature (see chart below).
Through the ÖkoKauf Wien programme, the City of Vienna was able to provide a holistic assessment of how procurement delivered tangible environmental and financial impacts. Specifically, the programme achieved this by attempting to perform quantitative impact measurement within those categories that were easily measurable, while supplementing these measurements with qualitative measurement of other, harder-to-measure areas. This was based on a detailed understanding of the goods and services being bought by the city’s administration, as well as a comparison against products and services bought in the past.
Where standards are more concrete and data is available, governments can gain greater insight into the attributes of the products and services being used. This can be done at a national level where authorities have visibility of goods or services that are procured centrally. This approach has been taken in Canada as described in Box 1.8, where improvements in the environmental specifications of centrally purchased goods and services are monitored over time according to improvements in green standards.
Box 1.8. Monitoring the Canadian Policy on Green Procurement
The Canadian Policy on Green Procurement was developed in 2006 to provide central direction on green procurement, and to develop a basis for assessing progress on green procurement. The implementation strategy for the policy on green procurement is based on the following principles:
integration of environmental performance considerations in existing procurement processes, policies, procedures, tools and instruments using life-cycle analysis
monitoring and reporting to support continuous improvement in the integration of environmental performance in procurement
a co-ordinated government-wide approach to optimising information sharing, consistency and performance measurement.
One key part of the implementation of the policy was the inclusion of environmental specifications and evaluation criteria in centrally managed procurement that was administered by Public Works and Government Services Canada (PWGSC). The framework agreements managed by PWGSC now include green procurement plans. The plans outline key environmental impacts for a given commodity and indicate how the framework agreement will purchase the goods or services in a way that will mitigate those impacts. Over time, the goal is to bring the purchased items closer to an aspirational green standard.
Canada conducts performance monitoring of the policy using a scorecard that outlines the criteria currently being used, the criteria included in the current renewal and the criteria anticipated for the next renewal. This information is communicated to suppliers, allowing them time to prepare for the next renewal and thus maintaining supplier competition. By tracking the volume of procurement done through this category, the scorecard can monitor the tangible benefits secured from purchasing the new, greener product or service.
Source: (OECD, 2015[39]), Going Green: Best Practices for Sustainable Procurement.
The above approaches rely on a deep understanding of the different procured products and services, as well as comprehensive data on how these products and services were bought in certain categories over time. Where data are not comprehensive, alternative approaches must be used in order to assess the impact of green procurement. A 2008 study drew on a sample of data regarding the use of green procurement criteria by seven EU countries and – relying on a number of assumptions and extrapolations – made quantitative connections to financial performance and CO2 reduction (see Box 1.9).
Box 1.9. Building an assumption-based impact model
In September 2008, the European Council called upon the European Commission to develop a practical evaluation methodology to measure progress made on green procurement by 2010 and thereafter. A study performed in 2008 by the consulting firms PricewaterhouseCoopers, Significant and Ecofys, contributed to this effort.
The study selected ten product groups frequently procured by public institutions in seven EU countries, based on the sophistication of countries’ data collection. Respondents were asked to indicate whether their most recently concluded purchasing contracts complied with certain green criteria, which were defined by the study. The study linked these criteria to key environmental impacts during the production and consumption phases of products. Furthermore, the criteria were divided into “core green” (which addressed the most significant environmental impacts) and “comprehensive green” (criteria for the overall best environmental products). The study then looked at the extent to which the criteria were used for purchasing, was then used to make assumptions about the environmental impacts of the products. Finally, the study identified the non-green and green products that met the criteria for each product group.
The study then calculated the financial impact of applying green criteria by comparing the costs of a green product with those of a non-green product. The analysis was based, as much as possible on the concept of life-cycle costing, meaning that the costs of purchase, operating and disposal were all taken into account. At each stage, the study determined a “cost ratio” for each product – meaning the ratio of costs of a green product as compared to the costs of a non-green product. This was done both for core and comprehensive green criteria.
The methodology used in this study makes generalisations; therefore, there are limitations to the findings. For example, the study does not include a full life-cycle costing analysis of each of the product groups, which would have allowed a broader range of environmental aspects to be assessed. Instead, the data limitations meant that the study focussed specifically on CO2 emissions. The results produced by the study relied on these assumptions to deliver an evaluation of the use and performance of green public procurement. A brief summary is provided below.
Source: (PWC, 2009[40]). Collection of Statistical Information on Green Public Procurement in the EU.
The above study was based on a macro-level view of the degree of spending across certain categories, and to what extent green criteria were applied to those categories. This study did not require a comprehensive suite of highly detailed, transaction-level data. Such an approach may be useful when limited data is available.
1.2.3. Social capital
Public procurement contributes to social resources by supporting trust, security and the fabric of society. Social resources, both formal and informal, provide the environment in which other kinds of capital can flourish, for example by providing a predictable business climate. In the area of public procurement, social capital relates to the integrity and transparency of public procurement institutions (including e-procurement systems). Social capital is strongly linked to human capital as highly skilled and aware procurers can promote high levels of integrity.
During the course of a procurement exercise, social results and considerations can be taken into account. This area of activity is not to be confused with the procurement of social services (which is often referred to as “social procurement”). Many governments conduct social procurement separately from more commercial procurement activities. Procurement can enhance and support social capital in several ways:
Social outcomes, such as job creation in low-income areas, or the engagement of specific types of businesses, like indigenous or women-owned businesses, can be delivered as an added value to a procurement project.
By taking additional steps to ensure that the supply chain of businesses contracted to government or tender participants have a compliant or responsible “value chain” – meaning that sub-contractors follow responsible business practices or conduct, such as fair wages and good working conditions.
Contracting authorities make deliberate decisions to contract with businesses that have certain characteristics, such as immigrant-owned businesses, or businesses employing people with disabilities or other groups that are not well represented in the workforce.
Countries that monitor the implementation of social procurement seem to measure the proportion of contracts awarded where procurers have taken the above considerations into account. Chile, for example, monitors implementation by tracking the market share (in value and quantity) of contracts awarded to women (individuals as opposed to organisations) (OECD, 2017[41]). As described in Box 1.10, the Polish government monitors the implementation of their National Action Plan on Sustainable Public Procurement by testing a sample of procurement contracts to see what proportion include social criteria.
Box 1.10. Monitoring inclusion of social clauses in Poland
Poland’s National Action Plan on Sustainable Public Procurement for 2013-2016 (NAP SPP) addresses green public procurement and socially responsible public procurement. Implementation of much of the plan by contracting authorities is voluntary, with some elements being mandatory, including obligations to:
consider application of social clauses (such as the reserved contract clause, employment clause and labour clause) in procurement procedures, particularly when purchasing education and training services and others
exclude economic operators from tender processes if they are in arrears with payment of taxes, charges, social insurance or health insurance premiums, or have been validly sentenced
clarify abnormally low contract prices in relation to labour costs and subcontracting
include social aspects regarding needs of all persons and disabled persons in the description of the subject matter of the contract.
The action plan included the goal to ensure that 10% of contracts were socially responsible by the end of 2016. Poland then measured levels of green public procurement and socially responsible public procurement on an annual basis.
Poland based the methodology for the NAP SPP on the analysis of contract notices placed in the national Public Procurement Bulletin (for procurements below EU thresholds) and the European TED database (for procurements above EU thresholds). From each source, a random sample of 4% of contract notices for works, supplies and services was selected, based on the date of their publication. To ensure that the selection was a random cross-section, Microsoft Excel’s random number generator was used.
The following elements were subject to analysis:
the subject matter of the contract (including a title and short description)
selection criteria used
contract award criteria
contract performance requirements.
For 2015, 4.08% of contract award procedures by the Polish contracting authorities included social aspects.
Source: OECD (2016), Survey on Public Procurement, OECD.
The aforementioned monitoring efforts focus on the outputs of procurement activities. Monitoring the social impacts of these outputs is much more challenging. Policy makers are able to measure the outputs of public procurement (which are the number or value of contracts that meet certain social criteria), but not necessarily the resulting outcomes or impacts. Governments can gain an indication of the benefits that targeted groups of suppliers can obtain from increased economic activity, however. For example, the Commonwealth Government of Australia recently committed to placing 3% of its procurement contracts with indigenous suppliers. In turn, this commitment is expected to generate an estimated 1 500 contracts or AUD 135 million each year (Jagatheeswaran, Stephens and O’Conner, 2018[42]). In other countries, by either setting targets in advance or retrospectively reviewing the total value of contracts given to companies that increase social capital, countries can get an indication of the additional revenue that these businesses will benefit from. Contracting authorities and other responsible public authorities often have to verify that contractors (and, where relevant, subcontractors) comply with social criteria. Some governments have developed sophisticated practices with regards to monitoring contractors’ compliance with contract provisions. As described in Box 1.11, countries such as the US and Denmark have implemented monitoring programmes to ensure that suppliers adhere to their obligations.
Box 1.11. Monitoring compliance with social criteria in contracts in the United States, Denmark and Sweden
United States
The Sweatfree Purchasing Consortium (SPC) comprises 14 US cities and three US states, and seeks to ensure that apparel products bought by the US government are made without sweatshop labour. The SPC provides procurement authorities with model procurement policies and codes of conduct, purchasing guides, labour compliance questionnaires and online worker compliance forms.
Participation in the programme also requires suppliers to be independently monitored for compliance with codes of conduct, showing that they are making credible efforts to address abuses. Several cities, including Los Angeles and San Francisco, require apparel contractors to disclose factory locations and retain the services of the Worker Rights Consortium to produce monitoring reports on compliance with each city’s code of conduct.
Denmark
Following a report by Danwatch that exposed forced labour and hazardous working conditions in the information technology (IT) supply chains of the Danish state and municipalities, public authorities in Denmark, Sweden and other jurisdictions were forced to re-evaluate public procurement contracts and conduct-significant due diligence of their contractors and suppliers. This included initiating third-party audits, on-site factory visits, and ongoing reporting on suppliers’ efforts to address abuses.
Sweden
In the case of Sweden’s municipal-level health authorities, the procurement agency sends out questionnaires to suppliers of medical equipment to determine if proper supply chain due diligence practices are in place. Authorities then follow up on these questionnaires by asking for audit results, and by asking whether a risk mitigation strategy was being used. In some cases, the public procurement agency can hire third party auditors to conduct on-site evaluations of suppliers.
Source: (OECD, 2017[43]), Responsible business conduct in government procurement practices.
Such monitoring campaigns help contracting authorities verify that the obligations they include in their procurement activities, such as fair working conditions or the use of minority-owned subcontractors, are being complied with.
However, it should be noted that these measures do not provide information on what effect the increased revenues, salaries or socially responsible business practices have had on the lives of citizens. There are examples from the private sector demonstrating how the impacts of an improved reputation might be measured. Beyond the positive social impacts, social procurement has the potential to generate real business value (Jagatheeswaran, Stephens and O’Conner, 2018[42]).
These findings correspond to a key element of how social capital is enhanced, according to the OECD Framework for Measuring Well-Being and Progress. The OECD framework shows that levels of trust in society can be improved by increasing public trust in institutions. This has not been seen as a significant issue in Germany, given that the country ranks 12th out of 137 countries in terms of the trustworthiness of its institutions, according to Transparency International’s Corruption Perception Index (CPI) (Transparency International, 2018[44]). The World Economic Forum’s Global Competitiveness Report ranks Germany 21st out of 190 countries in terms of the quality of its institutions (World Economic Forum, 2017[21]). Germany scores high in the context of the quality of government at the sub-central level as well. At the regional level, the best-performing states are rated as Schleswig-Holstein (36th rank out of 236 regions), Lower Saxony (37th), Bavaria (40th), Rhineland-Palatinate (42nd) and Saarland (43rd).
Germany has achieved this high performance on transparency and integrity indicators despite the fact that the country lags behind in the use of information and communication technologies (ICT) in public procurement (OECD, 2018[45]) (explored further in Chapter 4). Transparency International has identified the provision of public procurement data to the public and stakeholders in Germany as an area in need of improvement (Transparency International, 2017[46]). This prompted Germany to become a signatory to the Open Government Partnership, which recognises the importance of open standards for promoting civil society access to public data, as well as facilitating the interoperability of government information systems (Open Government Partnership, 2011[47]).
Public trust in government institutions is not just related to the efficiency of public servants and the effectiveness of public spending. Political events and media narratives can also influence trust in institutions. Because of this, measurement of public trust does not necessarily have a direct correlation with efforts to improve the transparency of public spending. The Edelman Trust Barometer has gauged public trust each year for the last 28 years. The 2018 survey covered 28 countries and surveyed over 33 000 citizens. It showed that trust in institutions is generally low at present, though in Germany trust in government experienced a slight increase in 2018 from the previous year (Edelman, 2018[48]).
While these indicators have limitations that stem from their construction, gaining an increase in the CPI score, for example, would reflect an improvement in civil society’s perception of public institutions. This is something South Korea achieved by improving their e-procurement platform (as described in Box 1.12).
Box 1.12. Gaining an improvement in the perception of integrity in Korea
Korea made notable improvements to the transparency of its public procurement administration in the early 2000s through the implementation of a national e-procurement system. In 2002, the Public Procurement Service (PPS), the central procurement agency of Korea, introduced a fully integrated end-to-end e-procurement system called KONEPS. KONEPS links with about 140 external systems to share and retrieve information on tenders and suppliers. Furthermore, KONEPS provides a one-stop service on a real-time basis. All public organisations are mandated to publish tenders through KONEPS. In 2012, over 62.7% of Korea’s total public procurement (USD 106 billion) was conducted through KONEPS.
The system has increased participation in public tenders and has considerably improved transparency, eliminating instances of corruption by preventing illegal practices and collusive acts. According to the integrity assessment conducted by the Korea Anti-Corruption and the Civil Rights Commission, the Integrity Perception Index of the PPS has improved from 6.8 to 8.52 out of 10 since the launch of KONEPS.
A key concern of the Korean government has been the use of illegal practices to obtain borrowed e-certificates. In order to mitigate this risk, the Public Procurement Service introduced “Fingerprint Recognition e-Bidding” in 2010. By July 2010, the government had applied this tool to all tenders carried out via the KONEPS. The tenders affected were from local governments and other public organisations procuring goods, services and construction projects. This corrective action is likely to improve the perception of the integrity of public procurement in Korea.
Source: (OECD, 2016[49]), The Korean Public Procurement Service: Innovating for Effectiveness.
1.2.4. Human capital
Public procurement contributes to human resources throughout society. Efficient and effective public procurement in the health sector contributes to higher quality healthcare and better medical equipment, which in turn lead to higher life expectancy (and higher levels of people living longer in good health). These gains can be translated into lower expenses for healthcare and a higher labour force participation rate, which lead directly to economic gains. Improvement in employees’ access to skills development contributes to economic growth through higher labour market participation (in terms of quantity, quality and duration). Skills access can also facilitate the transmission of knowledge, which eases the implementation of new technologies.
Education has a strong influence on societal well-being. Better-educated individuals earn higher wages and have a higher probability of employment. They live longer lives, report better health statuses and have lower occurrences of chronic diseases and disabilities. Better-educated individuals also participate more actively in politics and in their communities. They commit fewer crimes and rely less on social assistance. At a societal level, better education leads to higher GDP growth, higher tax revenues and lower social expenditure.
A challenge that Germany faces with respect to human capital relates to demographic changes (i.e. Germany’s ageing population). The old-age dependency ratio, which measures the number of elderly people as a share of those of working age, is expected to increase strongly over the coming decades. While the dependency ratio was 26.2 in 2000, it is expected to increase to 43.7 in 2025 and 65.1 in 2050 (OECD, 2015[50]). This trend will lead to increasing pressure on Germany’s pension and health care system. The increase in public expenditure on health care caused by demographic changes will increase by 0.7 percentage points over the period 2013-2060 and amount to 8.3% of GDP in Germany (European Commission, 2015[51]). Compared to other EU countries, the projected increase is relatively low, yet Germany already has the fifth highest relative health care spending in the EU (European Commission, 2015[51]).
Education is another area in which Germany has the potential to make more efficient use of public spending in order to achieve economic development. Germany invests less of its national wealth and its overall public budget in education than other OECD countries (OECD, 2016[52]). Spending on educational institutions in Germany represents 4.2% of GDP, which is below the OECD average of 4.8% (OECD, 2016[52]). In spite of below-average expenditure on education, the German education system performs comparatively well. The Global Competitiveness Report ranks Germany 13th (out of 137 countries) on quality of health services and primary education, and 15th on quality of higher education and training (World Economic Forum, 2017[53]). In order to maintain high-quality education, however, sustainable funding is required.
Where government initiatives have more indirect impacts on citizen health, quantifying impact can be challenging. For example, the city of Ferrara, an Italian municipality, undertook a project aimed at promoting students’ health and well-being through a commitment to organic food in school canteens. Even if the positive impacts of organic farming on the environment and on people’s health are commonly recognised, quantifying them in a precise way is still difficult today. Tender documents banned the use of fertilisers, pesticides, insecticides, fungicides and genetically modified organisms in farming. While this was likely to result in health improvements, it was not possible to assess the impact on citizens’ health (United Nations Environment Programme, 2012[54]).
Similarly, to attribute educational outcomes to a specific procurement exercise is challenging. While the procurement of facilities, technology and other resources might support the educational environment, these factors cannot necessarily be connected to educational outcomes. Measurement has been possible where the following conditions have been met:
A baseline was established that characterised conditions before the intervention occurred, and used a mix of qualitative and quantitative methods to describe the conditions that the programme could reasonably expect to affect (United Nations Environment Programme, 2016[55]).
a “results-driven” contracting approach was taken, with suppliers being incentivised to deliver certain outcomes, which were monitored through detailed key performance indicators (KPIs) (Harvard Kennedy School, 2016[56]).
There are concrete examples of how public procurement can be used to improve educational or health outcomes. The way in which procurers design tenders or contracts can exploit the power and knowledge of the market to deliver better outcomes for citizens. In order for those outcomes to be effectively measured, it is important for governments to establish detailed key performance indicators (KPIs), as described in Box 1.13.
Box 1.13. Developing a baseline for educational improvements through procurement in Scotland
Around one-quarter of the Scottish population (26.7%) faces challenges related to literacy. Geographic clustering of these problems can also contribute to the economic difficulties faced by individuals in some areas in comparison with others. Scotland’s economy relies heavily on SMEs, which account for 99% of the total number of Scottish businesses and for over half of all private sector employment. They also greatly contribute to supporting less able individuals, and help to improve their literacy and numeracy. Often, these less able individuals would not find work in large firms; in addition, employment opportunities provide opportunities and incentives to working on literacy and numeracy. Historically, however, many of these firms have not competed successfully for public sector business opportunities.
The Scottish government set out to procure framework agreements for consultants and temporary staff under the category of “flexible resources”. With a budget of up to USD 144 million per year, these flexible resource framework agreements had considerable potential to facilitate economic growth and increase the education levels of those working in SMEs in Scotland. The continuum of roles under the category of flexible resources was broken down into 13 separate framework agreements to allow SMEs to compete. Furthermore, the government included a requirement to facilitate literacy, numeracy and career progression improvements in the flexible workforce, within the specifications.
To ensure that the project was able to successfully monitor improvements in the workforce, one of the aims of the frameworks was to establish a detailed baseline for levels of literacy and numeracy training. The only baseline from which to start was that the companies had not previously been directed to support initiatives directed at boosting literacy and numeracy. The government then included explicit targets and key performance indicators relating to literacy and numeracy in the next re-tender of the framework agreements.
The project team learned that measuring the impact of training initiatives was a difficult exercise. The project team asserted that, in future iterations, very detailed key performance indicators should be included in contracts for procurement solutions that aimed to target training, literacy and numeracy improvement. The first iteration of the programme did allow for the development of a baseline from which future improvements could be established.
Source: (United Nations Environment Programme, 2012[54]), The Impacts of Sustainable Public Procurement.
1.3. Setting up public procurement for better measurement of impact
This section explores how Germany could use insights from other countries and from research to systematically track the impact of public procurement. By tracking the impact of individual public procurement processes and feeding the data into a more overarching repository, Germany could analyse all aspects of public procurement’s impact (as described in Section 1.2). At the same time, measuring the work of central purchasing bodies (CPBs) and the impact of framework agreements can be a first step towards understanding procurement’s impacts. This approach combines the knowledge of factors that can influence inclusive growth and national well-being (as delineated by the OECD well-being framework) with a process for assessing and monitoring impact (in the form of the Benefits Management Approach and the framework of indicators for measuring procurement impact).
The country examples mentioned prior demonstrate a number of successful avenues for understanding the impact of public procurement on the economy and society as a whole. While they are instructive, the examples are also context-specific, singular and concentrated in their focuses. This illustrates a main challenge: gaining a comprehensive understanding of the overall impact of public procurement. In addition, governments face a common challenge in gathering data from individual procurement processes that will provide a robust base for meaningful analysis of impact at an aggregated level.
Since data quality and availability is limited in most countries at this stage, impact analyses cannot be supported by robust data. However, increased data collection can create an opportunity to measure impact. These two aspects, quality and availability of data and its analysis, are linked together in a virtuous circle: monitoring of the impact of individual procurements will allow impact to be tracked at a more overarching level. At a later stage, this case-by-case data can be aggregated to allow for more general analysis of the impact of public procurement. This, in turn will allow strategies to be fine-tuned and based on a more informed view of procurement practice. Figure 1.6 illustrates the cycle of data use to inform strategy development.
Figure 1.6. Impact monitoring can contribute to a virtuous circle for strategic procurement
Source: Authors’ illustration.
As mentioned above, a structured analysis of the impact of public procurement should take into account possible impacts in all areas identified by the OECD’s well-being framework. This should be complemented by a structured approach to analysing day-to-day processes, as highlighted by the benefits management approach, which provides a structured process for assessing and monitoring the eventual benefits (and disadvantages) of public procurement. Without underlying information, a substantive analysis of the impact of procurement cannot be conducted.
1.3.1. Tracking impact of public procurement from project to portfolio level
As the country examples in the previous section illustrate, analysis of the impact of public procurement can be approached from different perspectives. First, countries can approach analysis through a focus on the measurement of procurement’s impact on the overall economy at an aggregated level. Second, countries can examine the impact of individual procurement processes.
Furthermore, countries can measure the outcomes of individual procurement exercises in order to form an overall picture of procurement activity. This approach presents its own challenges; most notably it requires that the measurement is built into the daily work by procurement officials. The approach does, however, present an opportunity for policy makers to develop a framework that measures the far-reaching impacts of public procurement.
Considering a tender as a project can help policy makers understand and assess the varied and often conflicting impacts of a specific procurement. A procurement project spans from the establishment of a need to the delivery and then ongoing management of a supplier delivering a good or service. Viewing procurement as a project highlights the fact that every procurement involves a process rooted in the desire to achieve goals and deliver benefits. Additionally, a strategy such as delivering sustainable procurement can be viewed as a programme, or a collection of projects. By viewing procurement in this way, policy makers can have a better handle on the many variables that affect impact.
Some countries have developed frameworks to support the assessment and measurement of project successes. Projects in the private sector are often assessed according to a number of criteria, many of them relating to financial impact or the degree to which the project was completed on time and on budget. Research identified a number of criteria used by private sector respondents to assess a project’s success, as shown in Table 1.1.
Table 1.1. Common measures of project success
Note: A percentage of mentions from 14 papers reviewed.
Source: (Freeman and Beale, 1992[57]), Measuring Project Success.
Many of the measures listed above are inadequate for governments, as they cannot measure the broad spectrum of outcomes that a government may seek to achieve from procurement. These outcomes can range from constructing sports facilities to incarcerating prisoners to other outcomes. When a government embarks on a procurement project it often has a broad range of outcomes that it seeks to achieve, and each must be aligned with relevant government strategies. In response to this challenge, the United Kingdom (UK) developed an approach to support the delivery of major projects through structured measurement (see Box 1.14).
Box 1.14. A benefits management approach to tracking outcomes from government spending in the United Kingdom
The UK has long focussed on recording benefits of procurement processes. However, the actual realisation of those benefits and their relationship with the initially requested investment were not often tracked, monitored or reported on. As a response, the UK developed an approach to actively manage benefits of a procurement project. “Benefits Management”, as this approach is called today, involves detailing the expected benefits from a project in a measurable way, and continuing to monitor whether they have been realised (and whether the costs required to deliver them have increased) over time. This approach is based on the project management methodology “Prince2”.
According to the UK government’s Guide for Effective Benefits Management, a benefit is defined as: “the measurable improvement resulting from an outcome perceived as an advantage by one or more stakeholders, which contributes towards one or more organisational objectives” (Infrastructure and Projects Authority, 2017[58]). Fundamentally this means that benefits:
Should be measurable. If they cannot be measured they cannot be claimed as realised.
Are the improvement resulting from the outcome (the end result) of the change – not the change itself.
Are in the eye of the beholder. In other words, different stakeholders value the same benefits differently. Additionally, in some cases, a benefit to one stakeholder may be a dis-benefit (an outcome perceived as negative) to another.
Create the link between tangible outputs and strategic goals.
Ensure there is alignment of effort, resources and investment toward achieving organisational objectives.
According to the Benefits Management approach, preparation of the public procurement procedure should start with an identification of the targets and benefits that can be achieved. A key product during this stage of the benefits management approach is the development of a Benefits Logic Map, which links drivers, enablers and business change that will result from the project to the expected benefits and dis-benefits, and links the benefits to objectives and goals. An example of a Benefits Logic Map for environmentally friendly procurement is provided in Annex 1.C to this chapter. The desired objectives of a project should comply with the S.M.A.R.T. principles (i.e. they should be specific, measurable, achievable, realistic and time-bound). This also means that consideration should be given to how data on benefits and dis-benefits are tracked and aggregated so that a bottom-up view of the impacts of the whole public procurement system can be monitored.
The last phase of every procurement project should be focused on evaluation, providing information on the effectiveness of the procedure itself as well as an analysis of whether the outcome has helped to achieve the expected benefits. Creating public procurement strategies according to these rules can boost the efficiency and effectiveness of the public procurement system. They can also lead to the achievement of desired benefits, thanks to proper design, monitoring and evaluation of the process.
Source: (Infrastructure and Projects Authority, 2017[58]), Guide for Effective Benefits Management in Major Projects: Key benefits management principles and activities for major projects; Department of Finance (n.d.), Identifying and structuring programme and project benefits.
If a government develops a measurement approach for monitoring individual projects, impacts must be aggregated in order to form a more holistic picture. Adding up impact is easiest if there is a predetermined set of outcomes and indicators, so that all activities can use the same criteria to measure impact. Very simple indicators can be used to measure impacts that are harder to define. For example, social programmes that have a range of activities and objectives, can report on “lives affected” in order to aggregate many different types of changes in people’s lives and impact in a simply way.
1.3.2. Establishing a framework for monitoring public service performance in a decentralised environment
Institutions in charge of public procurement at the central level have decreasing levels of visibility and control. The reason for this is that most procurement activity begins via centrally administered agreements and then moves towards decentralised procurement and the broader economy. This is particularly true in Germany, where the majority of spending is carried out at a sub-central level (see Figure 1.7).
Figure 1.7. General government procurement by level of government, 2015
Note: Data for Australia and Chile are not available. Data for Turkey and are not included in the OECD average because of missing time series. Local government is included in state government for the United States. Social security funds are included in central government in Ireland, New Zealand, Norway, the United Kingdom and the United States. Data for Costa Rica are for 2014 rather than 2015.
Source: (OECD, 2017[12]), Government at a Glance 2017, based on OECD National Accounts Statistics (database).
To understand the impact of public spending, Germany’s federal government must be able to first view how and where government spending is carried out. Traditionally, e-procurement systems have been a useful tool for gathering data on public spending. However, as discussed in Chapter 4, Germany does not currently have an integrated system that acts as a repository for procurement data. The data collection process that the federal government is currently undertaking will not provide a complete picture of public procurement activity in Germany.
Beyond procurement, the question of how to evaluate sub-central governance activities is an issue in all areas of governance for countries around the world. Sub-national governments are responsible for the delivery of key government services, including education, health, law and order, and social services. Yet, most central governments still see it as their role to ensure public services are delivered efficiently and equitably. Because of this, the OECD in 2017 undertook a study on improving performance of sub-central governments through benchmarking and performance reporting, as described in Box 1.15. The conclusions can provide insights for the area of public procurement.
Box 1.15. Benchmarking sub-national performance in OECD countries
OECD countries have applied several approaches to evaluating and benchmarking administrative performance in their regions and sub-central institutions. A proven technique has been to establish systems that benchmark the performance of different sub-central services and create incentives for good performance.
Such performance-based systems can improve efficiency and effectiveness of sub-central services in three ways:
1. by reducing information asymmetries between different levels of government;
2. by identifying providers that are over-performing or underperforming; and
3. by stimulating competition between sub-central governments.
While some countries apply quite competitive benchmarking, a more collegiate or collaborative form of benchmarking that is less likely to rate or rank participants is better suited to sub-central governments with greater revenue power and administrative responsibilities, like Germany. Collegiate (or collaborative) benchmarking is based on learning from best practices, as opposed to using “naming and shaming” techniques for performance. It generally involves consultation and collaboration between different levels of government. It is easier to implement collegiate benchmarking if all levels of government perceive that it will lead to new or better information channels, as well as improved policy effectiveness. It is also easier to implement collegiate benchmarking if all levels of government feel that they can share the additional resources and political leverage it brings.
In Australia for instance, central and sub-central governments undertake a collaborative exercise to produce an annual report on the performance of sub-central service delivery. Performance indicators include output indicators that are grouped under the designations of equity, effectiveness and efficiency, and outcome indicators. Each service area has a performance indicator framework and a set of objectives against which the service area has to report. The central government has not mandated formal benchmarks, and the Australian States and Territories have resisted the publication of any summary information that ranks or rates them. These factors may have facilitated the participation by all states. Comparisons based on efficiency and effectiveness criteria are used as a substitute for market competition, and performance indicators substitute for market price signals.
In general, qualitative mechanisms in the form of external inspections and user surveys help provide insights into consumer experience and well‑being. Countries should implement performance systems that measure both the efficiency and effectiveness of public services.
Source: (Phillips, 2018[59]), Improving the Performance of Sub-national Governments through Benchmarking and Performance Reporting.
In the area of public procurement specifically, policy makers are dependent on the reporting received from contracting authorities. To successfully aggregate information, reporting requirements must have clear guidelines and must be comparable across different government agencies. The federal government of the United States has developed a rigorous reporting regime to ensure that contracting authorities follow federal green procurement guidelines, as described in Box 1.16.
Box 1.16. Monitoring the use of green procurement across the federal government in the United States
Green purchasing and sustainable acquisition made by the US federal government dates to 1976, with passage of the first law establishing a preference programme for recycled products – those made with recovered materials. The federal government has been emphasising sustainable acquisition or green procurement monitoring and reporting since the early 1990s. Furthermore, it reports to Congress every two years on the results. The Federal Procurement Data System (FPDS) continues to be refined and improved as a tool to help agencies accurately report compliance with sustainable acquisition mandates.
Three agencies take the lead in designating products and providing purchasing recommendations to the other agencies in the federal government: the US Environmental Protection Agency, the US Department of Energy and the US Department of Agriculture. These three agencies have designated environmental criteria for more than 300 product categories.
US federal agency compliance is monitored through a variety of mechanisms. In addition to the FPDS data system where all procurement information is tracked, agencies are expected to submit an annual strategic sustainability performance plan, which identifies specific actions and goals the agency plans to achieve in the coming year.
In addition, the government tracks and assesses key milestones and activities through semi-annual scorecards. The Office of Management and Budget (OMB) and the Council on Environmental Quality (CEQ) use scorecards to: 1) monitor whether individual agencies are on track to achieve overarching government-wide goals; and 2) how much progress agencies are making to achieve key activities and milestones. In providing input on sustainable acquisition for the scorecard assessments, agencies are asked to conduct quarterly reviews of at least 5% of the acquisitions awarded in that period. As such, the agencies are asked to report on compliance with sustainable acquisition goals. If agencies fall below the 95% compliance rate, they are supposed to identify corrective actions they will take during the following six-month period to address the barriers or underlying conditions for non-compliance.
Source: (OECD, 2015[39]), Going Green: Best Practices for Sustainable Procurement.
Work is already underway to assess performance at the Länder level and municipality level in Germany. The Association of Local Government Management (Kommunale Gemeinschaftsstelle für Verwaltungsmanagement, KGSt), for instance, encourages voluntary participation from districts and municipalities in the organisation’s evaluation activities. The KGSt has established voluntary benchmarking networks and a common assessment framework to assess performance across governments (Kuhlmann and Jäkel, 2013[60]). Provided that economic indicators for public procurement could be agreed upon, this approach could be leveraged to gain an understanding of public procurement performance and its economic and social impact across Germany. Metrics on SME participation and spending on procurement for innovation are straightforward to study, and could serve as a starting point for additional indicators.
1.3.3. Quantitative indicators must be based on measurement priorities and data availability
Efforts to quantify the impact of public procurement systems in OECD countries has typically involved the use of indicators that span a number of different procurement operations areas, depending on the type of data that is available. For example, the effectiveness of tenders can be assessed based on the average number of tender responses submitted (Hoxha and Duli, 2014[61]).
In developing measurement frameworks, countries must consider the limitations of data availability, and should prioritise those areas where effective measurement is achievable. As a result of the increased buying power involved, centralised procurement activity has a greater economic impact than stand-alone procurement conducted by contracting authorities. Therefore, measuring the work of CPBs can go a long way in measuring public procurement in a country as a whole. The ease of measuring public procurement activity decreases as it extends beyond centralisation. In Figure 1.8 below, the expanding circles illustrate that a large part of public procurement takes place outside of CPBs, making it harder for policy makers to collect data and measure impacts.
Figure 1.8. Illustration of different levels of procurement activity
Source: Authors’ illustration.
Countries have advanced to different degrees of maturity in their ability to measure the broad range impacts stemming from procurement activity. The changing nature of the role of CPBs in OECD countries is just one of the many nuances that make it challenging to use performance data to conduct benchmarking or identify a number of simple and comparable metrics across countries. Each country has its own institutional settings, policy objectives and legislative framework, meaning that any metrics that are developed to compare performance across countries would require significant caveats.
There are a number of public procurement activities that can be measured and monitored by policy makers within a country. The applicability of each measure within a certain country is dependent on its relevance to the work of the government and CPB, and the availability of data. Table 1.2 below provides a number of metrics that can be used to measure public procurement activity. The measures are grouped according to different levels of measurement (i.e. measuring CPB versus broader measurement of the whole public procurement system). They are also grouped according to the types of capital described by the OECD well-being framework, (natural, human, economic and social capital) in order to demonstrate how public procurement’s impact on these areas can be measured and put into practice. The table also explains the data requirements for each metric.
Table 1.2. Metrics for measuring procurement objectives at different levels of government
Source: (OECD, 2018[62]), Methodology for Assessing Procurement Systems (MAPS).
As part of a study on the productivity of public procurement in Finland, the metrics in the above table were applied to the Finnish system in order to identify the measures that were relevant and applicable, as described in below.
Box 1.17. Using indicators to measure procurement with regards to natural, human, economic and social capital
A forthcoming OECD study seeks to develop a framework for measuring the public procurement productivity of central purchasing bodies (CPBs). The framework relies on the suite of indicators listed in Table 1.2 above. Analysts then assessed the Finnish public procurement system and the government’s ability to monitor activity. Finland’s ability to use the metrics above was assessed based on the availability of data, as demonstrated below.
Table 1.3. Extract of indicator assessment based on data availability in Finland
|
Objective |
Data requirements |
Applicability in Finland |
||
|---|---|---|---|---|
|
Economic Impact |
Framework agreement (FA) time savings |
Average time spent by CA personnel to establish a contract for the relevant good or service |
|
Time spent by CAs conducting tenders established by academic work in 2009; baseline could be updated to account for technology changes |
|
Efficiency in second-stage FA processes, as well as through dynamic purchasing system (DPS) and other instruments – businesses |
Assessment of time taken for businesses (averaged across several business profiles) to compete in initial and call-off stages of tender with and without efficiency tools such as DPS |
|
Data is not currently held on the time taken by businesses to respond to FA tenders or in using DPS or other efficiency tools |
|
|
Environmental impact |
Reduction of CO2 emissions |
Comparison between C02 emissions from historical goods and services from FAs and new goods and services selected using emissions as criteria |
|
Requires understanding of C02 emissions of previous goods and services throughout the life cycle, as well as emissions of current goods and services (e.g. emissions from previous vehicle fleet compared to current fleet). Current measurement purely involves calculation of spending through ‘green’ contracts. |
|
Social Impact |
Use of social criteria in FAs |
Ratio of FAs pursuing social objectives (and where possible, aggregation of social outcomes secured through FAs) |
|
Information available on which current FAs include clauses or criteria related to delivering social outcomes |
Source: (OECD, 2019[63]), Productivity in Public Procurement.
This chapter has considered the ways public procurement can directly and indirectly influence public service delivery, economic growth and societal well-being as measured using the OECD well-being framework; it has also discussed various ways to measure the impact of public procurement. The chapter explored country case studies to illustrate how measurement has been undertaken in each of the areas of economic, natural, social and human capital. The various approaches to calculating impact t can be brought together through a measurement framework. Such a framework would encompass the measurement of centralised activity in the short-term and a longer-term commitment to understanding the impact of procurement activity at a more granular level. Germany already has the adequate legal support to create this sort of impact measurement framework. Article 91d of the German Constitution gives federal and state governments the possibility of performing benchmarking and comparative studies. Public procurement would be an excellent field of application.
Proposals for action
Tracking the impact of public procurement is a challenge due to the lack of standardised approaches to gathering data and measuring impact. Furthermore, calculating the impact of public procurement is often difficult due to a lack of reliable information. If successfully done, measuring impact of public procurement would allow the benefits of an efficient procurement system to be disentangled from broader public service reporting, and individualised for better recognition, on one hand, and further improvement, on another. This chapter proposes an approach to better describe the broad impacts of public procurement, its linkages and interactions, by identifying channels through which public procurement may be used to influence the economy, the environment and society.
The report’s analysis of the German procurement system from the perspective of sustainable well-being highlights areas where public procurement could bring broad-ranging benefits to people’s lives. The analysis also demonstrates the linkages between different areas of impact. Based on the analysis, the following areas for action have emerged. Germany could consider:
focusing on the broad perspective of strategic procurement, which reaches beyond strictly economic impacts to target the well-being of Germany’s citizens
starting to measure the benefits from public procurement using indicators that have been tried and tested internationally in order to monitor and maximise potential gains
expanding the range of indicators tracking Germany’s National Sustainable development Strategy with procurement data
developing a consistent methodology that can be voluntarily used at the sub-national level to identify the impact of procurement and ensure comparability across states.
Further Reading
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Annex 1.A. Germany’s resources and risks for future well-being
Annex Figure 1.A.1. Illustrative indicators
Source: (OECD, 2017[10]), How's Life? 2017: Measuring Well-being.
Annex 1.B. Socio-economic performance: International indicators
Corruption Perception Index: An indicator published by Transparency International which measures how corrupt the public sectors in 176 countries are seen to be in a given year. The index aggregates information from numerous sources providing perceptions of business people and country experts on the corruption level in a country. The indicator values can range from 0 to 100 (the lower the value, the less corrupt the public sector). Higher-ranked countries tend to have better standards of public sector integrity, more access to information about public expenditure and an independent judicial system. The Corruption Perception Index can be used to measure the social capital of a country as defined by the OECD well-being framework for sustainable well-being over time.
Worldwide governance indicators: A set of indicators provided by the World Bank which aim to measure the quality of governance in over 200 countries and territories, divided into six categories:
voice and accountability
political stability and absence of violence
government effectiveness
regulatory quality
rule of law
control of corruption.
These indicators are aggregated based on responses to surveys from enterprises, citizens and experts, as well as data sources published by think tanks and international and governmental organisations. Worldwide governance indicators can be used to measure social capital.
European Quality of Government Index: This measurement is based on survey data on corruption and governance quality at the regional (NUTS1 or NUTS2) level in the EU. It covers citizens’ perceptions and experiences with corruption, as well as the quality of public services and goods. The indicator can be used to measure the social capital.
Global Competitiveness Index: An indicator published by the World Economic Forum integrating the macroeconomic and microeconomic aspects of competitiveness for 144 countries. It covers 12 areas representing institutions, policies and other factors contributing to sustainable growth. This indicator can measure social capital (institutions), economic capital (stable macroeconomic frameworks) or human capital (higher education and training).
Indicators of Product Market Regulation (PMR): The OECD has developed indicators to measure whether: 1) product market regulations in a country support competition and 2) antitrust frameworks in countries safeguard an equal playing field between firms. The indicators are calculated for a country’s entire economy, as well as on the sector level. Because market rules foster competition, which leads, in turn, to reassuring investors, safeguarding people’s health and protecting environment, PMR indicators can be used to measure economic capital, but also human capital and natural capital.
Annex 1.C. Example of a benefits logic map for the purchasing of more environmentally friendly products
