This chapter highlights the important role of competition in public procurement systems. Competition is widely regarded as a key mechanism for achieving value for money in public spending. Research shows that competitive processes can substantially reduce procurement costs. However, many countries face obstacles to fostering competition, including high incidences of non-competitive procedures and a prevalence of single-bid procedures. Understanding the root causes of these issues is key to identifying opportunities for enhancing the procurement system.
Improving Competitive Practices in Hungary’s Public Procurement
Reducing Single-bids and Enhancing Supplier Participation
OECD Public Governance Reviews
Abstract
Public procurement is a key pillar of strategic governance and service delivery for governments. It plays a pivotal role in the efficient allocation of resources, driving economic growth, and delivering public services to citizens. The primary objective of public procurement is to deliver goods and services necessary to accomplish government missions in a timely, economical and efficient manner. To achieve this goal, public buyers shall ensure value for money when conducting procurement processes, either by selecting the lowest-priced offer or the most economically advantageous tender. Public procurement has therefore the potential to greatly influence the markets, and for some markets in particular, the public sector is often the sole buyer. Public procurement accounts for a large share of public expenditure, approximately 12.9% of GDP and 27.8% of government expenditure in OECD Members in 2021. This is even more true in Hungary, with 16.4% of GDP and 33.8% of government expenditure. (OECD, 2023[1])
To ensure value for money in their public procurement processes, as a main rule public buyers rely upon competitive bidding processes, with the goal of ensuring optimal participation from the private sector. Competition creates a market environment that fosters innovation and diffusion of new technologies and makes businesses more productive. Well-designed competition brings many benefits to the procurement system, including trust from both economic operators and civil society (see Figure 1.1). (OECD, 2019[2])
Source: (OECD, 2019[2]).
The level of competition is usually guaranteed by the degree of access to public procurement opportunities, by relevant market players. As such, measures aiming at enhancing access to procurement opportunities are key for sound competition in public procurement. This is highlighted by the principle on “access” of the Recommendation on Public Procurement, which highlights the importance of a sound competition in public procurement and encourages countries to foster intense competition in public procurement, particularly by using competitive tendering and limiting the use of exceptions and single-source procurement.
Several risks may impact competition in public procurement. First, non-competitive procedures and distortions to competition in public procurement are still recurring issues in many OECD Members as highlighted by the EU single market scoreboard. (European Commission, 2022[3]) The use of non-competitive procedures (usually without prior publication and thus without general transparency) should normally be used only exceptionally and only in duly justified cases, but the rate of their use is still quite high in some countries. Other risks that hinder competition include complex public procurement rules and the use of non-standardised bidding documents, which impede broad participation from potential competitors, including new entrants and SMEs, as well as obstacles such as regulatory burden, financial constraints, lack of technical expertise, collusive practices and request for bribes, faced by the private sector for participating in public procurement processes. (OECD, 2015[4])
In addition to non-competitive procedures, a low number of bids in open competitive procedures is also a major concern in many OECD countries. (European Commission, 2022[3]) Indeed, low prices and/or better products are desirable for public buyers because they usually result in resources either being saved or freed up for use on other goods and services. As such, single bidding, where only one bidder submits a bid in a procurement process, tends to lower value for money by increasing prices, for example by 9.6% in a 2009-2014 EU-wide dataset of contracts (European Commission and Fazekas, 2022[5]).
The resurgence of single-bid procedures is also an endemic issue in several European Union (EU) countries. The European Court of Auditors has assessed the level of competition for public procurements in the EU’s single market over the period of 10 years up to 2021 and found that the level of competition has decreased significantly, with a lack of awareness that competition is a prerequisite for value for money. The report also highlighted that the European Commission and the EU member states have not made systematic use of data available to identify the root causes of limited competition and took only scattered actions to reduce obstacles to competition in public procurement. The report also highlights an increasing trend in market concentration across all industrial and services sectors over the period examined, coinciding with similar global trends according to the OECD. A specific recommendation from the report is to deepen the analysis concerning root causes behind low competition and to put forward measures to overcome key obstacles to competition and promote good practices. (European Court of Auditors, 2023[6]).
On the other hand, OECD Members started to pay attention to the issue of competition and single-bidding in public procurement. For instance, the National Audit Office of the United Kingdom recently issued a report on lessons learned regarding competition in public procurement, which emphasises the importance of healthy competition in public procurement and provides several recommendations to public buyers to enhance it. (National Audit Office of the UK, 2023[7]) The OECD is also assisting some of its Members, such as Slovenia, in identifying the root causes of low competition in public procurement.
Hungary is among the EU countries with a high rate of single-bid procedures according to the European Union’s Single Market Scoreboard. The rate was, with 40% in 2021, and dropped to 33% in 2022, but as Figure 1.2 shows, this issue is common among most EU countries. The rate is calculated based on the notices published on the European Union’s Tenders Electronic Daily (TED) portal.
Source: (European Commission, 2022[3]).
The issue of single-bid procurement in Hungary is not recent, as the Single Market Scoreboard reveals a steady rate since 2019. (European Commission, 2022[3]) Interviews carried out by OECD team with stakeholders in the Hungarian public procurement system have revealed that efficiency in public procurement is a major issue in Hungary with almost one third of public procurement contracts above the EU threshold not achieving their objectives, attributable to either the single-bid issue or the fact that no bids or only invalid bids have been submitted. (OECD, 2023[8]) To address this issue, the Government of Hungary has taken several measures, also to implement its commitments made as part of the remedial measures under the rule of law procedure launched against Hungary in 2022 based on Regulation (EU, Euratom) 2020/20921 for the protection of the European Union budget (the so-called conditionality procedure) and in connection with the Recovery and Resilience Plan (RRP).
First, under the conditionality procedure, Hungary committed to reduce and maintain the share of public procurements resulting in single bids to below 15%, both for procedures financed either fully or partially from European Union funds and for procedures financed solely from national resources. Hungary also committed to adopt an action plan by 31 March 2023 for increasing the level of competition in the public procurement market. The same commitment was included in the RRP that was adopted by the Council of the European Union on 5 December 2022 (see Box 1.1).
The RRP contains several reforms in “Component I - Governance and Public Administration” that aim to improve the operation of the Hungarian public administration. Five of these reforms are closely related to improvements in the public procurement system in Hungary:
C9.R10: Reducing the share of single-bid public procurement procedures
C9.R11: Development of the Electronic Public Procurement System (EPS) to increase transparency
C9.R12: Development of a performance measurement framework to regularly assess the efficiency and cost effectiveness of public procurements, and the reasons for limited competition in the sectors most affected by the low level of competition
C9.R13: Action plan for increasing the level of competition in public procurement
C9.R14: Training scheme and support scheme for micro-, small and medium-sized enterprises to facilitate their participation in public procurement procedures
Source: (European Commission, 2022[9]).
To fulfil these commitments, the Government of Hungary has adopted the following measures to increase competition in public procurement and tackle single bidding (see Figure 1.3):
1. First, in February 2021, Government Decision 1027/2021 on policy interventions to improve the efficiency of the public procurement system defined various measures on the further development of the Hungarian public procurement system. Although the Government Decision is also addressing other policy issues (such as green public procurement), its focus is on how to intensify competition in public procurement. The Government Decision set up the goal of reducing the proportion of single-bid procurements to less than 15% for both EU and non-EU funded procurements (defining deadlines for the various tasks and identifying the stakeholders in charge of the implementation).
2. In February 2022, the Government adopted the Decree 63/2022, which contains several specific measures, targeted at reducing the rate of single-bid procurements. Most of the envisaged measures aim at influencing the public procurement practices of contracting authorities towards more competitive procurement outcomes. The measures include, inter-alia, the obligation to use preliminary market consultations for certain procurements above EU thresholds and the requirement for contracting authorities that are most affected by single-bid procurements to prepare and publish a plan of measures to reduce single-bid procurements. The Government Decree also mandates the minister in charge of public procurement policy to continuously monitor the data on the proportion of single-bid public procurements, to prepare an annual analysis based on the outcome of the monitoring, and to publish the results of the analysis no later than 15 February of each year.
3. In March 2023, the Government endorsed an action plan (Government Decision 1118/2023) to increase competition in public procurement, which contains 14 measures for the time period of 2023 and 2026 and targets various stakeholders and areas of procurement such as improvements to the e-Procurement system and capacity-building of contracting authorities and SMEs. The list of measures and their status of implementation can be found in Section 3.2.2. (Government of Hungary, 2023[10])
Source: (Government of Hungary, 2023[10]).
Among the measures envisaged by the action plan adopted in March 2023 is the in-depth analysis on the state of play of competition in Hungary and the enhancement of the public procurement performance measurement framework. As such, this Report aims at analysing the root causes behind the prevalence of single-bid procedures in Hungary, the sectors that are most affected, and provide key recommendations to tackle this issue and to improve the action plan developed by the Government.
A constant dialogue was established with the Hungarian Government throughout the development of this Report to enable them to work in parallel in updating the action plan within the strict deadlines. (The update of the action plan was due by 31 March 2024.) The Hungarian Government already took on board several OECD recommendations presented in this Report. The updated action plan – which contains 14 new measures in addition to its original version – was published on March 28th, 2024.2
References
[3] European Commission (2022), Access to public procurement, Single Market Scoreboard, https://single-market-scoreboard.ec.europa.eu/business-framework-conditions/public-procurement_en (accessed on 20 July 2023).
[9] European Commission (2022), Recovery and resilience plan for Hungary, https://commission.europa.eu/business-economy-euro/economic-recovery/recovery-and-resilience-facility/recovery-and-resilience-plan-hungary_en (accessed on 20 July 2023).
[5] European Commission and M. Fazekas (2022), Single bidding and non-competitive tendering procedures in EU co-funded projects, Publications Office of the European Union, https://doi.org/10.2776/751156.
[6] European Court of Auditors (2023), Public procurement in the EU: Less competition for contracts awarded for works, goods and services in the 10 years up to 2021.
[10] Government of Hungary (2023), Action plan - Measures to increase competition in public procurement (2023-2026).
[7] National Audit Office of the UK (2023), Lessons learned: competition in public procurement, https://www.nao.org.uk/wp-content/uploads/2023/07/lessons-learned-competition-in-public-procurement.pdf.
[1] OECD (2023), Government at a Glance 2023, OECD Publishing, Paris, https://doi.org/10.1787/3d5c5d31-en.
[8] OECD (2023), Interviews held with various stakeholders in Hungary.
[2] OECD (2019), Enhancing the Use of Competitive Tendering in Costa Rica’s Public Procurement System.
[4] OECD (2015), “Recommendation of the Council on Public Procurement”, OECD Legal Instruments, OECD/LEGAL/0411, OECD, Paris, https://www.oecd.org/gov/public-procurement/OECD-Recommendation-on-Public-Procurement.pdf (accessed on 1 February 2023).
← 1. Article 6 (1) of Regulation (EU, Euratom) 2022/2082 of the European Parliament and of the Council of 16 December 2020 on the general regime of conditionality for the protection of the Union budget.
← 2. The revision of the Action Plan was adopted by means of Government Decision No. 1082/2024 of 28 March. The Government Decision and the revised action plan is also available at the following link: https://njt.hu/jogszabaly/2024-1082-30-22.