This chapter analyses the extent of co-ordination among the different contracting units in ISSSTESON and alternatives to improve communication and information sharing amongst them. It also assesses the incidence of exceptions to public tendering and argues for limiting their use in order to increase competition and efficiency in the institute’s public procurement. It goes on to describe the mechanisms used to collect market information and suggests that the institute should focus on market research. It also discusses alternatives for increasing efficiency in ISSSTESON’s public procurement, such as simplifying processes, harmonising tender documents and introducing tools such as centralised procurement and framework agreements. Finally, it evaluates the extent of the institute’s market engagement and suggests alternatives for constructive engagement while safeguarding integrity.
Reforming ISSSTESON’s Public Procurement for Sustainability
2. Towards Sustainable and Efficient Public Procurement in ISSSTESON
Abstract
Budgetary constraints are one of the main obstacles faced by the Institute of Security and Social Services of the Workers of the State of Sonora (Instituto de Seguridad y Servicios Sociales de los Trabajadores del Estado de Sonora, or ISSSTESON) to carrying out efficient public procurement. The main threat to its financial stability lies in the fact that contributors’ payments are not made directly to ISSSTESON but to the State of Sonora’s Ministry of Finance (Secretaría de Hacienda). Due to the state’s financial problems, the Ministry of Finance systematically retained these payments and only passed them on to ISSSTESON either in part or not at all, and in any case with significant delays. In sum, the fact that ISSSTESON does not have full access to the beneficiaries’ payments (which constitute most of its income) is at the heart of the institute’s inability to pay its suppliers in a timely fashion. As a result, suppliers do not always respect their contractual obligations, which reduces participation in the institute’s procurement procedures. Moreover, the broad healthcare coverage ISSSTESON provides is likely to exceed the capacity of its budget.
These budgetary deficiencies limit ISSSTESON’s efforts to develop efficient procurement practices and policies. Any analysis of ISSSTESON’s procurement thus depends on the institute’s budgetary situation, and the effectiveness of the recommendations proposed below will depend on the extent to which its budgetary constraints are alleviated.
At the time of the fact-finding mission, no strategy had been formulated to guide ISSSTESON’s procurement activities, nor were there plans to create one.
2.1. Efficiency in ISSSTESON’s procurement processes
2.1.1. ISSSTESON could further integrate or co-ordinate different procuring entities
As discussed in Chapter 5, ISSSTESON’s procurement workforce, in the General Procurement Office, is organically integrated in the institute’s Administrative Services Deputy Directorate (Subdirección de Servicios Administrativos), which includes both the Tenders Department (Departamento de Licitaciones) and the Acquisitions Department (Departamento de Adquisiciones). The Tenders Department is responsible for handling public tender procedures, including restricted tenders, and the Acquisitions Department manages direct awards.1 The responsibilities of public officials are set up in ISSSTESON’s internal rules, while each of the different administrative units involved in the procurement process has its own procedures manual. The procedures manual applicable to the Deputy Directorate of Administrative Services is available online (Secretaría de la Contraloría General, Gobierno del Estado de Sonora, 2016[1]).
Apart from the General Procurement Office, each ISSSTESON hospital has its own decentralised acquisitions area. When these areas need goods or services, they submit a request to the Tenders Department or to ISSSTESON’s warehouse. If neither can provide the required item, the hospital will purchase it through a direct award procedure. However, no written instrument sets out the particular competencies of the hospitals and the General Procurement Office. Although in practice, the powers of these decentralised acquisitions areas are confined to minor and urgent purchases, such purchases make up a significant proportion of the institute’s overall spending, as this chapter shows.2
The following table contains a list of ISSSTESON’s procurement units and their respective locations:
Table 2.1. Location of ISSSTESON procurement units
Source: Information provided by ISSSTESON.
The procuring units are not formally co-ordinated. ISSSTESON might consider integrating them (by completing the merger between the Tender Department and the Acquisitions Department, for example), or by establishing co-ordinating procedures between them when merging them is not a feasible option, to guarantee that procurement plans are discussed at the central level with the different purchasing areas.3 This way, the institute could ensure that the expertise and lessons learned from its procurement practices can benefit the whole institute, minimising the operative costs for the different units. Such co-ordination could ensure that purchases are aggregated where necessary, to avoid fragmentation and the use of direct awards.
ISSSTESON’s Committee for Acquisitions, Leases and Services (Comité de Adquisiciones, Arrendamientos y Servicios, or the Acquisitions Committee) could be instrumental in this context. The Acquisitions Committee is led by ISSSTESON’s Director General; the Executive Secretariat is led by the head of the Tenders Department and its members include the heads of the institute’s Finance Deputy Directorate, the Administrative Services Deputy Directorate, the Medical Services Deputy Directorate, and the supply area. The head of the institute’s Legal Department, the head of the Internal Control Body (Órgano Interno de Control, or OIC) and a representative of the Ministry of Finance participates in the Acquisitions Committee in an advisory capacity, but they do not have voting rights.
The Acquisitions Committee’s duties include the following:
approving policies, rules and guidelines on acquisitions, rentals and services;
analysing and issuing opinions on drafting and updating procurement programmes and budgets, on the basis of information on their needs provided mandatorily by different administrative units;
authorising exceptions to open tender procedures, according to the applicable law;
issuing opinions on procurement procedures, providing recommendations to avoid non-compliance with applicable legal or administrative provisions;
deciding on procurement matters that are not provided for by the applicable law.
Since the powers of the Acquisitions Committee are not limited, they could also be extended to include co-ordinating and integrating tasks necessary to achieve the objectives described above.
By co-ordinating and integrating tasks, ISSSTESON would be following the OECD’s recommendation to streamline public procurement and its institutional frameworks (OECD, 2015[2]). The OECD encourages adherents to evaluate existing procedures and institutions to identify functional overlap, inefficient silos and other causes of waste. Where possible, the OECD recommends building a service-oriented public procurement system around efficient and effective procurement processes and workflows.
2.1.2. ISSSTESON could maximise the use of the public tender procedure and limit exceptions
As a rule, ISSSTESON is permitted to procure the goods, services and public works it requires through open tender procedures. However, the institute can use restricted invitation or direct award procedure schemes for exceptional circumstances defined in the Acquisitions Law of the State of Sonora (Ley de Adquisiciones, Arrendamientos y Prestación de Servicios Relacionados con Bienes Muebles de la Administración Pública Estatal). Article 19 of the Acquisitions Law, for example, allows for an exception to the open tender procedure if the product can only be acquired from one source, due to patent rights.
Article 26 of the Acquisitions Law allows for direct award or restricted invitation procedures (to at least three potential suppliers) for purchases that, individually considered, do not exceed a specific threshold established in the Expenditures Budget Decree, which is issued for each fiscal year by the government of the state of Sonora. This decree lists the maximum amounts for each contract that public authorities are allowed to award by means of direct award or restricted invitation, depending on the total annual budget authorised for each institution.
Article 54 of Decree No. 107, setting up the Expenditure Budget for the State of Sonora for Fiscal Year 2017, sets the following thresholds for the purchase of goods:
Table 2.2. Thresholds for the purchase of goods, 2017
Source: Information provided by ISSSTESON.
For leases and services, the amounts were set as follows for fiscal year 2017.
Table 2.3. Thresholds for leases and services
Source: Information provided by ISSSTESON.
For public works, the amounts set for 2017 were the following.
Table 2.4. Thresholds for public works
Source: Information provided by ISSSTESON.
Although the Acquisitions Law does forbid artificially splitting contracts to make them conform with these thresholds, neither the Law nor its Regulations (Reglamento de la Ley de Adquisiciones, Arrendamientos y Prestación de Servicios Relacionados con Bienes Muebles de la Administración Pública Estatal) provide any guidance or examples of what constitutes artificial splitting of contracts.
Article 27 allows for direct awards in case a qualifying situation occurs. Such situations can include danger to the social order or economy, for acts of force majeure; acquisitions of perishable goods; if there are less than three suppliers capable of providing the product; if the prior contract for the acquisition of the product has been terminated; if the acquisition is made through non-standard commercial transactions; and when the acquisition involves rural or marginalised urban groups.
In practice, the direct awards procedure applies, apart from low-value purchases, to purchases that were not planned for and included in the Annual Procurement Programme.4 Moreover, contracts are also directly awarded as an interim way to cover short-term needs while public tender procedures are carried out.
The OECD Recommendation of the Council on Public Procurement (OECD, 2015[2]) recommends using competitive tendering procedures as a rule and limiting the use of exceptions. This is intended to increase efficiency, fight corruption, secure value for money and boost competition. Exceptions should be limited, pre-defined and require justification if they are used. They should also be subject to oversight.
It appears that ISSSTESON may be making excessive use of direct awards. Urgent purchases are frequent. Different units frequently submit urgent requests to purchase products such as healing materials.
The following table offers an overview of using exceptions to the use of open tender procedures.
Table 2.5. Use of exceptions in public procurement processes at ISSSTESON (2011-15)
Source: Information provided by ISSSTESON.
This situation can be attributed to several factors. First, deficiencies in the procurement planning process could be one of the causes obstructing public tender procedures and encouraging the use of direct awards. The need for supplies tends to be underestimated; in ISSSTESON’s experience, the supplies purchased for a whole year often run out several months before the year is over. As a result, supplies for the remaining months have to be purchased by direct awards, thus reducing competition and value for money. Procurement planning could be optimised by avoiding urgent-purchase surcharges. In particular, planning of the procurement timeline could ensure that open tenders are carried out far enough in advance to avoid the need for direct awards to cover unmet needs in the periods between two tender procedures.
Second, as noted above, neither the Acquisitions Law nor its Regulations contain any guidance on what constitutes artificial splitting of contracts. In practice, it appears that ISSSTESON tends to run public tenders only for what can be approximately anticipated. It is common to have medicines, materials and medical equipment not provided for in the annual budget or in the authorised medicines of the basic basket (cuadro básico), given that they are used to respond to sporadic diagnoses or to treat patients with relatively rare diseases. By the time the need is felt, they cannot be procured in an aggregated fashion in a competitive procedure, and must be procured individually by means of direct awards. It would be advisable to issue guidelines to avoid this situation or establish innovative practices, such as framework agreements, to address such cases. In particular, these guidelines should emphasise that even low-value purchases should be aggregated and tendered as far as possible, when they constitute recurring business needs foreseeable over a determined period of time, even if the exact value of each order cannot be determined in advance.5 For such cases, framework agreements are one solution that would allow ISSSTESON to place smaller orders with providers at short notice at prices comparable to those governed by large contracts awarded through a competitive procedure. Framework agreements are included in the OECD Recommendation of the Council on Public Procurement (OECD, 2015[2]) as a tool capable of improving procurement procedures, reducing duplication and achieving greater value for money.
ISSSTESON has also noted that its routine use of direct awards to satisfy urgent needs is not only due to insufficient procurement planning, but to its lack of resources. Even if purchases are planned, when they are not paid for, distributors may run out of funds for acquiring products from the manufacturers and may be unable to fulfil the contract. In such cases, ISSSTESON is forced to turn to direct awards and look for new suppliers to which it is not as indebted. In the end, the institute has to pay a price premium as a result of these deficiencies. Delays in payments also inhibit supplier participation in the procurement processes, which results in a lack of offers for specific goods.6 As already noted, it is essential that ISSSTESON ensure that budget deficiencies do not prevent it from properly paying suppliers.
ISSSTESON already has mechanisms that would allow it to implement these measures. Every year, the different requiring units and warehouses in the institute create a consolidated list of requirements for the upcoming year and submit it to the Deputy Directorate to which they belong (within ISSSTESON’s General Procurement Office) or to the relevant hospital’s acquisitions area (if the requiring unit is part of a hospital). The relevant Deputy Directorates are thus in a good position to observe the principles described in this section, since they are in charge of unifying, reviewing and assessing the lists submitted to them by the different units. The requirement lists resulting from this review are then fed into the drafting of the Annual Procurement Programme.7
This process occurs at the same time as the preparation of the expenditures budget. As the different needs are incorporated into the Annual Procurement Programme, they are budgeted for in the expenditures budget.
The Directive Board (Junta Directiva) is also in charge of overviewing this process; it authorises the Annual Procurement Programme for budgeting and returns to the Administrative Deputy Directorate, which can then initiate the relevant open tender procedures through the Tenders Department. These bodies could provide an extra layer of input and control, in addition to the Deputy Directorates.
Moreover, several control institutions are already charged with monitoring compliance with these principles, ensuring that direct awards are carried out as a truly exceptional measure.
The Acquisitions Committee is already responsible for following up on how many acquisitions are made by means of a direct award procedure and oversees compliance with the applicable law in the choice of this procedure. Direct awards need to be approved by the Acquisitions Committee for authorisation, under Fraction I of Article 27 of the Acquisitions Law. The Acquisitions Committee must also authorise the procurement programme for direct awards, the value of which is calculated monthly.
Similarly, the Superior Audit Institute reviews whether direct awards fall within the exceptions established by the law, and the Internal Control Body reviews the same parameters, namely whether the acquisitions are within the established thresholds and whether they are justified under the law. This review, carried out on the basis of data from the Electronic Procurement system (Sistema Electrónico de Compras, or SIEC), covers not only the appropriate use of the binary criterion, but also whether goods can be provided as urgently as needed.
The existing legal instruments can also support the implementation of these principles without the need for amendment: exceptions to open tender procedures are certainly allowed, but they are not mandatory, even under conditions described in the articles mentioned above.
2.1.3. ISSSTESON could improve its market intelligence mechanisms
Market investigations are an essential component of efficient and effective procurement procedures, helping procuring entities design procurement procedures to optimise value for money.
ISSSTESON does not have a mechanism to carry out market investigations. It outsources this function to an external company to determine the approximate value of the intended purchase, and assigns a budget to each individual procurement procedure.
Market investigations at ISSSTESON are considered to be an administrative formality; the institute has no specific tools and would benefit from setting up internal expert teams to conduct them. The applicable law contains no provisions indicating how exactly to carry out a market study. To gain some insight into the markets, ISSSTESON officials in charge of preparing technical specifications and determining reference prices consult historic price data from the institute and, if no reference prices or previous market studies are available, contact two or three companies to obtain price quotations.8
Recently, ISSSTESON commissioned an external contractor to carry out market investigations under Article 10 of the Acquisitions Law, which authorises ISSSTESON to engage technical advisers to carry out market investigations and improve the acquisitions, leasing and services procurement system. This firm intervenes once the requirements have been defined but before the calls for tender are drafted. The firm’s methodology consists of checking historical prices and quotations, current market price levels, the firms active in the relevant market, and the rules applicable to the product in question.9
However, this more sophisticated market research is not carried out as a rule for most procurement procedures. Instead, market investigations are usually a relatively rushed affair, due to the lack of sufficient time allotted to carry them out, and because there is no plan to guarantee that enough time can be allocated to carry out an adequate market investigation. As a rule, once the technical requirements are defined, procurement officials are expected to issue a call for tender almost immediately. There is also no co-operation amongst the different areas in ISSSTESON that work on market investigations.
ISSSTESON could use specialised staff and procedures to conduct in-depth market studies to gain a better understanding of the market, which is crucial if it is to obtain the best value for money. It could also set up guidelines for procedures for carrying out comprehensive market investigations covering a minimum number of sources, other than historical prices and supplier quotations,10 including an ongoing dialogue with other public entities on the prices paid for equivalent products by each purchasing body. Mexico’s Economic Competition Commission guidelines for conducting market investigations (COFECE, 2016[3]) could serve as the basis for this document. Moreover, a timeline should be created and enforced to guarantee that sufficient time is allocated for market investigations. It is also recommended that ISSSTESON create a communication channel between the relevant areas in this context, so they can share orientation, information and tools for market investigations.
The Acquisitions Committee is well placed to become the body issuing the relevant guidelines and provisions. A specialised market investigation unit could be created in the Administrative Services Unit. As for the legal framework, although the Acquisitions Law does not contain detailed provisions on how best to carry out market research, Article 3 of the Law authorises the Ministry of Finance and the State’s Ministry for Control to interpret the Law for administrative purposes.
2.1.4. ISSSTESON could get better value for money by adapting the drafting of tender documents
ISSSTESON’s Tenders Department is responsible for drafting the tender documents, which consist of the call for tender and their annexes, including technical specifications and requirements.
Technical specifications are somewhat standardised at ISSSTESON and generally consist of a description associated with a certain product reference code; functional requirements have never been used by the institute. Other requirements are similarly standardised; for example, the guarantee required following contract awards is invariably 10% of the contract value, under Article 33 of the Acquisitions Regulations, regardless whether the nature of the contract makes this a proportionate or sufficient amount.
Minimum requirements can also prove problematic. Institute officials interviewed by OECD in the fact-finding missions reported that ISSSTESON’s guarantee and eligibility requirements have sometimes been inadequate, and that the institute has drawn up contracts with companies that could not fulfil their commitments.11
As for guarantees, the monetary limits prescribed by law may be insufficient to ensure contract compliance, or alternatively may be excessive and prevent the vast majority of suppliers from participating.
Eligibility requirements may also be periodically reviewed to avoid the risk of unwittingly acquiring unlicensed drugs from the black market. In its tender procedures, ISSSTESON always requires registration of the products with the health regulator, the Federal Commission for Protection against Sanitary Risks (Comisión Federal para la Protección contra Riesgos Sanitarios, or COFEPRIS). Recently Sonora’s Ministry for Health detected a counterfeit oncology drug acquired in a direct purchase where the authorised distributor letter was not required. ISSSTESON does require such documentation in its tender procedures. At the other extreme, requiring suppliers to be distributors, rather than manufacturers, of certain products has in the past proven to be an excessively burdensome eligibility requirement. In Sonora, most patent-drug manufacturers sell through a single provider, so that if ISSSTESON runs a tender focusing on patent drugs, competition will be nonexistent. In this case, the choice of procedure could have also been investigated further, so that it could be better adapted to the specific requirements of each procurement procedure. For instance, in the case of patent-drug purchases from exclusive distributors, the use of a tender procedure was not appropriate given the absence of competition, and the auction mechanism (oferta subsecuente de descuento, or OSD) could not be used for any of the products.
As for award criteria, in practice, ISSSTESON exclusively uses the binary criterion, choosing the lowest-priced proposal that complies with basic requirements guaranteeing that the supplier is capable of complying with the relevant obligations. The importance of price as an award criterion is so high that procurement officers may often feel obliged to opt for a product with a lower price, on the assumption that the control institutions may otherwise object to their decision. This can entail higher costs in the long term, and have a negative impact on patient experience (since use of the drugs may involve longer hospital stays or harsher secondary effects). No guidelines or policies are used to define the technical specifications or the award criteria, and no training on this is provided to officials in charge of setting them up.
It would be advisable for ISSSTESON to creates guidelines or policies for the drafting of procurement documents, which should focus on the use of functional requirements and on the development of award criteria that reward reductions of total life-cycle costs rather than merely price. ISSSTESON could train officials responsible for drafting procurement documents to ensure the application of these principles. The institute could similarly create a specific quality-control procedure or unit in charge of reviewing tender documents prior to their publication. Procurement documents could also be standardised to a certain extent, to simplify and streamline procurement procedures, as discussed further in this chapter.
These measures would be in line with the OECD’s recommendation to implement sound technical processes to satisfy customer needs efficiently, for instance by developing appropriate technical specifications or identifying adequate award criteria. Delivering clear and integrated tender documentation, standardised where possible and proportionate to the need, is another measure recommended by the OECD to facilitate access to procurement opportunities (OECD, 2015[2]).
ISSSTESON’s current structure can provide a basis for the implementation of these measures, since they include several layers of tender document review. Currently, once the tender documents have been drafted by the Tenders Department, they are returned to the Deputy Directorates representing the requiring units, so that they can confirm and approve the calls for tender and annexes, or propose amendments or additions according to their needs. Once finalised, the tender documents are submitted to the State’s Ministry for Control and to the State’s Legal Counsellor for approval. These bodies control, in particular, compliance with the regulatory framework and whether requirements could be considered discriminatory or unduly limit participation.12 Their review could also be extended to controlling compliance with the principles set out in this section.
The applicable legal framework would also allow for the implementation of these principles. Far from focusing exclusively on prices, Article 19 of the Acquisitions Law explicitly states that tenders are meant to ensure that the State achieves the best available conditions in terms of price, quality, financing, opportunity and any other relevant circumstances. The Acquisitions Law does allow for the use of the points and percentages criterion (which allows for a more comprehensive assessment of the cost/benefit of the acquisition) and requires its use when the procurement concerns products involving a high degree of technical specialisation or technological innovation (see Articles 20 and 24 of the Acquisitions Law). Article 21 of the Acquisitions Regulations also, for example, allows for the procuring entity to determine the amount of the guarantee required for suppliers at the moment of bidding (in order to ensure seriousness of the proposals)13 on a case-by-case basis; ISSSTESON could use this leeway to waive the requirement of a guarantee when appropriate, to avoid restricting participation.
2.1.5. ISSSTESON could consider extending the scope of public contracts
Geographical scope
ISSSTESON’s tenders are generally national in scope, despite the fact that the Sonora Acquisitions Law mentions the possibility of carrying out international tenders. Opening procurement procedures to the participation of international bidders encourages competition in the market and allows procuring entities to obtain better value for money. ISSSTESON could explore the possibility of opening its procurement procedures to foreign bidders, but it should first ensure liquidity to carry out the corresponding payments in cases of awarding them a contract.
While the Acquisitions Law does contain provisions that favour local, regional or national firms in certain conditions at the evaluation stage, this would not stop ISSSTESON from opening up to international competition participation in its procurement procedures. This could yield price advantages, given that Sonora is a border state. Market research could assess the potential for participation of foreign bidders in light of the amounts contracted, distribution costs and operational implications, among other factors.
Time scope
ISSSTESON’s contracts with suppliers are limited to a maximum of a year. Although the optimal duration of public contracts can only be determined on a case-by-case basis after a thorough market investigation, longer contract periods can often provide significant advantages. For instance, they can create economies of scale leading to price reductions, allow for the reimbursement of large initial investments on the part of firms that would otherwise not be commercially feasible for suppliers, guarantee the continuity of supply, attract larger bidders to ISSSTESON’s procurement procedures, or reduce the administrative burden of annual procurements for needs that are likely to persist over a number of years. ISSSTESON could benefit from the option to sign multiannual contracts, or annual contracts with the possibility of extension for a determined period, in specific cases that the institute deems appropriate.
ISSSTESON is currently negotiating with the Ministry of Finance over using multiannual contracts in cases where this could yield significant advantages (i.e. multi-year leasing programmes for medical equipment). Unfortunately, the regulatory framework is not explicit, and there is resistance to the use of multiannual contracts. The institute is encouraged to continue actively pursuing the possibility. At the same time, Sonora’s authorities should review the regulatory framework to provide certainty in their use.
2.1.6. ISSSTESON could promote simplification and reduce red tape in procurement processes
The number of proposals received by ISSSTESON in its procurement procedures has been in decline throughout this decade, as the following figure shows.
Figure 2.1. Average offers received in open-tender procedures
Source: Information provided by ISSSTESON.
Competition is a precondition of achieving value for money, and ISSSTESON could try to facilitate access to procurement opportunities for potential competitors of all sizes (including small and medium enterprises, or SMEs), as the OECD Recommendation of the Council on Public Procurement (OECD, 2015[2]) advises. ISSSTESON could explore ways to maximise participation of genuinely competing suppliers in its procurement procedures.
Reducing bureaucratic burdens can be one way to achieve this goal. The OECD Recommendation of the Council on Public Procurement (OECD, 2015[2]) proposes streamlining public procurement systems and its institutional frameworks. ISSSTESON could assess whether the existing procurement processes and institutions entail waste from functional overlaps or inefficient silos. The processes and workflows could be reworked to increase their efficiency and effectiveness, reducing administrative red tape and costs.
Suppliers’ registry
Suppliers are recently required to sign up in a registry to participate in ISSSTESON’s procurement procedures under Article 22 of the Acquisitions Regulations. Under current practice, application to the registry must be in person (for open tenders) and entails a fee. In addition to the direct cost, international experience suggests that indirect administrative costs, for example, the hours spent complying with formalities, are onerous for businesses, particularly for SMEs, and may constitute a barrier to participating in procurement procedures. Ideally, in-person application to the suppliers’ registry should not be mandatory and should only entail minimal fees, if any. It should also be possible to register by electronic means. The Acquisitions Law requires application to the suppliers’ registry, but other restrictive aspects (i.e. the requirement for in-person registration and the fee) are not required by the Acquisitions Law or its Regulations, which would allow for their removal. Electronic registration in the suppliers’ registry on an online platform is already possible for suppliers applying for contracts through the direct award procedure. This could be used as a useful precedent for extending the system to suppliers wishing to participate in tender procedures.
Multiple e-procurement systems
ISSSTESON uses several e-procurement systems. Compranet, the federal e-procurement system, was used for programming needs and receiving quotations electronically in the context of tender procedures. A local version of Compranet, launched by the State Government in June 2017, took its place for tender procedures in which ISSSTESON does not use federal funds. Sonora’s product codes are not standardised with the codes used in the federal procurement system.
The Electronic Procurement System (Sistema Electrónico de Compras, or SIEC) is now exclusively used for direct award procedures. This was set up in 2010 to harmonise the annual needs of different units in ISSSTESON (the Annual Acquisitions Programme is uploaded into SIEC every year) and to allow quotations to be submitted electronically.
Another internal ISSSTESON system, the State Warehouse System (Sistema Estatal de Almacenes, or SEA), an older and less sophisticated version of the SIEC that is not public, is used as a support system if a request issued on the SIEC fails to yield quotations. In such cases, procurement officials may use the SEA and submit an invitation to a minimum of three suppliers.
These multiple e-procurement portals can be a source of inefficiency and waste, particularly because they do not use the same product codes consistently. Integrating these tools into a one-stop shop or single contact portal with access to all procurement opportunities could be helpful, in line with the OECD’s recommendation to develop tools for improving procurement procedures and reducing duplication (OECD, 2015[2]).14
Tender documentation
The OECD Recommendation of the Council on Public Procurement (OECD, 2015[2]) advises adherents to “deliver clear and integrated tender documentation, standardised where possible and proportionate to the need”. ISSSTESON is advised to design tender opportunities to encourage broad participation from potential competitors, in particular by ensuring that tender documents provide clear guidance to inform buyers’ expectations of contract terms.
In line with the OECD Recommendation, ISSSTESON could adjust the extent and complexity of the information required in tender documentation to the size and complexity of the procurement opportunity. In this sense, ISSSTESON could find it helpful to use standardised tender documents, such as model contracts, tender submission templates or catalogues of general conditions, which could be adapted or allow for negotiation on a case-by-case basis. The time allowed for suppliers to provide this information should also be adapted to the complexity of the project, taking into account the urgency of the procurement.
Developing and using alternative procurement tools
The OECD Recommendation of the Council on Public Procurement (OECD, 2015[2]) advises the development of “processes to drive efficiency throughout the public procurement cycle in satisfying the needs of the government and its citizens”. Centralised purchasing, joint procurement, framework agreements, dynamic purchasing, contracts with options and e-catalogues could be tools for achieving greater value for money and reducing duplication, as noted by the OECD Recommendation. Centralised purchasing, for instance, may lead to benefits such as savings from economies of scale created by aggregating demand and public procurement expertise. Likewise, most OECD countries are leveraging framework agreements to maximise efficiency, value for money and savings by aggregating and consolidating demand, thus reducing the pool of suppliers (see Box 2.1 for a description of how Chile leverages framework agreements). ISSSTESON could therefore consider exploring the use of alternative procurement tools that could help it achieve better value for money.
Box 2.1. Chile’s use of framework agreements
Framework agreements have been instituted in Chile since 2003. The Law No. 19 886 on Public procurement states that ChileCompra is responsible for implementing and managing this type of agreement. A by-law further details obligations of the public entities using framework agreements.
ChileCompra is one of the few central purchasing bodies that have very few framework agreements with a single supplier. Apart from the framework agreement relating to mandatory health insurance, all other instruments are concluded with multiple suppliers. On average, ChileCompra awards a framework agreement to 185 suppliers out of 248 bids received. This means that almost 70% of the bidders are admitted under framework agreements. Yet, more than 60% of suppliers on average did not receive any purchase orders in 2014, and the top 10 suppliers under each framework agreement accounted, on average, for 71% of the total revenue.
With the mandate and responsibility for managing framework agreements, ChileCompra developed an online platform (ChileCompra Express) for accessing all goods and services available for purchase by public entities. ChileCompra Express allows public entities to purchase goods and services available in the framework agreements. The platform also allows suppliers to modify their offerings. Changes to product specifications and prices submitted by suppliers are then assessed by ChileCompra and incorporated into the platform, if deemed appropriate.
Source: (OECD, 2017[4]), Public Procurement in Chile: Policy Options for Efficient and Inclusive Framework Agreements, OECD Publishing, Paris, http://doi.org/10.1787/9789264275188-en.
ISSSTESON may want to consider initiating or joining consolidated procurement procedures, as the applicable legislation (Article 16 of the Acquisitions Law) allows the institute to do so, particularly with the state’s Ministry of Health.15
Other forms for achieving procurement efficiencies, such as framework agreements (as discussed above) or dynamic purchasing systems, are not currently provided for by the law, but they are not explicitly forbidden. ISSSTESON, together with the Ministry for Control, could study the legal framework to consider reforms that provide certainty for the use of these instruments as part of its toolbox of available procurement mechanisms.
2.1.7. ISSSTESON could enhance its contract management and procurement evaluation
The OECD’s Recommendation of the Council on Public Procurement (OECD, 2015[2]) advises that adequate resources and expertise be made available for contract management after a contract is awarded. It also advises using oversight and control mechanisms to increase accountability throughout the public procurement cycle, including appropriate complaint and sanctions mechanisms. However, ISSSTESON has no specific contract management procedures or bodies: each of the officials within the Tenders Department is charged with managing each specific contract, with no overall supervision or co-ordination of this function. ISSSTESON would do well to take measures to upgrade its contract management framework.
Disputes relating to contract performance
In the event that any dispute arises from the outcome of the tender procedure, the state’s Ministry for Control is to resolve it. However, there is no established legal framework to deal with any disputes arising from contract performance. A Conciliation Area exists for this purpose at the federal level, but the state of Sonora has no equivalent.
ISSSTESON could set up a mechanism for handling disputes arising in connection with contract performance, which could be used both by suppliers and by the institute itself.
Assessing and incentivising suppliers’ contract performance
Since ISSSTESON does not have any formal processes for contract or supplier performance, in practice only contract administrators can assess suppliers’ performance.
The lack of incentives to secure suppliers’ compliance and improve their performance is aggravated by the delays in payments to suppliers; and no mechanisms allow for the use of information on suppliers’ performance to evaluate their bids to tender similar goods and services in future. Although ISSSTESON’s procurement officials take supplier compliance into account in the context of direct awards, there is no mechanism to share information among procurement officials from either the Acquisitions or the Tenders Department. Similarly, there is no points system to reward firms with a good compliance record.
In line with the OECD Recommendation, ISSSTESON could set up mechanisms to incentivise suppliers’ compliance with their contractual obligations. A follow-up process on contract performance or supplier performance could not only allow for better control of how each contract is performed, but allow ISSSTESON to assess suppliers’ past performance in the context of future tender evaluations. For example, in a tender using points and percentages criteria, a good performance record would entitle the bidder to extra points, and conversely, a poor performance record would cause the bidder to lose points. Bidders’ performance record could be even more important for suppliers of critical goods for ISSSTESON, whose activities require high standards of compliance
Ensuring a well-functioning payment system
Contract compliance also involves the purchasing body’s responsibility to pay suppliers according to contract conditions (amount and time).
For ISSSTESON, payment is due 30 days after performance of the contract and submission of an invoice on the part of the supplier, as established by Article 31 of Sonora’s Acquisitions Law. Anticipated payments are possible, under the conditions established in Article 22 of the same Law. In the context of public works, a 30% advance on payment is normally offered. Generally, no advance payments are offered in other kinds of contracts, but nothing would prevent this practice. Article 19 of the Acquisitions Law stipulates that whenever the manufacturing process of a good takes more than 60 days, an advance payment of between 10% and 50% of the contract’s value will be granted to Sonora SMEs that are awarded a contract.
However, due to the budgetary constraints described in Chapter 1, payment periods vary significantly depending on the availability of funds. Payments can take several years to be completed, which has on occasion landed suppliers in financial trouble or in certain cases, in bankruptcy. Federal legislation is more stringent towards public institutions on payments to suppliers, but Sonora’s legislation allows for asymmetrical payment obligations, strictly enjoining suppliers to provide goods but allowing ISSSTESON to delay payments. The greatest risk faced by the institute is a potential disruption of supply stemming from its failure to pay its suppliers, whereas suppliers must assume the financial costs of payment delays.
This not only discourages participation in ISSSTESON’s procurement procedures but disincentivises suppliers’ performance and, in some cases, renders them incapable of fulfilling the contract.16 ISSSTESON’s failures to pay have caused some suppliers to stagnate or reduced their capacity. SMEs are particularly affected by this problem, and their limited access to credit means that they cannot assume the costs of the delay. ISSSTESON’s payment problems can deter the participation of SMEs, so that only large and powerful firms can afford to submit bids.
According to suppliers interviewed, more clarity is needed around the order in which payments to suppliers are handled: while some suppliers are paid promptly, others have to wait for years before receiving payment. With every change of state government, ISSSTESON’s preferred suppliers change, and new suppliers are favoured with prompt payment.17 Chapter 4 includes recommendations on how ISSSTESON can increase improvements in integrity in its procurement procedures and practices.
ISSSTESON could endeavour to ensure a transparent, timely payment system, promoting compliance on the part of suppliers and encouraging competition in the market. This would be an ideal commitment in light of the promise by the state Ministry of Finance to settle its debt with the institute.
Measuring the performance of the public procurement system
Following the OECD Recommendation of the Council on Public Procurement (OECD, 2015[2]), ISSSTESON could improve performance by evaluating the results of its procurement policies and practices in general, as well as those of individual procurement procedures. The institute would need to collect detailed data on procurement procedures, which, with historical data, could periodically and consistently assess procurement results, and guide future procurement decisions and strategies (including needs assessments of the requiring units). This could be carried out with the help of indicators, as the OECD recommends, measuring performance, effectiveness and savings of the public procurement system.18
ISSSTESON does have specific control mechanisms in place in this respect. As noted above, the Acquisitions Committee, Sonora’s Supreme Audit Institution (Instituto Superior de Auditoría y Fiscalización, or ISAF), and the Internal Control Body oversee procurement procedures; the Ministry for Control, Office of the Legal Counsellor and Ministry of Finance also participate in different stages of open-tender procedures. However, their reviews focus on compliance with the law or calls for tender, but do not assess the performance of procurement instruments. Evaluating the effectiveness of ISSSTESON’s public procurement system, from individual procurements to the system as a whole, could be carried out by extending the competences of the existing control mechanisms or by entrusting this task to a new body.
2.1.8. ISSSTESON could focus on collaboration with and amongst stakeholders
Engaging in transparent and regular dialogues with stakeholders
Dialogue between ISSSTESON and its suppliers could help the institute gain a better understanding of markets. It would also allow suppliers to become acquainted with ISSSTESON’s procurement objectives, which would help firms prepare to fulfil the institute’s requirements.
The OECD recommends that public buyers engage in transparent and regular dialogues with suppliers and business associations to present public procurement objectives and encourage further understanding of markets, while complying with protocols to safeguard integrity in the interactions between procurement officials and private agents (OECD, 2015[2]).
ISSSTESON does not consult with suppliers before implementing changes in procurement mechanisms. This can have a negative impact on procurement procedures and value for money for the institute. For example, the institute recently carried out a procurement procedure in an unexpected and complex format (licitación integral), which took suppliers by surprise because ISSSTESON had not previously discussed its plans with them. Suppliers reported that this limited their participation, giving them no time to prepare to comply with the procedure’s requirements, which differed substantially from what they had anticipated.
Several firms were prevented from participating by specific requirements that they considered too stringent and unnecessary for guaranteeing contract performance, such as minimum social capital, number of vehicles available and warehouse size. Only one company complied with the requirements and was allowed to participate. This situation could have been avoided, to the benefit of both ISSSTESON and its suppliers, if a pre-tender dialogue had been conducted where the parties could agree on the minimum requirements that could protect the interests of both sides. Consulting or engaging with the market does not mean that ISSSTESON must implement the strategies suggested by consultees, but it can help the institute understand the market, recognise the market’s capacity to adapt the selected procurement strategies, and mitigate the corresponding risks (such as limited participation).
ISSSTESON could engage in a productive dialogue with suppliers and businesses and enlist their input in carrying out its procurement strategies. This could help the institute present its public procurement objectives to suppliers so they can plan their business activities, which would in turn improve contract performance. Such conversations could help give ISSSTESON a better understanding of the relevant markets and help it to develop more effective tender specifications. It could also collaborate with suppliers by discussing the results of procurement procedures, and conduct surveys or publish indicators to measure suppliers’ perception of procurement processes. Discussing the results of procurement procedures would include not only the award decision, but for example, the extent of participation, the adequacy of the bids for ISSSTESON’s needs, and savings, quality and other criteria. Such discussions should be subject to rules and protocols safeguarding integrity and impartiality (see Box 2.2).
Box 2.2. New Zealand’s guide for constructive market engagement
New Zealand’s Government Procurement Branch has produced a guide on procurement, Constructive Market Engagement: A Guide to Engaging Effectively with Suppliers. It defines market engagement as a process that makes it possible, at all stages of procurement, to:
communicate needs and requirements to suppliers;
openly and transparently discuss possible solutions;
stimulate innovation in the design and delivery of the solution;
understand market capacity, capability and trends.
The document describes why engaging with the market is important and the conditions under which engagement should take place, to avoid damaging trust in public procurement activities, for example:
being fair, open, and transparent;
recoding discussions;
taking steps to ensure integrity, for example, giving the same information to all suppliers;
giving equal access to all suppliers and treating all suppliers equally.
Finally, the document provides guidance about methods available for engaging with the market during pre-tendering (publishing forward procurement plans and meeting with industry bodies), tendering (briefing suppliers about the development of the process) and post-tendering (strategic supplier management and providing feedback to unsuccessful bidders).
Source: (New Zealand’s Ministry of Business, Innovation and Employment, 2015[5]), Constructive Market Engagement: A Guide to Engaging Effectively with Suppliers, Wellington, New Zealand.
These exchanges could also be extended to general questions about the public procurement system, such as amendments to the applicable rules and procedures. Public consultations could include not only the private sector but civil society. The OECD recommends that public buyers develop and follow a standard process that promotes public consultation in formulating changes to the public procurement system, inviting comments from the private sector and civil society, ensuring publication of the results of the consultation phase, and explaining the options chosen, all in a transparent manner (OECD, 2015[2]). This is consistent with Sonora’s regulatory framework, particularly the Law for Better Regulation in the State of Sonora and its Municipalities (Ley de Mejora Regulatoria para el Estado de Sonora y los Municipios).
Co-operation amongst suppliers
It is not clear whether subcontracting and joint bids are allowed by the normative framework applicable to ISSSTESON tenders. They are explicitly allowed only with regards to tendering for public works and related services, where supplier co-operation is allowed on the basis of Articles 44 and 48 of the Law on Public Works and Related Services of the State of Sonora, and Article 55 of its implementing Regulations.
In practice, subcontracting and joint bids are never allowed outside the field of public works and related services. ISSSTESON, together with the Ministry for Control, may explore the possibility of allowing for subcontracting and joint bids as a rule in its procurement procedures, since these mechanisms increase participation and encourage competition. If necessary, they could suggest legal reforms.
On the other hand, it is possible that ISSSTESON is unwittingly facilitating certain forms of anti-competitive co-operation amongst bidders by regularly holding in-person suppliers’ meetings (juntas de aclaraciones) in the context of tender procedures. In line with the OECD Guidelines for Fighting Bid Rigging in Public Procurement (OECD, 2009[6]), ISSSTESON could avoid bringing potential suppliers together at the tendering stage, since this significantly increases the risk of collusion amongst suppliers. This risk is higher where suppliers are few and inadequately paid, as is the case with ISSSTESON’s suppliers.
Proposals for action
ISSSTESON could further integrate or co-ordinate different procuring entities, such as the Tenders Department, the Acquisitions Department and the decentralised acquisition areas of hospitals, establishing better communication channels within the institute’s purchasing bodies and thus benefiting from a better quality of information and allowing for aggregated purchases.
ISSSTESON could maximise the use of the public tender procedure and limit exceptions, as a means to increase efficiencies, boost competition, reduce risks of corruption and obtain better value for money. ISSSTESON could benefit from improved procurement planning processes focused on avoiding urgent-purchase surcharges. Exceptions should be limited, predefined and should require justification; rules on artificial splitting of contracts should be properly enforced so that this is not done on purpose, to avoid open tenders. The Acquisitions Law or its Regulations could provide guidance on the matter.
ISSSTESON, with support from the auditing bodies, could improve its market intelligence mechanisms by developing clear parameters on what constitutes a proper market investigation and illustrating those parameters in internal rules. Once clarity is achieved on the items that compose a market investigation (which could include more parameters than simply historical prices and supplier quotations), the institute could adopt certain tools for developing those investigations and enlist internal expert teams to carry them out. This would help the institute gain a more comprehensive understanding of the market, which is crucial for obtaining value for money.
ISSSTESON could obtain better value for money by issuing guidelines or policies for drafting tender documents, to define technical specifications for the award criteria. It could focus on the use of functional (generic) requirements and on the creation of award criteria that reward reduction of total-life cycle costs19 rather than limiting the decision only to price. The state of Sonora’s Acquisitions Law currently permits the use of the points and percentages criterion, which can allow for the best available conditions in terms of price, quality, financing, opportunity and other relevant features. This could have a positive impact on patient experience in interacting with ISSSTESON, leading to shorter hospital stays and reduced secondary effects.
ISSSTESON could consider extending the scope of public contracts by opening its procurement procedures to international bidders. Sonora is a border state, so this could yield price advantages. The institute is encouraged to continue actively pursuing the use of multiannual contracts, or annual contracts with the possibility of extension for a determined period, to create better conditions of value for money and to reduce the administrative burden.
ISSSTESON could promote simplification and reduce red tape in its procurement processes to give potential competitors of all sizes access to procurement opportunities. It could consider revising its processes and workflows to increase their efficiency and effectiveness. For example, the institute could revoke the mandatory in-person registration and associated fees for suppliers, allowing them to register on an online platform. It could also bring together the different e-procurement tools now in use in a one-stop-shop or single contact portal giving access to all procurement opportunities; adopt the use of standardised tender documents, which could be adapted on a case-by-case basis, depending on the complexity of the project; and develop alternative procurement tools to obtain better value for money and reduce duplication.
ISSSTESON could enhance its contract management and procurement evaluation dynamics to apply oversight and control mechanisms that support accountability throughout the public procurement cycle, including appropriate complaint and sanctions processes. It could consider implementing mechanisms in the legal framework to deal with disputes relating to contract performance; and ways to allow the use of information on suppliers’ performance to help assess future tendering, including mechanisms to motivate suppliers’ compliance with their contractual obligations; ensure an efficient and equitable payment system for all suppliers, given the environment of budgetary constraints, and collect detailed data on procurement procedures to evaluate the results of procurement policies and practices, as well as those of suppliers.
ISSSTESON could focus on collaboration with stakeholders to obtain a better understanding of markets and allow suppliers to become acquainted with its procurement objectives. It could conduct transparent and regular dialogues with suppliers and business associations, and consult stakeholders before introducing changes in procurement mechanisms.
References
[3] COFECE (2016), Recomendaciones para promover la competencia y libre concurrencia en la contratación pública, Comisión Federal de Competencia Económica, https://cofece.mx/wp-content/uploads/2017/11/RecomendacionesContratacionPublica-v2.pdf.
[5] New Zealand’s Ministry of Business, Innovation and Employment (2015), Constructive Market Engagement: A guide to engaging effectively with suppliers, Wellington, New Zealand.
[4] OECD (2017), Public Procurement in Chile: Policy Options for Efficient and Inclusive Framework Agreements, OECD Public Governance Reviews, OECD Publishing, Paris, https://dx.doi.org/10.1787/9789264275188-en.
[2] OECD (2015), OECD Recommendation of the Council on Public Procurement, OECD, Paris, http://www.oecd.org/gov/public-procurement/recommendation/OECD-Recommendation-on-Public-Procurement.pdf.
[6] OECD (2009), Guidelines for Fighting Bid Rigging in Public Procurement, OCDE, París, http://www.oecd.org/daf/competition/cartels/42851044.pdf.
[1] Secretaría de la Contraloría General, Gobierno del Estado de Sonora (2016), Manual de procedimientos, Subdirección de Servicios Administrativos del ISSSTESON, http://www.isssteson.gob.mx/images/gcalidad/386[1].pdf.
Notes
← 1. However, the organic structure of ISSSTESON was amended in March 2019 by merging the Tenders Department with the Acquisitions Department.
← 2. ISSSTESON is currently undertaking a process of reforms to consolidate procurement in its central offices. Under this new scheme, hospitals will only be allowed to purchase based on urgent needs authorised by the Co-ordination of Hospitals. New policies are being drafted to restrict this practice.
← 3. The reforms described in the two previous endnotes address this recommendation.
← 4. In 2019, the institute launched an effort to limit the procurement of goods not included in the Annual Procurement Programme and not considered under the authorised medicines basket (cuadro básico autorizado). For instance, hospitals agreed that only the procurement of medicines and medical equipment considered urgent will be authorised, after exhausting authorised goods.
← 5. Some highly specialised drugs cannot be programmed because they are not included in the basic basket. Their management and storage can be complicated because they may need to be kept in a freezing room or because they are close to their expiry date.
← 6. The incidence of lack of bids for specific goods may also be the result of other factors, such as an inadequate market analysis, which does not feed the tender design, and because the process is inconsistent with market capabilities.
← 7. This programme includes information on each good or service purchased and its reference price; every work to be carried out is similarly listed, with its estimated value on the basis of the prior year’s prices. The programme does not include an estimated purchase date.
← 8. However, none of the suppliers interviewed by the OECD during the fact-finding mission reported having been contacted by ISSSTESON for these purposes.
← 9. Only one firm provides such services to ISSSTESON, which was selected by the Directive Board. The prices paid by ISSSTESON to conduct these market studies vary, since some services are more complex than others, depending on the number of product reference codes the investigation needs to cover. The firm was not selected through a procurement procedure, because the State of Sonora’s Acquisitions Law does not cover the rendering of professional services. The procurement of these services is regulated by a Decree dated 2011-2013. Under this Decree, a proposal to engage a firm for the provision of professional services is presented to the Directive Board, which can simply authorise it.
← 10. Limiting requests for pricing information to suppliers is all the more important considering that, according to Mexico’s Economic Competition Commission (Comisión Federal de Competencia Económica, or COFECE), providing quotations for market studies is one of the most common facilitators of collusion.
← 11. However, such lack of compliance may also be the consequence of liquidity issues caused by delays in payment by the institute.
← 12. After incorporating any amendments proposed by Sonora’s Ministry for Control or the State’s Legal Counsellor, the Tenders Department publishes a call for tender in a newspaper, and/or in the Official Bulletin (in the case of public works), as well as on the electronic procurement system, Compranet. No draft calls for tenders (pre-bases) are published, although there is no legal impediment to it.
← 13. This guarantee is different from the one mentioned above, which is required by Article 33 of the Regulations to ensure contract compliance once the contract is awarded.
← 14. Chapter 3 reviews ISSSTESON’s e-procurement tools in detail.
← 15. For example, ISSSTESON participated in the consolidated tender 2018 for the national health sector, led by the Mexican Institute for Social Security (Instituto Mexicano del Seguro Social, or IMSS).
← 16. Since many products are purchased from distributors, rather than from manufacturers, these distributors can become financially unable to purchase the goods to be supplied to ISSSTESON, due to the institute’s failure to pay.
← 17. Outsourced pharmacies (farmacias subrogadas) also change depending on the government in power.
← 18. Chapter 3 analyses in detail public procurement evaluation and issues recommendations for ISSSTESON in this respect.
← 19. For example, the Most Economically Advantageous Tender (MEAT) method allows the contracting authority to assess qualitative, technical and sustainability criteria, beyond price, to select the winning bid in a tender process.