2. Procurement as a critical function in government

To achieve their missions, governments must have access to the right capabilities, capacities and products. These are often provided internally by civil servants but in many cases need to be obtained from the private sector through public procurement processes. The primary objective of public procurement is to deliver goods and services necessary to accomplish government missions in a timely, economical and efficient manner. However, its impacts are not restricted to the public sector alone. The role of government as a purchaser has the power to influence or even create markets, and has the potential to become a key tool to leverage innovation both inside and outside the public sector (OECD, 2017). The realisation of broader policy objectives (e.g. promoting innovation, sustainability, social inclusiveness, and supporting small and medium-sized enterprises (SMEs)) forms an increasingly important part of public procurement strategies for governments – a point highlighted in the OECD Recommendation on Public Procurement (OECD, 2015[1]).

At the same time, public procurement activities are executed with taxpayer money, which makes it a sensitive domain that must be carried out efficiently and to high standards in order to safeguard the public interest. The critical nature of public procurement, coupled with the need to ensure integrity, leads to significant tensions and challenges in realising its transformative potential. This section seeks to explore the ways in which procurement is integral to achieving the mission of government, as well as the challenges often faced in doing so. It also seeks to describe the purposes of procurement in the Slovenian context, as explained to the OECD by the individuals representing different aspects of the public procurement ecosystem in Slovenia.

The importance of procurement in government cannot be overstated. In many ways, constitutes the lifeblood of government programmes and services. Even simple programmes and products require access to some level of financial support, and the availability and nature of such funding and the ability to use it to obtain needed goods and services can determine the eventual success or failure of government actions. The way money flows through government, and outwards towards government partners in industry and civil society, has a tremendous impact on current system and the ability of well civil servants to do their jobs, on the capacity of governments to serve their people and on the performance of economies.

As procurement is critical to almost all government functions, the contributions made by public procurement can be viewed through many different lenses. Recent OECD (2019[2]) work has highlighted citizen well-being as a binding goal for the various aims of public procurement. The value achieved from public procurement in many countries can directly impact the well-being of citizens, which in turn affects a plethora of issues, including their ability to contribute to economic development. For instance, when used strategically, procurement can improve significantly the life of citizens through agile and high-quality public services, such as health care and education. Similarly, it could work as an enabler for job creation, social inclusion, innovation and building trust in public institutions (OECD, 2019[2]). As a core and transversal activity of government, public procurement affects directly on all dimensions of citizens’ lives at the macro and micro level.

In OECD interviews and workshops, public leaders, civil servants, and representatives from industry and civil society positioned citizen well-being as a key objective of public procurement in Slovenia. The OECD Framework for Measuring Well-Being and Progress1 identifies a number of core issues that affect well-being and help to sustain well-being over time. The sections below discuss the ways in which public procurement intersects with these areas.

One of the largest areas impacted by procurement is “human capital” – the skills and health status of citizens. In practical terms, this translates into health and education services provided by governments. Health expenditures alone account for the largest share of public procurement spending, amounting to around 30% in OECD countries (34% for Slovenia), with education coming in third at 12% (13% for Slovenia) (OECD, 2019[3]).2 Efficient and effective public procurement in the health sector contributes to higher quality health care and better medical equipment, which in turn leads to higher life expectancy (and higher levels of citizens living longer in good health). It is estimated that more efficient spending of existing funds could increase health life expectancy by 1.4 years (McKinsey & Company, 2017[4]). These gains could also translate into lower health care expenses and higher labour force participation, which lead directly to economic gains (OECD, 2019[2]).

Additionally, the health system is dependent on procurement for medicines, products and services, a critical relationship that can affect the lives of citizens. Government needs to have a trusted system in place that has the ability to procure things quickly, safely and as necessary. For a small country like Slovenia, the challenge is greater as the majority of needs around health originate from outside their own borders.

The need for procurement in areas with large, complex and interconnected systems, such as health and education, is critical to the functioning of government. In many cases, the government lacks the necessary and often emergent skills sets and has to partner with the private sector to obtain and utilise them. As government begins to grapple with issues that require changes to the people management of government, it needs an efficient and effective way to obtain these skills for critical services. Box 2.1 provides an overview of challenges that the United Kingdom has faced with health procurement and some of the steps taken to address them.

Public procurement has a vast impact on economic development. On average, public procurement accounts for 29% of public expenditures and 12% of the gross domestic product (GDP) in OECD countries (OECD, 2019[2]) (Figure 2.1). The World Trade Organization (WTO) estimates that the share of public procurement in GDP globally is between 10% and 15% (Djankov, Saliola and Islam, 2016[6]). Within the European Union, over 250 000 public authorities spend around 14% of GDP on the purchase of services, works and supplies.3

Likewise, government is the main buyer of services such as education, health, social services, transportation and infrastructure – all of which are major pillars of GDP and economic growth in any economy. The governments of OECD countries are responsible on average for 70% of final consumption expenditure on health goods and services, as well as 84% of final consumption expenditure on education, as recorded in national accounts (OECD, 2019[2]).

Likewise, government is the main buyer of services such as education, health, social services, transportation and infrastructure – all of which are major pillars of GDP and economic growth in any economy. The governments of OECD countries are responsible on average for 70% of final consumption expenditure on health goods and services, as well as 84% of final consumption expenditure on education, as recorded in national accounts (OECD, 2019[2]).

Because procurement constitutes such a large component of GDP, finding ways to make the procurement process more efficient – often the objective of innovative procurement actions – can result in better value for money and significant savings for governments. A 1% saving in procurement expenditures might represent EUR 43 billion per year in OECD countries (OECD, 2019[2]). Better management of procurement in the EU context can also lead to significant savings in public budgets and more investment. For example, an efficiency gain of 10% could yield savings of EUR 200 billion per year, without cutting the level of service offered to European citizens. Procurement also has a major impact on EU structural and investment funds, almost half of which are spent via public contracts. Good contracting helps to obtain the best value for money (European Commission, 2017[7]) and the savings can be used for a variety of governmental priorities, such as investing in underfunded policy areas, support for innovative programmes and services, or reducing income taxes, which can result in even higher GDP through increased consumption (Vogel, 2009[8]; OECD, 2019[2]). Table 2.1 presents different types of savings indicators that governments can use as a baseline for current performance and to set performance goals. Box 2.2 provides an example of how New Zealand has achieved and measured savings through all government contracts.

Efficient procurement can also generate more employment opportunities. An efficient procurement policy can stimulate competition between companies, incentivise innovation and, as a result, enable corporations to provide employment to citizens. Public procurement is also a key way trusts capability to boost market potential for SMEs. It can serve to open new markets for these businesses and also level the playing field as they compete with larger established corporations. To facilitate this process, governments need to do more to develop small businesses (Zeng, Xie and Tam, 2010[13]) by dedicating investments to engage SMEs for public contracts (Preuss, 2011[14]). Slovenia has recognised the importance of public procurement in this area and has developed procurement strategies and policies designed to support SMEs (OECD, 2019[3]). Finally, efficient procurement can remove barriers to entry for international, cross-border procurements – a benefit of particular importance to Slovenia due to its small size. This outcome is among the best ways to stimulate competition and to obtain better choice in terms of quality and price (European Commission, 2017[15]).

Trust is defined as a person’s belief that another person or institution will act consistently with their expectations of positive behaviour (OECD, 2017[16]). Institutional trust is the basis upon which the legitimacy of governments is built and is key for ensuring compliance laws and regulations. It is essential for implementing reforms and ensuring the capacity of governments to govern without resorting to force. There is consensus in the academic literature that trust influences the relationship between citizens and governments, and has an impact on the outcomes of public policy (OECD, 2017[17]). As seen in Figure 2.2, trust levels in OECD countries in 2018 are on average at 45%, a value similar to 2007 (pre financial crisis) levels. This represents a positive trend overall for OECD countries; however, Slovenia has struggled in this area. In 2007, rates of trust in government in Slovenia were at 48%, but by 2018 they had fallen to 24%, representing a decline of 24 percentage points over the last decade.

The benefits of a well-functioning public procurement system are not limited to achieving a healthy economy – they have a direct correlation with citizen trust. The professionalism and integrity with which public procurers manage tender processes and contracts influences the overall reputation of the Civil Service, as does the quality of the resulting products and services. This in turn affects the trust of citizens in their government. Public procurement as a government activity is often highly visible to citizens, and therefore contributes to citizen perceptions about government. However, it is also a process that is vulnerable to corruption (see the discussion in Chapter 1) and other issues that can have negative impacts on trust. Integrity and transparency in public procurement procedures are thus crucial pillars in building societal trust. Tools and methods such as e-procurement and open contracting address this specific concern by broadening the number of suppliers and ensuring that citizens can access real-time information about ongoing procurement processes. Trust also then feeds back directly into economic capital, as it influences the overall investment climate in a country (OECD, 2019[10]).

Ukraine’s ProZorro eProcurement system serves as an innovative example of how the country is seeking to build trust through transparent procurements (see Box 2.3).

In addition to affecting the economy and the population of a country, public procurement can also have a positive environmental impact. Creating demand for environmentally responsible procurement in government – better known as “green procurement” – helps to reduce environmental impacts and create new markets that contribute to the conservation of natural resources (OECD, 2019[2]). With regard to the environment, strategic public procurement can also reduce carbon dioxide (CO2) emissions, thereby contributing to the safeguarding of natural resources on which future health and well-being depend (OECD, 2019[10]). Green procurement has gathered momentum in recent years, with all OECD countries now having strategies for its promotion in place (see Figure 2.3).

While it is clear that efficient and effective procurement systems can produce a number of positive contributions, governments often face a number of foundational challenges as a result of the complex environments in which they operate. In particular, the OECD Public Procurement Toolbox4 has determined that governments can:

  • be prone to corruption risks, because of the magnitude of the projects or the amount of government spending related to specific sectors

  • lack competition, for instance in the energy and the health sectors

  • have inadequate cost recovery, for example in infrastructure projects

  • witness important variation in prices, in particular in the health sector.

Because of the volume of spending it represents, well-governed public procurement can and must play a major role in fostering public sector efficiency and establishing citizens’ trust (OECD, 2015[1]). In seeking to address these challenges and promote accountability, integrity and effectiveness in procurement processes, governments often enact arduous procedures regulated by long and complex legal frameworks, which may limit the capacity for innovative ideas to be implemented, or even considered. While the strict procedures surrounding public sector procurement aim to protect public money, they often generate perverse incentives, delay processes and could ultimately compromise the quality of service delivery. Such complex public procurement systems and processes represent a major hurdle to SME participation in public procurement markets, as such companies are disproportionately affected by these factors, due to limited financial, technical and administrative capacities (OECD, 2019[3]).

The behaviour of civil servants is framed by these same incentives, resulting in low risk-taking and lack of innovative practices to boost and strategise procurement activity. For instance, a large obstacle to achieving public procurement outcomes related to innovation, environment and sustainability is the use of the lowest price as the sole criterion for awarding tenders. The use of award criteria that take into account dimensions such as maintenance and exploitation costs along the lifecycle favours goods and products with better environmental performance, while also encouraging innovation (OECD, 2019[3]). This was a recurrent problem in the Slovenian procurement system.

In addition to the challenges and tensions classically associated with public procurement, OPSI has identified a number of issues that hinder the ability of governments to take innovative or systems approaches to procurement (OECD, 2017[16]):

  • Competing priorities across government. The institutions, rules and processes that structure and manage financial resources in government have been developed to meet many, and sometimes competing, objectives. Regulations are usually designed, first and foremost, to ensure transparency and reduce the potential for corruption. Attempts to innovate procurement functions usually involve negotiating complex webs of rules and regulations that may not be straightforward or immediately apparent and often lack the necessary flexibility for public procurement.

  • Working through the complexities of government. Government bureaucracies are usually among the largest organisations and employers in any given country. The size of their budgets means that implementing even relatively simple reform in these areas can require significant effort, time and resources. The size of government also makes it hard for any particular function to possess a broad overview of the system as a whole, as each segment works to ensure its own operations. Taking time to step back and view government management and procurement systems as a whole, from the perspective of innovation, rarely forms part of an organisation’s job description.

  • Evaluating innovation is difficult. Challenges exist related to realising the benefits of procurement. Governments are not very good at measuring their own internal operations and understanding their costs. Procurement systems are situated significantly “upstream” of the impacts that governments create, which makes it difficult to assess how changing them will lead directly to impact on the ground.

Public sector organisations generally use some form of fixed price contract in which time, cost and scope of activity are fixed in the procurement process. This usually means that the supplier takes the brunt of the risk at the outset, while changing activities based on feedback and “learning by doing” becomes very difficult later on. This dynamic is exemplified in software development (Book, Gruhn and Striemer, 2012[18]; OECD, 2019[19]).

Such traditional procurement approaches work best when there is a very clear sense of the need and the outcomes being sought. When trying to innovate or achieve a systems approach, this is not always feasible. Even where there is a clear sense of the need, it may be hard to imagine or envisage the outcomes and progress is rarely linear. Indeed, too much certainty around outcomes can lock in particular pathways and limit options for experimentation or reframing of the issue (OECD, 2017[20]).

Along these lines, procurement can become increasingly difficult for governments operating in fast-changing environments, especially in fields such as technology. In general, traditional procurement practices in the public sector limit open-ended processes, which can make the use of iterative, agile methodologies very difficult (OECD, 2017[21]). Many also face considerable churn in the market place or concerns about reliability and consistency. When faced with such issues, a direct approach to the market may not be the most appropriate course of action. Such increasingly dynamic environments call for innovative approaches in procurement. For instance, it may be necessary to break the procurement process down into discreet steps in order, first, to gauge the capabilities of potential suppliers and test the framing of the problem, and then move through a series of steps that leave other options open if a particular option is no longer deemed feasible or suitable (OECD, 2017[20]). Innovative approaches to procurement can help governments overcome the challenges and tensions discussed here. Doing so is critical to achieving a systems approach, as research has identified complicated procurement systems that limit experimentation as a key characteristic linked with systems failure in government (Chapman, 2002[22]; OECD, 2017[21]).

Slovenia is impacted by many of these issues (or the perception of them), but also has significant potential to leverage innovative approaches to procurement. Much of the rest of this report focuses specifically on the Slovenian context, including views on the purpose of procurement, as well as a number of country-specific foundational challenges and systems dilemmas.

Public procurement systems play a critical role in the machinery of governments, the products and services that citizens receive from government, and the macro economy. In such a far-reaching system, some outcomes and activities are likely prioritised and more critical. In order to apply systems thinking to the Slovenian procurement system, it is critical to understand how success is framed within the system.

Through the co-design and co-creation project which formed the basis for this report, the OECD worked with system actors across the system to determine the key purposes and drivers of procurement in Slovenia. In analysing any system, it is critical to make explicit the overall purpose and ambitions. Having all actors understand the purpose of the system and share common goals creates a shared anchor, whereby all actors can determine if policies, laws and behaviours are having a positive effect.

Additionally, it allows for a more nuanced view of the trade-offs and tensions within the system. For example, a new law that creates additional layers of approval may increase trust and reduce corruption within the system. However, these new additional layers will also likely slow down processes and may reduce the ability of procurement to help the government fulfil its needs. Changes must therefore not be made in isolation but instead analysed in relation to the various purposes of the system to ensure overall proper functioning. These tensions and trade-offs are explored in greater detail in Chapter 3.

For the Slovenian public procurement system, the OECD worked with actors over several days in a co-creation workshop to define five key purposes of procurement, covered below. The purposes are broad and include both an internal (functioning of government) and external (societal goals) perspectives.

Each goal and purpose of public procurement is unique and discussed separately. However, it is important to keep in mind that they often have strong interlinkages. Complex goals will often seek to achieve a combination of these core purposes. For example, in Germany, the government launched Energiewende, a transformational strategy to create a low-carbon, nuclear-free economy. The project served as an intersection for various government goals such as social impact, crowding in resources, driving the economy and supporting the creation of new markets. This example highlights the need to think about these purposes and their related goals from a system-wide perspective. Real systemic change will likely not occur if changes are made with only a single purpose in mind. In fact, such an approach is likely to produce unintended effects throughout the larger system, shifting problems from one area to another.

As stated in the previous section, trust and legitimacy in the government and its ability to execute its responsibilities without corruption is critical – a point that becomes even more important when the scale of public procurement is taken into account. In fact, establishing and maintaining legitimacy and trust in the procurement process is the overarching driver for reforms and the procurement process in Slovenia

In the Slovenian context, OECD interviews and workshops focused on the key characteristics of a legitimate and trusted repeatable process. Establishing an explicit and repeatable process allowed all actors within the system to understand the procurement lifecycle, while standardisation allowed for easier identification of illicit actors and corruption. In terms of establishing trust within the system, three characteristics emerged: 1) the process was carried out with integrity, 2) the rule of law was maintained and 3) there is transparency in the system.

These three pillars create a strong foundation for a trusted process within the system. However, specific outcomes and expectations within the system also help build legitimacy. As public procurement accounts for over 10% of Slovenian GDP and uses taxpayer funds, the process must ensure that the system prioritises maximising value and acts as a good steward of taxpayers’ money.

Lastly, discussion took place around the question of “burden”. While a certain level of burden is needed and accepted within the system to ensure it is a trusted process, the question is where the burden resides. The idea emerged from workshops that a fair system ensures that the burden of the system is equal for actors inside and outside the system.

Because of Slovenia’s dedicated efforts to achieving a transparent and trustworthy process, the country was recognised in the OECD 2019 Government at a Glance for its transparency (see Box 2.4).

Creating a trusted process supports legitimacy, but the system still needs to be able to achieve the desired expected outcome. Ultimately, for a system to be recognised as functional, it needs to be able to produce the desired end results. In the case of procurement, this means that the products or services procured must meet the stated needs.

A functioning system is therefore not just a matter of maintaining integrity and ensuring a well-defined process; it is also essential that the process outcomes, whether products or services, meet the requirements of end users (government or citizens). As one participant noted, “in the end, procurement is about buying stuff… and if we cannot buy the right stuff, then it really does not matter if we have the best process in the world.”

As with many governments, the Government of Slovenia has skills gaps in certain areas, as well as a need for new ideas and solutions. Long-term aims include human resource management strategies and boosting innovation capacity within government, but often the needs are more immediate and respond to new challenges, crises or problems. In order to respond properly to these needs in a timely fashion, the public sector has to procure skills, ideas and solutions from the private sector.

The government will also need to engage new, unique and diverse voices to help resolve current and future challenges. These voices may be representatives of academia, industry, the third sector or private citizens. Procurement provides a path to allow these voices to test, share, collaborate and compete in a marketplace that helps improve government.

Slovenia has already taken an active role in this regard through its participation in the international project Public Procurement of Innovative Solutions (PPI2Innovate) (see Box 2.5).

As stated earlier in this chapter, government has the ability to create and enhance markets. As public procurement represents more than 10% of Slovenia’s GDP, it has the ability to affect dramatically the country’s private sector ecosystem. As the economist Mariana Mazzucato (2011[23]) explains in her book, The Entrepreneurial State, governments have created markets and helped to drive the economy since the earliest days of their existence. In the United States, for example, the government’s mission to land on the moon spurred other innovations both inside government and in the private sector. Many of those innovations subsequently served as the foundation for later innovations.

This relationship between government innovation and the private sector also speaks to the ability of government to not only signal to the market, but also to help mitigate some of the risks of innovation from the private sector. In this regard, the public sector has a history of various procurement and funding strategies to spur innovation in the private sector.

The Government of Slovenia has recognised the importance of driving the economy through its procurement practices. Slovenia, like most OECD countries, has specific strategies in place to support SMEs through public procurement (Figure 2.3). It also takes steps to ensure that the private sector is considered when developing new laws and regulations that may impact industry (see Box 2.6).

While any procurement strategies have an impact on the shape of the economy, they also help shape and support social goals and goals from other policy areas. For example, most OECD countries, including Slovenia, have developed strategies at the central level to support green procurement, while some have developed strategies for other societal goals, such as supporting women-owned businesses (see Figure 2.3). This is a clear example of using procurement to help affect change and signal the government’s desire to drive social change. By developing new requirements and integrating them into public procurement, the government can make contribute to major societal goals that help improve quality of life.

Australia’s Social Procurement Framework provides an international example of a country seeking to build a foundation for social goals through public procurement (Box 2.7).


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