Chapter 2. Ensuring a public procurement environment conducive to SME participation

2.1.1. Division of contracts into lots

Dividing public contracts into lots facilitates SMEs’ access, both quantitatively and qualitatively. Quantitatively, the size of the lots may better correspond to the capacity of the SME to deliver the good or service, and qualitatively, the content of the lots may correspond more closely to the specialised sector of the SME. With the latter aspect especially, when division into multiple lots involves unbundling a procurement contract that includes heterogeneous products or services, SMEs may generate competition as they may display higher levels of specialisation and efficiency than larger competitors (Albano, 2017[4]).

Some of the reasons identified by OECD countries for dividing a contract into lots included promoting SMEs and new entrants to the market; promoting tender participation, namely by specialised groups of firms; generating competition in the market; avoiding single supplier dependency; and spreading risk (OECD, 2015[5]).

The majority of the surveyed countries encourage division of public procurement contracts into lots (Figure ‎2.2). For EU Member Countries in particular, the 2014 EU Directive on public procurement1 obliges contracting authorities to consider at the planning stage whether or not to divide a contract into lots. Where the contracting authorities decide not to do so, they must justify the reasons for it. This provision is included in the Directive as one of the measures intended to facilitate SME participation in public procurement.

Figure ‎2.2. Encouraging division of contracts into lots to facilitate SME participation in public procurement

Source: 2017 OECD survey on strategic use of public procurement to support SMEs.

Some of the arguments against dividing contracts into lots include concerns over the potential adverse effects on transparency. If lots are defined too narrowly, that may open the door to direct awards, which often lack transparency and thus damage value. At the EU level, the 2014 EU Directive on public procurement takes this concern into consideration by stipulating that contracts must not be artificially split in order to avoid application of the public procurement rules concerning aggregation requirements (SIGMA, 2016[6]).

There are undeniably risks associated with splitting a procurement contract into lots. First of all, doing so may not result in multiple awardees. Certain firms, due to their accumulated knowledge as existing or historical government suppliers or contractors, could exercise market power resulting in supplier lock-in, which is a potential by-product of recurring public procurement procedures. The relative disadvantage of SMEs that have no experience of contracting with the government persists. Additionally, when bidding is only allowed on a lot-by-lot basis, larger firms are not able to exploit synergies among multiple lots in their bid for each individual lot. This may lead them to bid a higher price for each individual lot, compared to the lower price they would offer if they were bidding for the total volume. For example, their higher price might ensure they cover their fixed costs in the event they win a smaller number of lots. Division into lots can therefore be inefficient where there is healthy competition for current and future contracts (Albano, 2017[4]). The potential benefits of dividing contracts into lots thus needs to be balanced with the associated risks. Package bidding could help achieve that balance by allowing SMEs to bid for single lots and large enterprises to exploit the possible synergies between different lots. Economic literature, though limited on this topic, could still give some insight into the necessary considerations when splitting contracts into lots (Box ‎2.2).

Contracting authorities take a number of factors into consideration when deciding whether the works, goods, or services are to be procured using one contract or a number of separate contracts – and, in the case of the latter, how to split the contract into lots. The increased participation of SMEs leads to a higher level of competition in the tendering process where the division into lots is appropriate and feasible with respect to the procurement needs of the contracting authorities. At the same time, the savings derived from increased economies of scale could also promote the use of a single contract. In this context, the decision to split up contracts should consider the specific characteristics of the market concerned and the object of the contract. Market characteristics that may impact the decision include the number and type of economic operators in that market, technical and quality aspects, the speed of technological change, and risk of dependency on a sole supplier (OECD SIGMA, 2016[12]). Box ‎2.3 offers an example of a tool developed in Germany to help contracting authorities in their decision to split contracts into lots. OECD has also developed a checklist in order to help public procurement practitioners mitigate the risks when splitting contracts into lots (Box ‎2.4).

2.1.2. Joint bidding

Another channel through which governments can address the financial and technical capacities of SMEs to carry out large and complex contracts is by encouraging joint bidding. Where compliant with competition law, joint bidding – in which two or more firms submit a single bid – is commonly accepted practice in OECD countries. Suppliers, typically operating on a temporary rather than long-term agreement, bid in consortium for a contract (Albano, 2017[4]). The reliance on capacities of other firms to meet criteria relating to economic and financial standing and technical and professional ability constitutes the main benefit of this mechanism.

Joint bidding facilitates access to public procurement markets, especially through:

• Grouping – Allowing economic operators to group together in order to participate as candidates or tenderers in procurement procedures. The possibility of forming such a group enables SMEs to compete jointly for large and complex contracts, the execution of which would surpass their individual capacities.

• Reliance on capacities of other entities – Enabling economic operators to rely on the capacities of other entities in order to meet the criteria relating to economic and financial standing and technical and professional ability. This option encourages the participation of SMEs in the procurement process (SIGMA, 2016[14]).

There are different forms of joint bidding, depending on the liabilities of each member of the consortium. For instance, France specifies the type of liabilities that are foreseen in different forms of consortia that economic operators choose to form. There are joint-and-several liability consortia (groupement solidaire), where each member of the consortium is committed financially to the performance of the whole contract, and joint-liability-only consortia (groupement conjoint) where each member of the consortium is responsible only for the performance of an allocated contract share. Central purchasing bodies (CPBs) also very often allow suppliers to bid jointly as a means to balance SME access with aggregation and centralisation of public procurement activities For instance, the CPB in Finland always includes instructions on how suppliers can bid jointly in their call for tenders. Similarly, the CPB in Norway encourages co-operation between suppliers in their tender documents, and templates for joint bidding are attached to tender documents.

Joint bidding may raise concerns over collusion in the market. It is a principle of competition that where competitors can bid individually, they should do so. Joint bidding between competitors reduces competition and may also enable sharing of commercially sensitive information between actual or potential competitors when discussing the terms of a joint bid. In this sense, when suppliers consider forming consortia to bid jointly, they should evaluate whether they are able to bid alone or not. The Competition and Consumer Protection Commission of Ireland has published a guide to help SMEs in their decision to tender as part of a consortium (Box ‎2.5).

2.2.1. Standardising procurement documents

One way that countries address this issue is by standardising procurement documents through the use of templates. Canada, for instance, has used them to simplify solicitation and contractual documents for all suppliers. The templates are part of the commitment of Public Services and Procurement Canada, as the country’s CPB, to promote a common look and feel in acquisition documents by standardising terminology and simplifying contract language by using plain language; this ensures greater consistency and uniformity. Additional steps are under way to simplify solicitation and contract documents, as well as documentation requirements for suppliers and procurement processes generally.

The use of templates reduces the administrative burden for both contracting authorities and bidders. It streamlines public procurement procedures and helps bidders to better understand them. The Office of Government Procurement (OGP) in Ireland has created a standard suite of tender document templates to drive best practice and to reflect the 2016 EU Procurement Directives. The OGP website offers a repository with an extensive amount of template documents and guidance material. There are currently six model documents available and more are planned, covering the tender process and the contract phase of a procedure.

Certain types of contract indeed require specially designed tender documents, especially those involving higher-risk goods or services. While acknowledge these specific needs, some countries define use of the standardised documents for lower-risk and/or lower-value procurements. In Australia for instance, application of the Commonwealth Contracting Suite (CCS), which provides standardised procurement documentation, is mandatory for procurements under AUD 200 000 and is encouraged for low risk contracts valued up to AUD 1 million (Box ‎2.6).

2.2.2. Process simplification

Document standardisation also supports the simplification of public procurement processes. Together, these efforts help greatly reduce the administrative burden for SMEs. The European Single Procurement Document (ESPD), provided for in Article 59 of the 2014 European Directive on public procurement, is a supplier self-declaration tool. Based on a standard form, it offers preliminary evidence concerning exclusion criteria (e.g. criminal convictions, grave professional misconduct) and selection criteria (financial, economic and technical capacity). The full set of supporting documentation, including attestations and certificates, needs only to be presented by the winning economic operators. While supplier selection is a key stage in assessing the credentials of bidders before considering tenders, this approach prevents unsuccessful suppliers from having to provide large amounts of evidence (as further described in Box ‎2.7).

With the introduction of the ESPD, some EU Member States envisage further simplification of public procurement processes, in particular through its integration with databases and/or IT systems for the pre-qualification of suppliers. A report prepared by the European Commission based on a survey of member states and stakeholders shows that the majority of Member States (68%)2 indeed plan to integrate or have already integrated the ESPD with a pre-qualification system, acknowledging the importance of the ESPD as a “building block for the digitisation of public administration.” Another key element in the use of the ESPD to bring about simplification is the “once-only principle”. This means that suppliers should be asked only once at most to provide information, through interconnection and wider use of databases owned by public authorities, to demonstrate that they meet the requirements set out in administrative procedures (European Commission, 2017[17]).

Integration of e-procurement platforms with other e-government systems could also reduce the burden on suppliers to submit certificates issued by other public authorities. In Korea for instance, the shared use of government data through data interchange between KONEPS (the Korean e-Procurement System) and other databases owned by public authorities enabled the elimination of paper submission of business registration certificates and tax payment certificates. Furthermore, for public construction tenders, bidders are not required to submit certificates attesting to past experience, as such information is electronically collected through data interchange with construction industry associations (OECD, 2015[18]). Another example can be found in Finland, where the information related to certain exclusion and selection criteria of Finnish firms – such as unpaid taxes and social security contributions – gets sent to the e-tendering system at the time of the bid evaluation. In this way, the contracting authority could request explanations from bidders before awarding of the contract; this reduces the burden of receiving official attestations and then having to award the contract again if there are discrepancies in the company data.

2.2.3. Clear establishment of the public procurement rules

Regulatory frameworks in OECD countries define different threshold amounts above which competitive procedures should apply. Thresholds are often different depending on whether the procurement is of goods, services or works. For government buyers, meeting the threshold should justify the cost of undertaking a procurement exercise, because of the additional value or cost savings that can be achieved from engaging in a competitive process. For suppliers, the thresholds for a competitive process must be sufficiently high to justify the cost of participating in a tender, yet sufficiently low to provide certainty that government will generate competition rather than arbitrarily select a single supplier.

Advertising procurement opportunities for competitive procurement procedures facilitates SME access. In particular, SMEs benefit from enhanced visibility and easy access through obligations to publish these opportunities on e-procurement systems. Information on upcoming tender opportunities is further enhanced through publication of annual public procurement plans and prior information notices. The OECD Recommendation on Public Procurement also promotes the use of open and competitive tendering, which should be the standard method for conducting procurement as a means of driving efficiencies, fighting corruption, obtaining fair and reasonable pricing, and ensuring competitive outcomes (OECD, 2015[1]). In particular, governments establish clear rules on the minimum number of advertising days so that interested suppliers have sufficient time to be informed and prepare their bids, as is the case for public procurement contracts under EU directives (see Box ‎2.8).

When applying a procurement procedure other than open tender, contracting authorities’ decisions on which suppliers to invite to tender, and the criteria by which they must qualify, have a direct impact on SMEs’ access to public procurement opportunities. Austria addresses this concern by specifying in the Federal Law on Public Procurement (Bundesvergabegesetz 2006) that in cases of restricted procedures3 and negotiated procedures4 without prior notice or without prior call for competition:

• The selection of the economic operators to be invited must take place in a non-discriminatory manner.

• The buyer must change the economic operators that are invited as often as possible.

• If possible, SMEs in particular should be involved in the tender process. 5

In this light, having a clear legal framework in place that provides clear guidance on how to maintain competition and that sets proportionate participation requirements further facilitates SME access to public procurement opportunities.

2.2.4. Adapting the use of procurement instruments and tools for lower-value contracts

SMEs are generally more successful in winning relatively lower-value contracts; the value of public procurement contracts won by SMEs thus does not display the same public procurement market distribution of contract values (Figure ‎2.3). While Figure ‎2.3 only represents SMEs’ share for above-threshold contracts, the study also estimated SME participation in below EU-threshold contracts. While there is a higher representation of SMEs in below-threshold contracts, their share in terms of numbers is larger than their share in terms of value. This reaffirms that relatively lower-value contracts are generally won by SMEs.

Figure ‎2.3. SMEs’ share of public contracts won in selected European countries

Average total of SMEs’ share of above-threshold contracts won, by aggregate value and number of contracts for 2009-11 (percentages)

Note: The line in each figure represents a line of equality, which means that the vertical or horizontal distance between the data point and the line represents the difference between the values on x- and y-axes.

For methodological discussion of the calculation of SMEs’ share of above-threshold contracts won, refer to (PwC, ICF GHK and Ecorys, 2014[20]).

Source: Adapted from (PwC, ICF GHK and Ecorys, 2014[20]).

The publication of tender announcements on e-procurement platforms greatly helps SMEs to be informed about public procurement opportunities. The use of e-procurement systems is indeed the practice in almost every OECD country (OECD, 2017[2]) (for further discussions on e-procurement systems, see Section ‎2.4). However, the relatively high value and complexity of above-threshold contracts that are advertised publicly – in particular the high level of financial, technical and professional capacity that they require – may not represent the public procurement opportunities where smaller firms can best compete. While this holds true, some countries also recognise the potential strategic leverage of larger contracts on SME performance. For instance, the Procurement Review Policy of Canada obliges all procurements in excess of CAD 2 million to be reviewed for potential regional and industrial benefits.

Indeed, a recent report on SME access to public procurement in the European Union includes a statistical overview saying that “it is important to highlight that SMEs’ share of the total value of contracts below EUR 300 000 in fact slightly exceeds the corresponding figures for the real economy. However, this is more than offset by the huge disadvantage they (micro and small enterprises primarily) have in accessing larger contracts. Whilst one would not expect the largest contracts to be won by SMEs, they could eventually win more lower-value contracts to have their ‘fair share’ of public procurement overall” (EU, 2009, cited in (Nicholas and Fruhmann, 2014[21]).

In this vein, countries have devoted efforts to designing and developing public procurement instruments that could ease the procedural burden on low-value procurements. The example of Italy sheds light on how the development of an e-marketplace facilitated SMEs’ participation in public procurement (Box ‎2.9).

2.3.1. Timely and advance payments

Receiving payments from government in OECD countries often offers high certainty. Yet if payments are not made in a prompt manner, it could pose an additional risk for SMEs. In particular, delays in payments have an adverse effect on the cash flow of firms. For smaller firms in particular, this could severely affect a firm’s liquidity and even force some firms to exit the public procurement market and sometimes even go bankrupt (OECD, 2017[22]).

The problem can be exacerbated when there is no efficient and effective complaints system, and difficulties made even worse during times of financial and economic difficulties, due to restrictions on credit lines and bank loans (Wehinger, 2013[23]).

Governments have implemented measures to put legal limits on the payment period for public procurement contracts. For instance, in the European Union the directive on combating late payments in commercial transactions obliges public authorities to make payment for the procurement of goods and services within 30 days (Box ‎2.10).

While under a legal obligation to make payment within 30 days of the presentation of the invoice, countries have reported that payments are in general made in a timely and efficient manner. For instance, the United Kingdom also commits to support the prompt and reliable payment of invoices. In 2015, UK central government departments had 80% of all invoices paid within 5 days and most of the remainder within 30 days (Crown Commercial Service, 2016[26]).

Yet in order to initiate the payment process, suppliers often need to obtain from contracting authorities a certificate attesting to the performance of the contract. Administrative red tape or complex processes that are involved in obtaining the certificate would thus not be reflected in payment deadline statistics. In France, UGAP, a national central purchasing body, implemented a mechanism that establishes a deadline for public entities to certify the performance of the contracts. Since January 2016, suppliers inform UGAP and the buyer regarding contract performance through an online system. If the buyer in charge of attesting the performance of the contract does not react within 20 days, UGAP considers that the contract has been performed and the terms of the contract respected, and therefore pays the supplier.

Statutory obligation for prompt payment is not limited to European countries. A maximum payment term of 30 days is also applied in Canada and in Australia for contracts valued up to AUD 1 million. Furthermore, the Australian Government’s payment policies stipulate that payment cards (e.g. credit cards) are the preferred method for paying supplier invoices below AUD 10 000. Canada is developing pilots to further reduce payment times, for instance as detailed in an action plan on prompt payment in the construction industry developed by the government-industry working group.

As an additional example, the Public Procurement Service (PPS), the central purchasing body of Korea, provides an upfront payment of up to 70% of the value of a government contract. For some lump-sum contracts for goods valued up to USD 423 800, including orders on unit-price contracts, suppliers are entitled to instant payment. Businesses may also be entitled to instant payment for other goods contracts at the request of the end user. In these cases, payment is made from a special PPS account and then reimbursed by the end user. Though central government entities are entitled to a payment period of up to five days, instant payment allows SMEs to receive payment within as little as four working hours. The collaborative reverse factoring (affacturage collaborative) mechanism developed by UGAP illustrates provision of financial support to further expedite the payment process (Box ‎2.11).

2.3.2. Setting proportionate qualification levels and financial requirements

Excessively high requirements asked of bidders can be one of the major barriers to SME participation in public procurement markets. This could be the result of the risk-averse nature of public procurement officials, or a lack of professionalism on their part.

A disproportionate level of technical and financial requirements for participation in public procurement opportunities precludes a large number of SMEs. In defining selection criteria, the technical and professional capacity requirements should ensure that “the tenderer has the capacity required for the contract in question, rather than the general capacity of tenderers” (Bovis, 2016[3]). At the EU level, the 2014 procurement Directive limits the annual turnover requirement to at most twice the estimated contract value, except in duly justified circumstances, such as for certain high-risk contracts.

The Public Procurement Act in Hungary introduced normative limitations to selection criteria. By law, the contracting authorities’ discretion in determining the selection criteria has been significantly limited:

• The required amount or measure of references shall not exceed 75% of the estimated value or other quantity of the contract; moreover, the law introduced the requirement to accept all references that are equivalent to the subject matter of the contract from a technical standpoint.

• The required total amount of annual income over the previous three years shall not exceed the estimated value of the procedure.

Disproportionate financial guarantees also limit SME participation. This is especially so since SMEs in many countries face difficulties in obtaining financial guarantees, such as bid or performance bonds. They have more difficulties in accessing financial markets and obtaining these instruments under favourable financial conditions due to their low credit ratings and limited financing levels.

In the same vein, unjustified retention of the resources by contracting authorities has a critical impact on SMEs, in particular their cash flow. In this regard, in requiring financial guarantees only at a level in line with the risks of the given procurement contract, authorities could greatly aid SME participation in public procurement markets, and their performance in general.

2.3.3. Supporting SMEs participating as subcontractors

SME representation in public procurement often does not take into account those SMEs that take part in the delivery of public contracts as subcontractors. For large or complex contracts, a SME may not be in a position to be a prime contractor, perform the whole contract, or even tender jointly with other economic operators because of its small size, specialisation or limited resources. Subcontracting may therefore provide good opportunities for SMEs to perform some of the services or works included in a project. In this way, subcontracting can facilitate the access of SMEs to the public procurement market (SIGMA, 2016[14]).

Promptness and certainty of payment also constitute a key area of support for SMEs that participate in public procurement opportunities as subcontractors. In general, there is a low degree of transparency of payment between the prime contractors and subcontractors. In order to protect the subcontractors from unfair treatment, governments have put in place various measures to better monitor the payments to subcontractors.

Subcontractors could be exposed to demands for price reductions, delayed payment or non-payment, and to use of dual contracts (see Box ‎2.12) at the post-award stage due to the lower degree of transparency and accountability for payments among private companies. Governments are considering ways to ensure timely payment not only to prime contractors but also to subcontractors, such as through the possibility of direct payments to the latter, such as in Poland and the Czech Republic. In Spain, contracting authorities are able to monitor the payments of main contractors to subcontractors. Development of the subcontractor management system for government contracts in Korea is an example of the use of electronic platforms to better manage subcontractors.

2.4.1. Increasing transparency of public procurement opportunities

E-procurement systems, referring to integration of digital technologies in the replacement or redesign of paper-based procedures throughout the procurement cycle, increase transparency by improving access to public tenders and allowing timely diffusion of information to diverse stakeholder groups. This information facilitates the participation of more suppliers, especially SMEs, in public procurement processes through a reduction in marketing and transaction costs. Indeed, SMEs’ lack of knowledge of opportunities to supply the public sector had been identified as a major hindrance to their participation (Fee, Erridge and Hennigan, 2002[28]). The development of e-procurement systems has mainly focused on their functionality as an informational platform; every OECD country has an electronic procurement platform on which information on public procurement opportunities and award notices are published (Figure ‎2.4).

Figure ‎2.4. Functionalities provided by the e-procurement systems in OECD countries,2016

Note: For electronic submission of bids and invoices, the data exclude submission by emails.

Source: 2016 OECD Survey on Public Procurement.

Special attention is paid to making information available to suppliers about upcoming public procurement opportunities. Such information, through for instance annual procurement programmes or plans, not only helps contracting authorities better plan procurement activities and control their spending in a more structured way, but also is crucial for suppliers to remain informed so as to plan and prepare for them. Reflecting these benefits, public procurement plans are published on e-procurement systems in 80% of OECD countries (Figure ‎2.4).

Central purchasing bodies, as contracting authorities responsible for centralised purchasing, do what they can to make this information available. Additionally, CPBs very often actively communicate about upcoming tenders in order to promote participation of suppliers, including SMEs (Figure ‎2.5). In addition to providing information through online publications, many CPBs and large contracting authorities organise events to better explain their needs and the upcoming opportunities; this is the case of the OGP in Ireland, which organises “meet the buyer” events together with Enterprise Ireland.

Figure ‎2.5. Enhanced information about upcoming tenders in advance by the CPB

Source: 2017 OECD survey on strategic use of public procurement to support SMEs.

At the same time, lack of visibility, especially of lower-value contracts, along with a high administrative burden, has been identified by SME associations as the toughest challenges to accessing public procurement opportunities. Some countries addressed this issue by developing electronic tools to enable businesses and in particular SMEs find small value procurement opportunities. For example, the Contracts Finder website in the United Kingdom is an example of a country’s efforts to increase the availability of information on smaller value contracts (Box ‎2.13). For the example of the development of an e-marketplace in Italy – MePA – see Box ‎2.9.

2.4.2. Reducing transaction costs

The use of digital technologies in public procurement, and in particular the development of e-procurement systems, has greatly helped simplify public procurement processes. By definition, e-procurement implies standardisation, streamlining and integration of processes. The role of e-procurement in improving public procurement systems is also recognised by the OECD Recommendation on Public Procurement (OECD, 2015[1]).

Transaction costs associated with public procurement processes disproportionately affect SMEs. E-procurement systems covering the whole procurement cycle enable cost and time savings through automation and standardisation of the procurement process, thus bringing about efficiency benefits for suppliers and the public sector. They could also support effective implementation and monitoring of policies by facilitating data and information collection.

Countries have indeed underlined the benefits to SMEs of the increased efficiency and reduction of administrative burdens that result from standardising and integrating processes. Calls for tender that take a structured format, shorten procurement process times, and reduce administrative burden by removing paper and envelopes and allowing for electronic submission of bids also reduce transaction costs for SMEs in doing business with the public sector.

Electronic submission of invoices also delivers major improvements not only in payment timescales but also in reducing transaction costs. There is an academic study that establishes the link between the low involvement of SMEs in state procurement with a lack of electronic systems in order processing and invoicing (Karjalainen and Kemppainen, 2008[29]). At the OECD level, only about one-third of countries have enabled the electronic submission of invoices through central e-procurement systems (Figure ‎2.4). Measures to implement electronic invoicing are gradually being devised by European governments for public authority contracts under procurement legislation. (European Commission, 2016[30]).