Gustavo Piga

1
The Italian system for centralised purchasing and
electronic procurement
Gustavo Piga University of Rome Tor
Vergata THE NEW PROCUREMENT PROCEDURES AND
INSTRUMENTS, Department of Contracts, Malta and
OECD/Sigma Valletta, January 26th
2
The electronic developments in US procurement

• Survey over 47 US states (1998 vs. 2001)
• In Moon (2001), Journal of Public Procurement

• Electronic Ordering from 44,7 to 68,1 of all
  States
• Purchasing Cards from 68,1 to 85,1
• Digital Signature Accepted for Tender Documents
  from 0,09 to 14,9
• Reverse Auction 10,6 in 2001
• E-proc Adoption grows with
• Managerial Innovation
• Centralized procurement with a high level of
  authority
• Size of the State.
• Anyway
• It is also true that ICT development has lead
  public procurement to become more centralized,
  spending and investing in qualified human
  resources to manage purchases. Indeed, the new
  European Directive introduces both e-proc and
  central purchasing stations.
• Italy is no exception. To the contrary .

3
Rationalization Program on Public Spending
Spending for Goods and Services
Total amount of Italian public expenditure for
goods and services sums up to about 100,9
billion, about 15 of overall public spending and
7,7 of GDP
Public spending for goods and services, 2003 ()
Public spending for goods and services eligible
for the Program, 2003 ()
University and other P.A. 5
University and other P.A. 6
CentralGovernment 16
Central Government 17
Local Government 26
LocalGovernment 36
Health bodies 42
Health bodies 52
About 102,3 billion
About 42 billion
3.2 of GDP 20 of discount permanent
reduction 0.4 deficit if so desired
Report on needs for the year 2003 and Consip
estimate
4
Rationalization Program on Public Spending the
aim of the Program

• Define purchasing strategies
• Draw up competitive frame contracts for Public
  Administrations
• Promote the use of e-procurement within the
  Public Administration
• Provide purchasing monitoring tools to the
  Public Administration
• Deliver innovative e-procurement models

Service efficiency and quality
Processsimplification
Cost saving
5
Rationalization Program on Public Spending
The financial act 2000 (December 23, 1999 n.488)
laid down the foundations of the Rationalization
Program for Public Spending on Goods and
Services. Article 26 says
The Ministry of Economy and Finance (MEF),
according to the regulations currently available
regarding suppliers selection, draws up frame
contracts with providers. Within the frame
contract, the selected providers have to accept
any order coming from public administrations.
By means of 2 Ministerial Decrees (February 2000,
May 2001), the Ministry entrusted Consip S.p.A.
with the development and management of the
Program.
6
Rationalization Program on Public Spending

• The following Financial Acts (2001, 2002, 2003,
  2004, 2005, 2006) streamlined the Program scope
  and the roles of involved actors.
• Today, according to the current legal framework
• Frame contracts regard goods and services
• All public administrations (e.g. Central
  Government, municipalities, health agencies,
  etc.) may purchase within the frame contracts.
  Alternatively, whenever they run their own
  tenders, they have to take price and quality of
  the frame contracts as a benchmark. 2006
  Financial Act has contingency plans in case
  public finances worsen
• Our tenders affect all purchases of the Public
  Administration, where a Consip frame contract is
  available, thanks to the benchmarking effect.

7
Consip Task and structure

• Consip is a joint-stock company totally and
  directly owned by the Italian Ministry of Economy
  and Finance (MEF), and it operates exclusively to
  serve Public Administrations
• Consips operations are carried out through two
  Divisions
• the DSIT (Treasury Information System Division),
  with about 300 employees, is in charge of
  managing the Information System of the Ministry
  of Economy and Finance
• the DARPA (PA On-line Procurement Division), with
  about 160 employees, is in charge of implementing
  the Rationalization Program on Public Spending
  for goods and services.

8
Consip Task and structure - DARPA
9
E-Procurement tools
www.acquistinretepa.it
Electronic Shops
e-Marketplace

• Purchases below the Eu threshold
• Direct Purchase or RFQ
• Many to Many approach
• Supplier defined eCatalog
• Purchase Scope
• Low cost
• Highly fragmented

• Purchases within frame contract (through
  traditional tender or on-line auctions process)
• Direct Purchase

• Many to one approach

• Purchase scope
• Large volumes
• Standardized
• Low price volatility
• Demand aggregation
• Slow and High obsolescence

When the good has a rapid obsolescence Consip
resorts, if possible, to ONLINE
AUCTIONS Automatic Technical and economic offer
evaluation
Development of Frame contract through electronic
system
ASP towards other Administrations
Below EU Threshold
Above and Below EU Threshold
10
E-Procurement Portal
On-line services
Registration
Public buyer registration
Data News
Who we are, what we do, what you can buy, how you
can buy, Newsletters, Magazines
Notices
Tender publication, supplier qualification for
Public Marketplace, ....
On-line orders
Opportunity to buy on line using frame contracts
conditions
Marketplace
On line access to public Marketplace
On line auctions
On line access to public auctions
Supplier Area
Information on e-procurement models, correct way
to participate to public tender, ...
Specific Market Area
Data and information on Client market Area
(Central PA, Health bodies, Universities,
Municipalities)
11
Electronic shop Strategy
Objectives
Strategies

• Focus on state of the art in supply market
• Wide range of goods and services
• Constant assessment of service levels

To guarantee quality standards in P.A. purchases

• Direct costs, through
• demand aggregation (economies of scale)
• competition among suppliers
• product standardization
• Indirect costs, through
• on-line bidding and ordering
• process simplification
• centralization of litigation

while reducing
Side effects
Change Management in the Public Administration
Industry dynamics
12
Frame contracts Process simplification
From the traditional.
to the new process of goods and services
procurement
Public Administration activities
Goods/ Services delivery
Payment
Needs analysis
Supplier selection
Possible litigation with suppliers
Contract and tender documentation
Contract signing
Fax / on-line Order
... achieving, in addition, administrative
procedures reductions for suppliers
13
Electronic shops Operational model
Portal www.acquistinretepa.it
Frame Contracts (public tender) and e-shops
activation
Consip
Suppliers
Contracts reporting
Needs Feedback
Monitoring tools
On-line/fax order
Public Administrations
Delivery
Payments
14
Electronic shops Operational model
E-shops represent an open window on the web in
which goods and services selected through tenders
and frame contracts are available to PA
procurement offices registered to the Program
15
Frame Contracts Some examples of unit cost
reduction
70 signed frame contracts and more than 40
product categories by 31/12/05
16
Split of framework contract in many lots
competition issues (1/2)

• Consip started a comprehensive plan of
  cooperation with the Antitrust Authority. The
  objective is to make the tenders handled by
  Consip even more open and accessible to all
  providers.
• This is why, for any tender procedure, Consip
  asks Antitrust Authoritys advice (via the
  Ministry of Economy and Finance) concerning the
  competitiveness of the tender itself.
• The degree of competition in a given procurement
  auctions may depend on the participation
  requirements, rules regarding enterprises
  groupings, and the number and dimension of lots
  in which the contract is divided.

17
Split of framework contract in many lots
competition issues (2/2)

• Length of contract to avoid lock-in (but mind
  collusion)
• Participation requirements should be as low as
  possible and not focus excessively on requests
  which are only indirectly related to the
  execution of the contract, allowing alternative
  means of proof for the capacity to fulfil the
  contractual duties
• Temporary groupings of enterprises and
  sub-contracting are a mean to overcome the
  barriers to entry for enterprises not having the
  necessary critical mass to participate to
  public tenders however it should not be allowed
  in a grouping the presence of two enterprises
  who could match participation requirements
  autonomously
• Increasing the number of lots decreases their
  size hence facilitates participation of SME and
  reduce risk of lock-in on the other hand, more
  and smaller lots may facilitate collusive
  market-sharing agreements and render more
  difficult the exploitation of potential economies
  of scale
• Combinatorial auctions where package bidding is
  allowed can be a way to allow the exploitation of
  possible scale economies while at the same time
  facilitating participation of SMEs.

18
Innovative e-procurement tools On line auctions

• Possible Procurement auction formats
• Descending Auction (English Auction) the price
  starts high and competing bidders cut the price
  until no-one is willing to bid any lower.
• Multiple-Round Auction multiple round auctions
  are similar to descending ones in multiple round
  the price does not decrease continuously but
  round by round with a predefined percentage. A
  multiple round auction is the discrete version of
  the descending auction.
• Sealed Bid Auctions bidders submit bids in
  sealed envelopes the person submitting the best
  bid wins the auction and pays what he bid
  (pay-as-you-bid) OR the person submitting the
  best bid wins the auction but pays only the
  second best bid (pay-as-the-second-best).
• Descending-Clock Auction (Japanese) the price
  decreases continuously in a predetermined period
  of time (e.g. 1 hour) in which players do not
  have to submit bids and they are considered to
  stay in the auction until they decide to exit.
  The prize is awarded to the last bidder remained
  in the auction.
• Anglo-Dutch Auction consists in adding a final
  sealed-bid round (e.g. only for the two best
  bids) to a descending auction, in order to hinder
  potential collusion generated by dynamic.
• The various formats have different advantages and
  disadvantages in terms of information gathered
  by the bidders and by the auctioneer, potential
  collusion, and participation. Some of these
  format my not be allowed by current directive,
  albeit useful in same cases
• Consip experimented the following auction
  formats
• Descending, Multiple round with unlimited n. of
  round, Multiple round with a pre-defined n. of
  round, Sealed bid (pay-as-you-bid).

19
Does e-proc curb corruption?
Procurement and corruption by Lengwiler e
Wolfstetter, in Handbook of Public
Procurementedited by Dimitri, Piga e Spagnolo,
Cambridge University Press, forthcoming in
September 2006

• Possible formats of corruption
• Modify bid of favored bidder to let him/her
  win reverse auction keeps all players active
  until price hits each players cost
• Pre-Auction to determine favored bidder with
  sealed bid tender the purchasing price for the
  taxpayer is higher as winning firm has to pay the
  bribe. Wth reverse on-line auction firm wins, not
  paying bribe, by having taxpayer pay lower price
• After seeing bids, the most advantageous briber
  is approached on-line auction eliminates this by
  making bids public.
• Good! However keep in mind that
• If on-line auction favors collusion, then sealed
  bid electronic auction with proper security
  reduce possibility of corruption ( see Consip)
• Corruption through lower quality of goods and
  services remains a possibility.
• Public e-Procurement Common Technical
  Specifications elaboration using State of the Art
  and Learning Demonstrators. Framework Contract
  ENTR/01/58-TOOLSW DG ENTR.

20
Does e-proc lower collusion?
On-line auctions and collusion (1)

• Strictly speaking, e-auctions increase
  transparency.
• For example, compared to a sealed-bid tender, in
  ascending auction economic operators get to see
  the evaluation of their competitors in real time
  and are allowed to react to it. This increased
  transparency is often positively considered by
  procurers
• Thanks to electronic tools enterprises make
  various offers and at the same time see the
  others bids. In this way already at the
  psychological level competition is increased.
  This in turn leads to better results and savings
  for the Public Administration. Bidders are masked
  with a code, which does not allow them to know
  the identity of others during the tender. In this
  way the Administration tries to avoid
  collusions (cited in Magrini, p. 36).

21
Collusion in auctions

On-line auctions and collusion (2) taken from
Albano e Spagnolo, in Handbook of Public
Procurementedited by Dimitri, Piga and Spagnolo,
Cambridge University Press, forthcoming,
September 2006

• Ascending auctions remove uncertainty about the
  value of the good and make firms bid more
  agressively. But online auctions can increase
  collusion
• competitors get to see, in real time, if a cartel
  agreement is being broken by a defector and have
  the possibility to retaliate with lower prices.
  Knowing this, there will be no defection and
  collusion will be self-sustained, causing harm to
  the Administration
• the openness of the format may scare away small
  firms that anticipate being easily topped by big
  firms during the auction.
• Indeed, current practice seem to show a certain
  caution among EU procurers to choose the
  e-auction method even if available. Sealed-bid
  e-auctions are favored.
• In a sealed-bid, retaliation can occur only in a
  successive tender, if there is one, and therefore
  cartels are less sustainable than in an
  e-auction.
• And .
• Do Framework Agreements facilitate or hinder
  collusion?

22
Innovative e-procurement tools Public
Administrations Marketplace

• The Marketplace is a virtual market in which any
  P.A. can select goods and services offered by
  several suppliers, for purchases below EU
  threshold
• The Marketplace is open to qualified suppliers
  (and goods) according to not particularly
  restrictive selection criteria
• The entire process is digital, using digital
  signature in order to guarantee transactions
  legally

Qualification notice (public announcement)
Buying administrations
Suppliers
Qualified suppliers selected through a
qualification process, starting from the date of
publication of the qualification notice
Public Administration Marketplace

• Central Government
• Universities
• Local Government
• Health bodies

Market
23
Innovative e-procurement tools Public
Administrations Marketplace
Results

• 59 vs 2004

• 274 vs 2004

• 208 vs 2004

550 registered suppliers (81 SMEs) 1.100
Punti attivi registrati
24
Innovative e-procurement tools Public
Administrations Marketplace
25
Innovative e-procurement tools Public
Administrations Marketplace - Major advantages

• To Public Administrations
• costs and process cutting
• potential broadening of suppliers base
• easy access to selected goods (pre-defined
  quality standards)
• information transparency and ease of comparison
  among goods
• purchases logging and subsequent expenditure
  monitoring.

• To Suppliers
• selling cost reduction (due to broadening of
  potential customers base and lower intermediation
  cost)
• higher visibility
• more competitiveness especially in local markets
  (for small and medium sized enterprises)
• B2G introduction, especially for large sized
  enterprises, in addition to existing B2B and B2C.
• WHAT WILL HAPPEN WITH DYNAMIC PURCHASING SYSTEMS?

26
Rationalization Program on Public Spending
Programs results
27
Back-Up
28
Green Procurement
Green procurement policies support represents
an additional goal to frame agreements stipulated
by Consip

• The tender for the supply of paper to PA has been
  worked out also with ANPAs partnership (National
  Agency for Environmental Protection) focusing on
  the definition of eco-compatibility requirements
  
• exclusion of products containing elementary
  chlorine ECF hexavalent chlorine etc..
• Ecolabel, EMAS or ISO 14001 certifications
• The tender on motor vehicles includes a double
  feeding model (methane petrol or gpl petrol) as a
  test to verify the feasibility of a future
  specific tender on ecological vehicles, electric
  vehicles, hybrids (electric-petrol)
  etc..according to the recent European regulation
• Tenders for the supply of photocopiers include
  the collection of disused second-hand
  photocopiers according to the present regulation
• Future tenders on the supply of rubbish skips for
  waste collection will comply with the present
  rules as they will include differentiated waste
  disposal