Socio-economic impact of public procurement reforms

This note explores socio-economic impacts from procurement reforms by highlighting examples from various countries. It aims to illustrate the increasing attention paid to the use of public procurement to achieve socio-economic outcomes, from the large size of the public procurement market, which in some countries constitutes as much as 40% of the GDP.

Many reasons exist as to why the public sector may wish to derive socio-economic impacts from procurement reforms. These include: value for money, through making the most of budgets and buying on whole life costs; developing local capacity and employment; driving innovation as procurement can be used to develop new ideas; improving ethics and transparency; and securing sustainability.

Examples of the use of regulated procurement as an instrument to achieve socio-economic impacts from procurement reforms abound in many countries. For example, besides using public procurement to stimulate economic activity (e.g., by requiring foreign contractors to use local labour and resources in performing public contracts), many countries use their procurement activities to protect national industries, to improve the competitiveness of certain industries, to remedy regional disparities, and to pursue more direct social policy functions. Such social policy functions may include fostering job creation, the promotion of fair labour conditions, the prohibition of discrimination against minority groups, (including the encouragement of equality of opportunity between men and women), the improvement of environmental quality, increased use of the disabled in public contracts, and preferential procurement policies to support designated national industries and people. Some countries also use public procurement to provide support for small and medium-sized enterprises, and to address concerns such as corruption and ethical issues, human rights violations, and sustainable development.

As a first example, South Africa illustrates these imperatives through its procurement reforms, which focused broadly on two areas: the promotion of principles of good governance and the introduction of a preference system to address certain socio-economic objectives.

Specifically, s. 217(1) of the country’s Constitution (enacted in 1996) requires the procurement system to be fair, equitable, transparent, competitive and cost effective. S. 217(2) then establishes the promotion of socio-economic objectives as it permits organs of the state to implement a preferential procurement policy to promote the advancement of people historically disadvantaged by unfair discrimination on the basis of race, gender or disability.

Further, s. 217(3) then establishes the manner in which to implement South Africa’s preferential procurement policy. Pursuant to that provision, South Africa enacted further legislation – the Preferential Procurement Policy Framework Act (PPPFA) 2000 and subsidiary regulations in the form of the Preferential Procurement Policy Framework Regulations 2011. These inter alia prescribe requirements regarding integrating black economic empowerment considerations in tenders. The legislation makes use of award criteria to implement the policy and provides for weightings of 10 or 20% for preferences, depending upon the financial value of the procurement. In evaluating tenders, procurers calculate the points for functionality requirements, price and categories of preference. The contract is then awarded to the tenderer which scores the highest point, unless objective criteria justify the award to another tenderer.

Although this constitutional basis of preferential procurement may not meet an objective test for treating all tenders equitably, it is condoned given the socio-economic goals advanced by the Constitution. There has however been criticism that the PPPFA and its Regulations do not go far enough to achieve the preference, empowerment and socio-economic objectives of the procurement reform, and that the system makes it difficult to achieve government’s developmental and empowerment objectives, as it is not flexible enough to adapt to changing empowerment expectations and developmental policy requirements. Evidence also suggests that most of the preferential considerations in tender documents are highly subjective, and that the adjudication of tenders is sometimes subject to manipulation.

To redress this situation, there are ongoing reforms to the South African procurement system, which include monitoring the effects of empowerment, training for procurers, openness and transparency in the tender process, advertisement of all tender adjudications decisions and the use of clear and unambiguous tender documents. Beside South Africa, other countries have derived socio-economic impacts from procurement reforms.

In 2010, Ghana through its partnership with the Swiss Government established a framework to entrench sustainable public procurement practice, which among other goals, seek to improve lives for women. In Brazil, the public procurement framework contains criteria, which seek to increase participation of smaller businesses in public procurement. In Malaysia, in order to encourage greater participation of the indigenous Malays, tenders from companies owned by indigenous Malays receive preferential treatment in government contracts. In India, procurement rules stipulate that certain goods must be purchased from small and micro-enterprises.

In Canada, for contracts for which aboriginal populations are the primary recipients, procurement is to be restricted to qualified aboriginal suppliers. In Switzerland, a requirement of equal pay between men and women is a condition for public contracts to be performed in the country. In the United States of America, conditions requiring ‘affirmative action’ in employment in government contracts are among the measures, which seek to achieve greater equality for African-Americans. In the United Kingdom, many contracting authorities require contractors to demonstrate wider community benefits that would be delivered through public contracts. Under this approach, the UK ensures that even after a contract has been completed, it leaves the UK economy and society in a more competitive state, by for example ensuring that the contractor trains apprentices during the contract (rather than importing cheap labour). This ensures that the UK workforce is more skilled than before the commencement of the public contract.

What is significant from the above illustrations is that, there is significant scope for countries to pursue socio-economic impacts through their procurement reforms and a number of countries have taken up the challenge. The issue, which then arises, is why more countries are not keying into this imperative. Perhaps, it is time for more countries, especially in the developing world to give appropriate considerations to these issues.

As a first step, there may need to consider whether the country’s legal framework, including procurement legislations, and commitments allow or restrict the pursuit of these goals through procurement. Second, procurement practices in the country may need to be amended to incorporate socio-economic priorities, reflective of each country’s unique circumstances. Third, policy makers and procurement practitioners may need to provide commitment to the goals.

Procurement officers may also need to be trained on the benefits that can accrue from integrating socio-economic priorities in procurement practices and contract conditions. Thus, they should be provided with practical tools such as relevant templates for tender documents and contracts. It may also be necessary to engage in awareness raising activities for procurement staff and the supplier community, and targeted training to help influence procurement culture and behaviour.

Activities should also be put in place to ensure early engagement with the private sector and other stakeholders to gain their support for the inclusion of socio-economic priorities in the procurement process. In addition, the supply community may need to be supported to reflect such goals in undertaking relevant contracts.

Author: Dr. Ama Eyo

Date: December 2016

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