Beyond Low Bid: Global Procurement Starting In 2015

Buying complex goods and services by governments in the developing world is a big business that is about to get a lot more scrutiny and is in for some serious change. The changes will cost billions and when implemented will have impacts on literally trillions of dollars in purchases of infrastructure, goods and services.  U.S. businesses have a large stake in the outcome of this process.  Public procurement can represent up to 25-30% of GDP in many developing countries.  The private sector has paid significant attention to how it sources goods and services for itself for decades and has made very large efforts to link those activities to corporate strategy. Now developing country national and sub-national governments, as they get wealthier and as technologies change, are increasingly buying more complex infrastructure, technologies and services.

In 2012, the World Bank began its first ever comprehensive review of its operational procurement policy that it uses and promotes among its client countries. The revision, due in summer of 2015, will be something that many governments will use not only for the purchases of goods and services provided by World Bank loans but will be adopted as a government standard for procurement over time.  Therefore, the process the World Bank is going through will have vast repercussions throughout the developing world.

The revision should address a common complaint from the Bank’s donor nations regarding certain evaluation selection criteria under the Bank’s long-recommended procurement methods, among the most common being the International Competitive Bidding (ICB) method (which has been the required procurement method for all large and complex transactions at the Bank): The Least Cost Technically Acceptable selection model (LCTA) has in many cases put companies from donor nations at a disadvantage since LCTA doesn’t incorporate “non-price factors” such as product quality or maintenance agreements during the bidding process, which has led to least cost bidders winning most contracts. While “non-price factors” have always been allowed for consideration under the Bank’s current procurement policy, there are a number of reasons for why client governments have preferred to dismiss them and settle on “lowest bidder” methods.

One reason for going for lowest bidder has been significant pressure on governments to fight corruption and one source of corruption around the world has come through government contracting. “Lowest bidder” is simple, elegant, and allows for transparency, which in turn addresses the focus and pressure of civil society groups on anti-corruption efforts around procurement.

Another reason is the lack of trust and tacit concerns about government procurement human resource capabilities. In other words, many procurement professionals in developing countries lack the training to use more complex forms of “value-analysis”, and opt instead to settle for the less complex method of low-cost bidding. It is a recognized problem that public procurement functions have suffered from a lack of prestige, professionalism and status.  In developing countries, this problem is even more acute.  In the private sector, purchasing functions have taken on increasingly important roles in companies and procurement professionals are properly compensated for their value add in terms of the savings they generate, etc.  As a result, it has been difficult to attract the strongest human resources to this public sector function—though I would be quick to add that I have met some very capable and sophisticated procurement officers in the U.S. Government.

Forces are bringing about the change in World Bank standard.  One such force has been the rise of China.  Chinese infrastructure companies can often offer the delivery of certain sorts of products, infrastructure and services at a much lower cost than U.S., or other OECD country companies.  If a low bid standard –like LCTA under ICB– for a notional BRICS bank were used, the Chinese would win all the time. Therefore, I think the procurement standards around BRICS Bank projects will prevent this aspirational institution from going anywhere.

The World Bank’s upcoming procurement reform will help institutionalize a shift towards greater emphasis on “value for money” purchasing (which includes non-price factors) as opposed to simple lowest-cost bidding. The Bank’s new policy will feature a greater emphasis on “whole life costs”, which applies “life-cycle cost analysis” (LCCA) in assessing the costs of a project, which may justify a higher initial purchase price of a good or service due to greater cost savings over time.

When the standard is agreed upon and the World Bank issues its paper the real work will begin. Much of the focus in Washington and at other Multilateral Development Banks this year is on how the World Bank policy will differ and how it will look at Life Cycle Cost.  The person leading the review is a widely regarded former procurement czar from New Zealand.  The far bigger challenge over the next ten years will be for governments to learn how to use LCCA to understand the real, long-term costs of a project, and carrying out the change from low bid to a focus on “value for money” procurement.  Do developing country governments have the will to implement these changes to procurement in ways that do not significantly increase corruption?  Do the procurement officials have the adequate training and capabilities?  The U.S. government’s MCC is running a procurement professionalization training program in Indonesia with a goal of creating a certificate training program and a core of 500 procurement professionals trained to a new standard out of several thousand across the country. That program’s cost to the United States is around $46 million over 5 years.  Multiply that by around 100 and you get a back of the envelope idea of what it will cost the world to move to a life cycle cost regime for 100-plus countries.  Currently very little development aid by any wealthy country is spent on procurement systems reform, admittedly an obscure topic when first looked at. Only a subset of countries will want to take on the headaches of professionalizing procurement services largely because it will imply hiring new procurement officers, changing the law, and/or paying for significant training.  Global companies and many countries have a big stake in seeing the new World Bank standards reformed but will have to put significant effort into partnering with those countries willing to do the hard work of actually adopting these standards.

Article Published in Forbes.com on December 12, 2014.

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