Outsourcing Procurement in the Public Sector, A Case Study The Asian Development Bank aims for an Asia and Pacific free from poverty. Approximately 1.8 billion people in the region are poor and unable to access essential goods, services, assets and opportunities to which every human is entitled. Established in 1966, we are a major source of development financing for the Asia and Pacific region.  With more than $17.5 billion in approved financing, and 2,800 employees from 59 countries, ADB - in partnership with member governments, independent specialists and other financial institutions - is focused on delivering projects that create economic and development impact.  Whether it be through investment in infrastructure, health care services, financial and public administration systems, or helping nations prepare for the impact of climate change or better manage their natural resources, ADB is committed to helping developing member countries evolve into thriving, modern economies that are well integrated with each other and the world.  Jeff Taylor Operations Services and Financial Management Department Asian Development Bank

Introduction Project design will generally include procurement capacity and risk assessments Sizeable amounts of MDB lending has been dedicated to capacity development Question to consider: Do executing agencies have the capacity to manage procurement? Can the private sector undertake procurement?

Do executing agencies have the capacity to manage procurement? Is actual capacity insufficient to meet procurement needs? What are the costs of maintaining or building procurement capacity? Does the agency have the financial resources to invest in the procurement function? Is delivery of procurement a core mandate? Are the transactions repeatable?

Can the private sector undertake procurement? Does the law allow it? Is there an existing domestic market? Long term or transactional agreements? Full outsourcing (Agency) or partial? Costs and fee structure (percentage; target pricing; success fees etc.) Risks – dependency; lack of control; quality etc.

Procurement Agents in the Public Sector Less of an agency (outsourced role) more advisory/consultancy Public procurement regulations (and MDB policies) can constrain the potential benefits Shorter term relationships that deliver less value Focus on the agents fee and not transactional benefits and value creation

Procurement Agents in ADB Projects ADB Experience

Procurement Agents in ADB Projects ADB Experience Weak procurement capacity harms projects

Why Does East Asia Complete Evaluations twice as fast? China’s Use of Procurement Agents Functions of PAs: a. Decision making and consultation. PAs provide professional advice on the relevant laws, the market and suppliers  b. Coordination. PAs coordinate the transactions and relations among all involved  c. Administrative function. PAs handle all the administrative tasks involved in the public procurement activity, including importation and tax relief requirements Source: Foreign Capital & Technical Import Center, Ministry of Railways, PRC

China’s Market-Based Model Advantages of Procurement Agents: Minimizes information asymmetry Reduces legal risks Professionalism Contributes to advancement of new and international practices Accreditation of Procurement Agents Impact of a regulated fee structure (CBTA estimates) Value of PRC’s tendering market (2012): US$2 Trillion Gross procurement industry revenue 0.01% Gross profit 11% of revenue

Centralized Procurement Agency Consip, Italy From 50,000 purchasing entities to single a centralized agency Public spend for goods/services accounts for 8% of GDP (US$162 billion) 40% spent on generic goods Public agencies that buy from Consip save around 28% of purchase price

Centralized Procurement Agency Korea’s Public Procurement Service Source: Ministry of Strategy and Finance, Republic of Korea (2011) Source: Public Procurement Service, Republic of Korea (2011)

Centralized Procurement Agency Korea’s Public Procurement Service Advantages Disadvantages Centralized Procurement Economies of scale Accumulated expertise and data Focused monitoring for transparency and traceability Effective use of government procurement as economic policy tool Complex and longer procurement processes Limited choices for the procuring entity Decentralized Procurement Freer choices for the procuring entity Shorter process time Lower professionalization Lesser standardization Loose monitoring – risk of moral hazard Source: Public Procurement Service, Republic of Korea (2011)

Centralized Procurement Agency Philippines’ Procurement Service Source: Procurement Service, Department of Budget and Management, Philippines (2012)

Philippines’ System Agency-to-agency, like the centralized approach of PS-DBM Outsourced procurement of non-commonly used goods and works to private or public agencies Allowed by IRR of RA 9184. Guidelines to be issued Procurement management

Conclusion Public procurement can: Around 8-20% of GDP As high as 30% of total public expenditure Leakages through fraud, abuse and waste can be 20-50% of spending (WB and OECD) Ex.: Percentage of difference between highest and lowest prices of similar goods in UK: Price Range % Variation Toner Cartridge (per cartridge) £41 to £89 117 Electricity (day rate kWh) 4.8p to 8.3p 73 Box of 5x500 sheet A4 (80 g/m²) £6.95 to £14.95 115 Post-it notes (pack of 12) £4.41 to £10.55 139 Source: National Audit Office, UK

Conclusion Advantage of Procurement Agent will depend heavily on reputation and ability to tap markets – increases confidence of market (esp. international firms) and competitiveness Savings generated by successful procurement exercise increases impact of ODA projects Use figure of 20% of spend lost through leakages, but assume conservative estimate of 15% potential savings Juxtapose with ADB’s 2011 procurement portfolio of around US$10.7 B: estimated savings of US$1.6 B (roughly ADB’s annual lending program for East Asia region