Framework Agreements for the public administration of ICT services and equipment and SME´s – the Swedish Experience

Co-ordination of public procurement as a cost saver  Trend (?) in the public sector in Europe to coordinate public procurement activities using frame contracts system or framework agreements.  These practices are seen as ways to reduce public procurement expenses. Different EU countries use different framework contract designs.

Coordination potentially an entry barrier for SMEs  But the co-ordination of government procurement and purchasing activities may create entry barriers for small and medium enterprise, which is problematic since one of the most important aspects of procurement design is to promote entry.

Topics  Are frame contracts system, framework agreements etc poor in this respect, i.e. do they work to deter the entry of small and medium enterprise?  What are the experiences of the different EU countries with regard to this issue?  How can the design of public procurement using frame contracts, framework agreements etc be improved to promote entry of small and medium enterprise?

Statskontoret  co-ordinates state procurement activities.  coordinates public procurement in the area of information and communication technology (ICT)  procures general framework agreements for the public administration of ICT services and equipment.

Government assignments to Statskontoret  Obtain savings for the government by effectively coordinating government procurement/purchasing  Obtain better conditions and lower costs for the public administrations use of equipment and services in the area of information and communication technology.

Regulation (SFS 1998:796) of coordination of gov. procurement 1§.This regulation comprises rules regarding procurement coordination in order to bring about savings for the state. The regulation applies to authorities under the government.

Regulation (SFS 1998:796) of coordination of gov. procurement  2§ For goods or services that authorities buy often, in large quantities or that cover high values, framework agreements or other common agreements shall exist that make procurement more efficient.  In that connection the possibility of the small and medium enterprises to participate in the procurement shall be considered.

The Department for Procurement at Statskontoret  The department consist of two units: (i) the unit for coordination of goverment procurement and (ii) the unit for procurement of framework agreements for the public administration of ICT services and equipment.  In total, 26 people are working at these two units.

 The department of Procurement is funded through a fee calculated as 0.7 percent of the total sale on a particular general framework agreement.

What is a framework agreement and how does it work??  A framework agreement is an agreement that is used successively during the contract period.  For every product area (software, pc, servers etc) Statskontorets make agreements with a number of suppliers.

 A government agency may now order products directly on the agreements without making a procurement on its own.  The way this is done is through an inquiry to one or several suppliers..  Statskontorets general recommendation is to make an inquiry to all suppliers that received a framework agreement and fulfill the needs.

 The inquiry should describe the need the agency wants to fill and the answer from the supplier should describe how the need can be met.  When the inquiry is made to several suppliers there is, de facto, a second-stage of competition between the suppliers (in accordance with dir. for public procurement 32.4).

Some ICT-products for which there exists framework agreements  PCs  Servers  Copiers and printers  Software  Telephone and communication services  Information supply services

Benefits of using framework agreements  Practical.  Increase flexibility.  Lower transaction costs.  Lower prices due to economics of scale in purchasing.

Costs of using framework agreements  Konkurrensverket, the Swedish competition watchdog, criticize the use of framework agreements on the following grounds:  May prevent entry from small and medium size enterprises and thereby reduce participation from SME´s, which is bad for competition.

Specific areas of critique  Framework agreements with several suppliers without a predetermined order of buying.  Framework agreements with non-specified quantities.  Handling of subsuppliers/retailers.

Two important issues  Is Konkurrensverket right? Do our framework agreements for ICT products prevent entry from SME´s?  What have we done to facilitate participation from SME´s?

Participation from SME´s – a look at the data  Out of 81 suppliers with a framework agreement 10 are firms with less than 10 employees, 26 are firms with employees, 33 are firms with employees, and 12 are firms with more than 250 employees.

Examples of SMEs with framework agreements  Many examples that small and medium size enterprises both participate in the procurements and compete successfully.  Information supply services: Crecendo Communications, 35 employees Init AB, 36 employees.

 IT-consulting: Citat, 3 employees IT-arkitekterna, 18 employees Matai Consulting, 5 employees Objektfabriken, 7 employees Real Sense, 18 employees Spinator, 3 employees Sysnet IT-konsult, 4 employees.

How do we promote entry from SME´s?  One strategy for facilitating entry of small and medium size enterprises is to split the procurement into smaller parts where it is possible for a firm to submit a bid on one or several parts.  One particular form of this that we use is to divide the suppliers into A and B suppliers.

 A-suppliers are typically large firms with capacity to supply a large volume of products and services.  B-suppliers are typically smaller firms, specialized on particular areas of the procurement.  The idea behind is that large firms should compete with large firms, and small firms should compete with small firms.

 Due to the division of firms into A and B suppliers, small firms that lack capacity to supply all the demanded products can participate.

Small firms may also participate as a subsupplier/retailer  It is common that the main supplier on a framework agreement have a number of retailers or subsuppliers.  Among the retailers are both small and large firms.

How much do different firms sell on framework agreements?  For PCs there was 13 framework agreements in year 2003 (7 for Laptops and 6 for stationary PCs).  Total sales on these framework agreements were about 2 billion SEK in 2003 (Laptops 452 million and stationary PCs 1200 million).

Market shares for Laptops  Dell 45% of total sales  HP31%  FSC16%  Network4%  EUD1.5%  ACER<1%  DGD<1%

Market shares for stat. PCs  Dell41% of total sales  HP27%  FSC15%  IBM14%  Network2%  Scribona<1%

 This picture is rather typical. Sales are not evenly divided betweed the firms that have framework agreements.  The pattern of variation in sales differ between different product areas, however.  The dominance of one firm, as in the case of PCs, stand in contrast to for instance network products and services where market shares are much more evenly divided between firms.

What the gov. agencies say about our framework agreements?  In a study conducted by Statskontoret in 2003, 94 percent of the government agencies were using frameworks agreements.  In total, 40 percent of all procurement are done with framework agreements.  Main reason for using framework agreements it that is lower transactions costs (60 percent say that the cost saving is greater than 10 %).

 Often more than 10 percent lower prices due to framework agreements.  The agencies usually choose suppliers that are located near the agency.  Over 50 percent of the agencies say that they will increase their use of framework contracts in the future.

Do the benefits outweigh the costs?  At present, the answer must be ”YES”. The evidence so far indicate that the benefits of the framework agreements used by the Swedish government outweigh the costs.  However, it is important to be aware of the potential harmful effects of framework agreements on competition, and especially on the opportunities for SMEs to participate.