Three myths keeping government procurement stuck in the past

Governments worldwide spend $9.5 trillion annually procuring everything from hospitals and bridges to pencils and brooms. To meet the Sustainable Development Goals by 2040, however, the world economy needs an injection of $97.5 trillion in infrastructure, according to the Global Infrastructure Hub. According to the IMF, meanwhile, there is an efficiency gap of 30% between public capital and the quality of the resulting infrastructure - which makes it more even more important for governments to create a more inclusive and efficient public procurement market.

Although a data-driven approach is beginning to transform business environments and governance, the world of public procurement - picture long corridors of dusty paper files and slow, secretive processes - remains stuck in the past.

When Carillion, the UK government’s second-largest contractor, went into liquidation earlier this year, it was some time before the British government was able to understand how many contracts it had with the company and how many subcontractors were going to be affected by the situation. In an optimised procurement environment, this should have been easy; all the data would have been centralised, linked and published, but this wasn’t the case.

Government officials and incumbent contractors who oppose transparency will often argue that opacity of this kind is a good thing. It protects competitiveness, commercial confidentiality and prevents collusion. The public shouldn’t need to know the details of public contracts. Those who need to know, know. But are they right?

A recent report by the Open Contracting Partnership interviewed 70 experts from more than 20 countries, and unearthed several myths that are hindering the open data revolution and keeping government contracts in the dark. Let’s take a look at three of them:

1. Requiring transparency of suppliers improves, not deters, competition

Doing business with government is a challenge for the private sector - especially smaller, newer enterprises. While it provides a stable channel for generating revenues, the opacity and corruption associated with it will put off many companies who are not ready to assume the risk of engagement, or who cannot afford to lose money. Heavy-handed government procedures and paperwork can also be a huge barrier. Most businesses invest time and resources in understanding their competition and building a differentiated offering. This is harder for small enterprises to accomplish, which puts them at a significant disadvantage. More information on public contracting levels the field for competitive intelligence.

In Ukraine, the government was able to halve the perception of corruption, grow its supplier base by 45% and save $1 billion on procurement by introducing a transparency law, and publishing open data on an award-winning open source e-procurement system based on the Open Contracting Data Standard. Businesses are looking for this information. Searches for information on contracts in Ukraine have grown by a thousand-fold. In Colombia, half of the contractors who won government bids under its new, more open procurement system in 2015 had never participated in public contracting before.

The evidence suggests that having access to information on existing and past tenders and awards helps aspirant businesses to research the marketplace and to know when contracts come up for review. In Slovakia, the average number of bidders doubled after procurement reforms required the default publication of contracts and the use of e-procurement systems.

A similar study looking at procurement patterns across Europe analysed over 3.5 million procurement records and found a clear correlation between publishing more information about tenders and a reduced likelihood of single-bid contracts, equivalent to savings of about €3.6-6.3 billion per year.

A lack of transparency can also discourage innovation, as greater competition encourages suppliers to come up with the best solutions for solving and delivering public services.

Putting contracting information in the open also allows business and civil society to monitor who gets the contracts. It is shocking that women-led businesses supply only 1% of the global public procurement market. Many countries, including the Dominican Republic, South Korea, Indonesia, South Africa and the US have brought in policies to limit competition for tenders in favour of targeting women-owned businesses. This is important for reaching the Sustainable Development goals, as women entrepreneurs have been found to reinvest up to 90% of their income for the benefit of their families and communities.

2. Transparency does not promote collusion and cartels. It prevents them

Collusion plagues all procurement markets. The myth is that more information allows firms to identify competitors, and organise price-fixing or bid-rigging. In practise, this seems less likely.

Cartels exist in highly concentrated markets where it is easier to spot and control suppliers, so businesses already know who their competitors are. If anything, more transparency decreases the lifetime of a cartel. A study carried out on a sample of firms indicted by the European Commission for forming illegal cartels found that disclosing contracting information actually decreases cartel duration, because it allows the cartel to detect a cheating member earlier than if it had to rely only on self-reported information.

There is also some evidence to suggest that more transparency can make it easier for governments to spot price-fixing. In Colombia, the case of the City of Bogota’s school meal programme, open and transparent processes helped end a suspected $22 million price-fixing scheme, and today reliably provides more than 900,000 high-quality meals for schoolchildren each day. A $136 million market that was previously shared between 12 companies is now spent among 55 specialized producers.

3. Transparency can expose commercial secrets. It doesn’t have to

It is often argued that more transparency will endanger commercial confidentiality - but this information is already freely available in many countries without any apparent harm. A review of defence contracts in Australia, perhaps the most secretive part of government, shows that only 2.7% of contracts were actually flagged as confidential. Simpler contracts and better publishing guidelines can protect the few exceptions for national security and commercial secrets. Who got the contract and what it was for is not commercially sensitive. Coca Cola’s secret formula is. The latter should not be in a government contract.

In most jurisdictions, financial and technical proposals and proposed prices aren’t disclosed until a contract is awarded. When there is a legitimate conflict between the right to know and the right to privacy, some personal data can be disclosed without endangering the privacy of individuals, through for example anonymization or aggregation.

A recent inquiry by the UK House of Commons’ Public Accounts Committee found that private companies contracted by the government would be willing to disclose more information than was typically made available and that they would comply with many of the freedom of information (FOI) requests that are made in relation to their contracts. Resistance to disclosure, in their view, came mainly from government departments.

This information is critical for public scrutiny. Examining existing best practices, the Open Contracting Partnership’s report provides five principles for deciding what information to publish:

- Disclosure should involve minimal redaction

- All information that is not legitimately sensitive should be disclosed unredacted

- A clear and detailed justification for redaction should be provided

- It should be stated how long/what period of time the information is considered sensitive

- Withheld information should be disclosed at the moment it ceases to be sensitive

Decades of economic theory have taught us that markets thrive when all actors have access to the same information. Asymmetry of information creates room for unfair practices and an administrative burden for the companies, civil society, citizens and government who have to deal with thousands of FOI requests about public contracts every year.

There is a better and more transparent way for governments to use public money - one that incorporates disclosure, engagement and open data at the heart of it. Publishing government contracts are now standard in many countries. There is a growing movement of countries who are using transparent procurement processes and standardised open data to make this information as useful as possible to provide real-time insights, leading to better decision-making and rebuilding trust in government procurement markets.