Economic Research Forum (ERF)

Public procurement: the value of making global commitments

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The World Trade Organization’s Agreement on Government Procurement aims to ensure that public procurements in signatory countries are conducted in a competitive, non-discriminatory and transparent manner satisfying the conditions of integrity. This column reports research showing that the agreement promotes competition, reduces corruption and delivers better value for taxpayers’ money.

In a nutshell

A major potential benefit from joining the WTO’s Agreement on Government Procurement (GPA) is the possibility of realising enhanced competition and improved governance in signatories’ own procurement markets.

The GPA’s provisions on transparency, non-discrimination, integrity and competition will certainly benefit developing countries.

It is surprising that to date no countries in the MENA region have become signatories.

The Agreement on Government Procurement (GPA) of the World Trade Organization (WTO), which came into force on 6 April 2014, provides its 47 members with a framework for ensuring that public procurements are conducted in a competitive, non-discriminatory and transparent manner satisfying the conditions of integrity. Our research examines the effects of the agreement on how public authorities in the signatory countries spend taxpayers’ money on goods, services and infrastructure.

Public procurement, which constitutes 12% of GDP in OECD countries, is typically governed at the national level by setting rules that try to balance a number of goals. Of these goals, transparency, non-discrimination, integrity and competition are probably the most important (Togan et al, 2017).

The aim of transparency is to ensure that the rules are followed and that non-compliance can be identified and addressed. It involves five main elements:

  • Public disclosure of the rules that apply in the procurement process.
  • Publication of procurement opportunities.
  • Prior determination and publication of what is to be procured and how submissions are to be considered.
  • Visible conduct of procurement according to the prescribed rules and procedures.
  • A system to monitor that these rules are being followed.

The effect of transparency is a higher level of competition. Since the public authorities must make procurements publicly known, more suppliers will be aware of the opportunities. Furthermore, suppliers that know that their potential rivals will have access to the same information can deliver proposals that are competitively superior. This ensures that the contracting authority can pick the best possible proposal.

The principles of equal treatment and transparency are closely related to the principle of non-discrimination. Equal treatment requires that comparable situations are not treated differently and that different situations are not treated similarly unless such a difference or similarity in treatment can be justified objectively. Thus, a contracting authority must act fairly in the course of public procurement, and all competitors must have an equal opportunity to compete for the contract.

Discrimination against foreign firms in an international trade context includes price preferences, outright bans on foreign bidders, local-content related restrictions such as offsets, and standards adopted in the procurement process that raise the costs of foreign firms. As long as the non-discrimination principle in public procurement is observed, all these practices must be avoided.

Integrity in procurement involves both the avoidance of corruption and abuse and the notion of personnel involved in procurement acting ethically and fairly, avoiding any conflicts of interest.

Corrupt practices might involve collusion between government and bidders, such as awarding contracts on the basis of bribes; awarding contracts to firms in which a public official has a personal interest; awarding contracts to firms in which a public official’s friends, family or business acquaintances have an interest; and awarding contracts to political supporters. Such corruption, which can occur in both the award and execution of contracts, may prevent public authorities from achieving value for money since contracts will not be awarded to the best firms.

Economic research typically emphasises the value of competition in leading to lower prices and higher quality products. In public procurement, the main issues are preserving free entry and the absence of collusion. Competition will be promoted in procurement markets by prohibiting discrimination, adopting transparent and standardised procedures for awarding contracts, opening procurement markets to international trade and preventing collusion among alternative suppliers.

The four conditions of transparency, non-discrimination, integrity and competition form the primary goals of a sound system of public procurement. In principle, countries can achieve these goals by their own efforts. But it is questionable how successful such an approach will be.

An alternative approach is to join the GPA, which is outside the WTO’s ‘single undertaking’ in that it is not binding for all members but only for the signatories. The Agreement allows for the opening of procurement markets to international competition.

The GPA’s provisions on contract awards, qualification of suppliers and conditions on procurement process ensure the achievement of transparency and non-discriminatory conditions of competition between suppliers, resulting in cost savings to procuring governments.

In addition, access to the WTO’s dispute settlement mechanism helps to enforce fair and non-discriminatory competition in public procurement. As a result, the GPA is expected to bring about lower prices, better quality, efficiency gains and reduced corruption.

A major potential benefit for countries that join the GPA is the possibility of realising enhanced competition and improved governance in the their own procurement markets. Our research examines empirically whether the GPA has been effective in promoting non-discriminatory, open, transparent and competitive public procurement (Taş et al, 2017).

We analyse a unique dataset provided by the European Union (EU) covering more than three million tenders conducted in the European Economic Area plus Macedonia and Switzerland over the period 2006-15. Our main results are that:

  • The GPA significantly increases the probability that a foreign firm will win a public procurement contract in the EU member and affiliated states.
  • The GPA promotes a more competitive environment by increasing the number of offers for a given contract.
  • The GPA significantly lowers the risk of corruption by decreasing contracts with a single offer, reducing the success ratio of firms and allowing firms with lower network strengths to win contracts.
  • The competitive environment in a country is a significant determinant of the efficiency of public procurement. An increase in the number of offers decreases the contract price with respect to the estimated cost.

Our research shows that the GPA commitments will secure better value for the money spent by governments in their procurement processes as a consequence of applying the principles of competition, non-discrimination, transparency and integrity.

Given that the GPA’s provisions will certainly benefit developing countries, it is surprising that to date no countries in the MENA region have become signatories.

Further reading

Taş, Bedri Kamil Onur, Kamala Dawar, Peter Holmes and Sübidey Togan (2017) ‘Does the World Trade Organization Government Procurement Agreement Deliver what it Promises?’, unpublished paper.

Togan, Sübidey, Bedri Kamil Onur Taş and Servet Alyanak (2017) ‘Public Procurement in Turkey’, in The Internationalization of Government Procurement Regulation edited by Aris Georgopoulos, Bernard Hoekman and Petros Mavroidis, Oxford University Press.

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