Does your local government get a good deal when it buys paper clips, computers, or garbage collection services?
That depends on how such goods and services are procured. If contracts are awarded without competition, with little publicity and inconsistent rules for bidders, chances are good that prices will be inflated.
That was essentially what Adalberto RodrÌguez Giavarini found when he accepted a job as treasury and finance secretary for the City of Buenos Aires in early 1996. With a procurement budget of around $1 billion, or 30 percent of the total city budget, the city government had reason to be concerned. Based on evidence that prices on many municipal contracts were as much as 30 percent higher than what was available on the open market, the city leadership ordered RodrÌguez and other officials to implement a sweeping overhaul of procurement practices.
In a paper presented at a recent IDB conference on "efficiency and transparency in public sector acquisitions," RodrÌguez described the city's new procurement rules and provided some startling evidence of their impact. First, officials set out to eliminate "closed procurements," where only a limited number of companies were allowed to bid for a contract, and greatly expanded commercial advertising of upcoming contract opportunities. The result, said RodrÌguez, was an immediate surge in the number of companies submitting bids.
Second, officials began using a database of "reference prices." before awarding a contract, procurement officials can now quickly check the latest market prices for any product or service and compare it with bid prices.
The results of these changes were immediate, RodrÌguez said. When the city requested new proposals for an expiring contract to provide food services to 29 metropolitan hospitals, 34 companies offered competitive bids. The new contract was awarded for just under $32 million, or 47 percent less than the $59 million paid to the previous contractor for the same services.
Comparable savings materialized as the city awarded contracts in other sectors. According to RodrÌguez, Buenos Aires saved 37 percent on food services for public schools, 45 percent on garbage collection and public lighting maintenance, and 60 percent on contracts to run communal kitchens. Overall, the city saved $200 million in the first full year following the procurement reforms.
RodrÌguez said the city has also improved its relationship with suppliers by overhauling its payment system so that contractors are paid on time. Deficiencies in the previous system, in which payments were decentralized and issued by the unit that had purchased a service, led to chronic payment delays that contractors ultimately used to justify their higher prices. The city has now centralized the payment system through the creation of a single account managed by the general treasury office.
"The financial integration allowed by a single account favors transparency and tends to reduce discretionary powers," RodrÌguez states in his paper. At the same time, the city is in the process of decentralizing the purchasing side of the procurement process. Why? Because letting each division within the city government control the purchases of the goods and services that it uses eliminates several layers of bureaucracy and makes the procurement process more agile.