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Protecting the Little Guy

What does the international promotion video of ChileCompra—the Chilean government’s web portal for public announcements of competitive bids—have in common with Peruvian police boots or with a stream of government contracts in the Bolivian city of Oruro? These are all cases of microenterprises participating in public bidding and competing with the big traditional suppliers.

During the roundtable discussion on “SME Access to Public Sector Markets” at the eighth Inter-American Forum on Microenterprise held in Santa Cruz, Bolivia, in October 2005, it was clear that governments were opening up to doing business with microsuppliers of goods and services.

The experiences of the ChileCompra portal, the Promperú system and Bolivia’s Inverse Fairs are testimony to this progress. While a consensus exists that the public-bidding market needs to be democratized, an in-depth debate persists: Should the state favor microenterprises, or should they have to compete with big providers? Should the government take the initiative, or should society determine the opening of public procurement systems?

Competition, Pure and Simple

In Chile, public purchases are equivalent to 15% of the country’s GDP. Several years ago, the government noted some problems and decided to reform the market by instilling greater transparency and access. Thus, ChileCompra was born: a web portal designed to improve prices and management of government procurements and to promote government business online.

“ChileCompra broke the mold of traditional marketing where each participant establishes multiple relationships with different agencies in order to ensure sales,” says Tomás Campero, ChileCompra’s Director of Public Purchasing and Contracts. “The portal centralizes all of that; in one single site it brings together both sides— government demand and business supply—which makes the government purchasing and private management system more efficient.”

ChileCompra’s key element is its electronic platform, which ties in some 900 agencies and 12,500 public employees with more than 120,000 suppliers. The Chilean government makes 80,000 purchases per month through the portal, which in 2005 transacted US$2.5 billion in purchases, 31.6% more than the previous year.

In ChileCompra all bidders—from the smallest to the most powerful—compete to offer the best products and services at the lowest price. “We’re not interested in using ChileCompra to benefit microenterprises,” Campero says. “Our business is to see that the e-market functions efficiently and transparently.” And it has worked. According to Campero, even though microenterprises and small businesses represent only 18% of the value of Chilean economic activity, through ChileCompra, they transact 30% of the value of public-sector purchases.

The experience has enabled microenterprises to advance in technology and plant their feet within a new entrepreneurial culture, characterized by competitive practices and learning strategies to ensure quality. Campero asserts, “Microenterprises have helped meet complex demands and, thanks to their agility and wide-ranging geography, they can innovate quickly and provide new products that the big guys don’t consider.”

However, the Chilean government was concerned with improving market access, so it eliminated restrictions such as forbidding purchases or contracts to be shared as well as collateral on purchases under US$40,000. All government agencies were required to accept any legal document as an invoice, allowing suppliers to recover their working capital quickly. Through business associations the government made information available, organized training workshops, and signed up those interested. Training instructors were placed at Internet centers, free of charge, and a nationwide telephone help desk was set up to answer questions and give guidance on the supplier process.

Executives were assigned to clear up particular issues, and instructors from ChileCompra were available, on request, to the chambers of commerce to conduct weekly training courses. In addition, an SME observatory follows developments in areas where small bidders rarely participate, while a technical cooperation agency identifies new operational niches.

ChileCompra is now incorporating financial applications. In 2005, a pilot program was set up to use bank collateral in an electronic format and to issue electronic invoices to certify domestic taxes. Electronic payment transfers are scheduled for 2006. And an ordering system in the pipeline will allow banks to certify purchase orders issued, so they can be used as collateral on loans.

Bolivian-Style Fairs

In 2002, the nongovernmental organization Procal won a contest for innovations held by the Multilateral Investment Fund of the Inter-American Development Bank (MIF/IDB) with a project to create a system for more transparent public-sector procurements. It was called Ferias a la Inversa (Inverse Fairs).

The IDB funded training courses to prepare people for negotiating with agencies, municipal governments, the armed forces and the police. “It was a long process of persuasion,” says Dieter Wittkowski, senior operations specialist in the IDB’s Micro, Small and Medium Enterprise Division. “It meant opening the procurement process to micro and small enterprises—in no way a simple matter.”

The difference in access to information between large and small bidders was a major problem. And microentrepreneurs’ difficulties in gaining access to public contracts aggravated these differences. “Now, with this tool, we do things just the opposite from what brought us into poverty,” says Flavia Giménez Turba, the coordinator of Procal’s Inverse Fairs and former top public official in El Alto. “We’ve moved beyond the immediate, which is government purchases, to focus on the structural aspect of market dynamics.”

In traditional markets, the sellers exhibit their wares. Under the Inverse Fairs system, public agencies come out to exhibit, either physically or through a database, what they want to buy. Bids are awarded at public fairs, but private fairs also are held to meet with business owners, and there is an information system that cross-references supply and demand to immediately identify who is requesting what and in what quantities.

On the supply side, Procal and IDB work to inform bidders about the existence of the fairs. They also are involved in training and technical support—including instruction in carrying out required procedures and using invoicing tools—in order to assist small suppliers who are tendering bids and applications in response to requests for proposals. “Business wheels” also have been organized to link groups of suppliers of different goods and services to the government areas that need their products.

“After the first fair, the project was a success, because public procurements had previously been marked by little transparency, corruption and favoritism, and ties to firms that had sources of information to which others had no access,” says Wittkowski. Currently, Inverse Fairs is working with 20 public institutions and agencies that have opened their books to display their budgets and report their annual purchases, with a value in excess of US$100 million during 2004–2005. The Ministry of Defense alone awarded contracts for bids to provide 100,000 products, and shared its entire budget with the microenterprises.

Inverse Fairs has improved access to information on major public projects. Requests for bids are now more accurate, publicized in advance, and available with improved graphic and instructional displays and more details. In addition, the price of obtaining a bid announcement or call to tender has dropped from US$50 to US$1.

The project’s success can be measured not only by the fact that the first four fairs were held on schedule, but also by the growing interest and new markets that are opening with additional financing from other donors. Wittkowski emphasizes the acceptance that Inverse Fairs has achieved. “Part of the project’s success is due to the experienced, committed team that Procal contracted—they believe in what they’re doing and are convinced that it will benefit the country.”

Guaranteed Access in Peru

The Center for the Promotion of Small and Medium-sized Enterprises of Peru (Prompyme) was created in 1997. But it was not until 2003, under a law to promote small and medium-sized producers, that the center was granted the authority to facilitate SMEs’ access to public purchases and contracts, which reaches US$4.8 billion annually.

In Peru, this market has always been highly centralized. While 60% of the national government budget is concentrated in Lima, the city also supplies 68% of government demand for goods and services. Historically, only the large companies developed good business connections with the public sector.

Prompyme set out to change that situation. Iván Mifflin, the center’s executive director, lobbied for public agencies to announce their annual procurement budgets at the beginning of each year. With further lobbying, he managed to get purchases to be divided into small batches, appropriate for the size of microenterprises. But he did not declare victory until a law was passed requiring the government to assign 40% of purchases to small businesses and microenterprises.

Thus, the share of products and services supplied to the public sector by small companies rose from 23% in 2001 to more than 44% by September 2005. Thanks to the law and Prompyme’s work, a group of 42 small producers supplied half of the uniforms budgeted for the national police in 2002. A dozen consortiums of small and medium textile firms tendered the winning bid to manufacture 285,000 promotional T-shirts for the National Office of Electoral Processes, an operation that created 400 temporary jobs.

Prompyme trained the firms and performed follow-up on the bids awarded. The center also works with state procurement managers to eliminate barriers to access and increase transparency. Mifflin has implemented an online course on the center’s website, and approximately12,000 suppliers having signed up to learn to sell to the central government.

One main challenge is to decentralize purchases through pilot regionalization programs. The idea is that in the near future, for example, the Army will purchase boots locally for its troops in Arequipa or Trujillo, and not buy them in Lima. If the strategy works out, Mifflin assures, it will improve efficiency in public expenditures. “At present, social security, which has a national structure, makes all its purchases in Lima,” he says, “and thus it must add freight charges to the cost of all products going to the country’s interior, when these expenses could be saved by purchasing from a local supplier.”

The center also is working to overcome technical and financial barriers, standardize specs for products in demand and substitute the providers’ collateral (which currently represents 10% of the total value) with smaller amounts to allow them to make regular payments on operating debts and avoid financial stress. Mifflin also supports the proposal that government purchase orders serve as collateral in applying for bank loans.

Protection or Free competition?

These three models have the potential to incorporate the smallest businesses into the extensive state procurement markets, but they differ in how to establish such access. Campero (of ChileCompra) believes that the quota system distorts the market. Mifflin defends it as a cost-reducing factor. “One cost being eliminated is that of corruption, since increasing the number of participants gives more control through greater transparency,” he says. “Quotas don’t necessarily go against free competition but instead let you know that more businesses exist beyond those that usually participate.”

Campero does not agree. “There are many myths about how microenterprises cannot access technology or participate in high-tech or complicated bidding,” he says. With its open system, Chile has managed to get three out of every ten dollars of public procurement into the pockets of small producers. However, Peru’s guaranteed model has put US$4.40 of every US$10 in the hands of small suppliers.

But does having guaranteed sales make them more competitive? Without a guaranteed platform, in Chile’s public procurement system, the portion awarded to microenterprises is greater than their share in the real economy. On the other hand, protective mechanisms are not always counterproductive in terms of facilitating competition. They can even cause market distortions. “A municipality may end up making poor decisions in public expenditures, because it might buy a lower quality product simply to meet a quota,” Campero explains. “On the other hand, when the business person has good instinct, things get arranged per se.”

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