Chapter

Chapter 8. Public Procurement in Latin America

Editor(s):
Mario Pessoa, and Carlos Pimenta
Published Date:
January 2016
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Author(s)
Carlos Pimenta and Natalia Rezai 

Introduction

Within the area of public financial management (PFM), procurement relates to the acquisition by the public sector of goods and services. This includes routine purchases of supplies (e.g., printer ink, paper, and fuel) to more complex contracts for large infrastructure projects, such as government constructions, subways, and bridges. Public procurement usually includes different stages: planning, selection, and contract management.

Procurement is one of the largest government spending activities and is estimated to account for up to 10 to 15 percent of global gross domestic product (GDP) (OECD, 2007). Depending on the institutional arrangements in place and the level of decentralization within each country, procurement regulation takes effect at the central, state, and local levels. Public procurement is a government’s most vulnerable activity to waste and corruption (OECD, 2007) due to the volume of financial flows it can generate, the close interaction with the private sector, and the complexity. Public procurement, therefore, should be based on a set of three main principles—efficiency, efficacy (value for money), and transparency (Schapper, Veiga Malta, and Gilbert, 2006)—and regulated by way of well-defined procedures, as well as standards that are enforced to achieve transparency and efficacy. At the same time, the principles should be sufficiently simple to enable efficiency and to attract a large number of participants.

Procurement also plays a vital role in the way in which governments manage public resources; it also influences the medium- and long-term effects of such resources on the economy and society. More specifically, procurement can affect whether public expenditure is efficient and effective by ensuring that suppliers are selected competitively and transparently, as well as supervised as such; quality of procured goods and services are achieved; and available information is reliable.

As the role of PFM has evolved to promote more efficiency of resource management, value for money, and accountability, so has the role of procurement. In general, reforms aim to increase the efficiency of procurement systems and procedures, ensure transparency of the award process, and increase competitiveness and savings through electronic procurement. Furthermore, procurement is starting to play a role in the design of economic, social, and environmental policies that improve citizens’ welfare.

The structure of this chapter seeks to highlight the main principles of procurement mentioned above, and it is organized in the following way. A conceptual analysis is presented relating to the design, goals, and functions of procurement, together with a description of their relationship to PFM systems. This includes the importance of appropriate management in terms of public resources. Following this is a review of some of the factors that have contributed to the recent progress of procurement systems, such as information and communications technology (ICT) and the effects of commercial integration and liberalization. The chapter then explores the current state of public procurement systems in Latin America—legal and regulatory frameworks, institutional architectures—and their contribution to other public policies, based on standardized assessment methodologies. Finally, the chapter puts forward a series of policy recommendations that take into account the challenges that the region continues to face.

Impact of Procurement on Public Financial Management

Public procurement is embedded in PFM and, as such, influences a broader set of processes, systems, and institutions. These may vary in accordance with country’s institutional arrangements and economic context; overall, however, procurement does affect how public administration manages its resources. Procurement systems—defined in this chapter as the set of rules, processes, and information systems that support procurement planning, selection, and contract management—can (i) facilitate spending along budget forecasts; (ii) facilitate reliable and efficient resource flows and transactions; and (iii) enhance accountability and generate critical information to support prudent fiscal decision making.

PFM is an umbrella concept that covers administrative elements, tools, and management systems that are critical to produce information, processes, and rules that are necessary to aid fiscal policy decision making. It also provides the requisite instruments to carry out decisions (Cangiano, Curristine and Lazare, 2013). The primary objectives of PFM are to promote sustainable fiscal policy, effective allocation of public resources, and the efficient provision of public goods and services (Schick, 1998). To achieve these objectives, the tools and systems that make up PFM (e.g., procurement systems) must operate in an integrated and coordinated manner.

Budgeting is the basis of PFM. It ensures that broad policy objectives are translated into spending envelopes, based on anticipated economic conditions and spending priorities in various sectors, organizations, and programs (Andrews et al., 2014). Once the budget has been prepared, approved, and enacted into law, the executive branch has the authority to collect and spend resources. Efficient public procurement practices should contribute to sound expenditure management by allowing agencies to spend in accordance to budget allocations. The integration of budget planning with procurement systems ensure that public agencies and entities improve their resource management, share information, and reduce administrative transaction costs that are associated with updating, maintaining, and operating both systems. Furthermore, sector expenditure ceilings—in aggregate and in detailed allocations—can be integrated into systems to prevent cost overruns, unless funds have been allocated to specific objectives (OECD, 2010).

Procurement systems and procedures enable entities to purchase goods and services in a timely and cost-effective manner. Through electronic catalogues (e-catalogues), which are online repositories of approved suppliers and price comparisons, entities are able to purchase goods and services that most closely meet their needs in terms of price and quality. In addition, contracts can be paid on time, thus reducing penalties and arrears that are incurred due to late payments; and goods and services can be delivered as planned, resulting in improved quality of government service delivery. During this process, payments should be linked to treasury’s cash management processes by way of integrated procurement and payment systems.

Procurement systems can reduce the misallocation of resources and promote greater transparency and efficiency. Corruption in public procurement can take the form of bribes to government officials and collusion by providers through price fixing or bid rigging (OECD, 2007). Fair and equal treatment of providers, however, can be achieved by publishing contract information, such as that pertaining to (i) procurement management, including tenders and selection and evaluation criteria; (ii) laws and regulations relating to public procurement; (iii) responsibilities of procuring entities; and (iv) a budget that includes acceptable cost allocations. Engagement with the private sector and civil society, as well as improved coordination with oversight and audit institutions, can significantly increase integrity in public procurement.

The ability to track resource flows and inventory is critical to PFM. Effective procurement systems can provide timely and reliable information that relates to public spending, enabling government officials to assess whether spending is consistent with budget allocations, whether relevant laws and regulations are complied with, and whether there is value for money. Such information not only enhance accountability across PFM; it also provide officials the necessary information to conduct valid spending analyses. Analysis will produce feedback for future budget negotiation, bringing with it realistic data on goods and services costs.

Transformation of Public Sector Procurement

The concept of procurement has evolved during the last two decades. Traditional and legalist procurement was mainly based on a set of procedures whose objective was to regulate the selection of goods and services provided through various categories of acquisition, while minimizing abuse and favoritism by way of open bidding. The majority of procured goods and services consisted of basic administrative supplies and relatively simple services. Integration with other PFM systems was limited and, in general, procurement was viewed as independent from other government systems and market conditions. Dissatisfaction with public procurement systems, in general, often led to periodic changes on rules and flurries of regulations on the selection and evaluation of suppliers, making procurement complex and burdensome.

During the last two decades, however, public procurement has significantly transformed—ICT has contributed substantially to the development of sophisticated procurement tools and systems; economic integration and trade liberalization efforts have aligned systems globally; and the establishment of the Agreement on Government Procurement (GPA) and the creation of the Model Law on Procurement of Goods and Services have stimulated the promotion of global standards and good practices in public procurement.

The advance of ICT, in parallel to the rapid growth of the Internet and the decreasing financial costs of systems and databases, has provided an incentive to modernize the way in which governments operate. In terms of procurement, ICT was initially designed to facilitate the dissemination of online information. It provided a means by which purchasing entities could make public their procurement plans, thus increasing business opportunities. Now, the ICT tools that have been developed in response to the needs of procurement entities enable governments to strike a balance between the scale and flexibility of procurement systems design—not possible a couple of decades ago (Santos, 2011). Tools include transactional portals to support electronic reverse auctions and e-catalogues, as well as online procurement plans and supplier registries. The efficiency and transparency offered by these tools have increased competition as a result of open tenders; improved supply chain management through online tracking of contract outcomes; and facilitated contract management through electronic payment schemes.

Economic integration and trade liberalization, furthermore, have contributed to a more modern and standardized procurement concept (Allen, Hemming, and Potter, 2013). Among European countries, the creation of a single market—the European Union (EU)—has shed light on the overly complex and intricate nature of Europe’s public procurement frameworks. European governments now have aligned their systems and, since 2004, have adopted common procurement regulations to facilitate trade within the region. New regulations (Box 8.1) have been adopted to “simplify public procurement procedures and make them more flexible, benefitting both purchasers and businesses, particularly small- and medium-sized companies” (EU, 2014).

Compared to EU countries, however, the influence of common markets and international trade agreements on public procurement in Latin America has been very limited. In South America, the creation of the Southern Common Market (Mercado Común del Sur, or MERCOSUR), comprising Argentina, Brazil, Paraguay, Uruguay, and Venezuela as full members and Bolivia and Chile as associate members, led to the establishment of a procurement protocol in 2006. This protocol aims to facilitate economic integration and free trade (Mercosur, undated), and it recognizes that a common regulatory framework for public procurement is fundamental to transparency. Moreover, providers of goods and services in member countries are to be treated in a nondiscriminatory manner and procurement processes will be conducted transparently, legally, objectively, and fairly. While negotiations have led to this important initiative, to date, not all Mercosur members have ratified the protocol, thus limiting its ability to fulfill its objectives.

Box 8.1.New Procurement Regulation of the European Union

Voted into law by the European Parliament on January 15, 2014, European Union (EU) member states have until April 2016 to enact the new rules into national law. The new procurement rules, which will replace those that date back to 2004, aim to inject transparency and greater efficiency into the procurement process and increase access to all European companies so as to increase the number and quality of public products and services throughout the EU.

Among others, the rules, prompted by economic, social and political developments, seek to simplify public procurement procedures to make them more flexible; facilitate the negotiation of contract terms; reduce minimum procedure deadlines; and reduce the documentation required from participating companies.

While public procurement is considered a policy strategy instrument, the EU argues that the new rules also seek to implement environmental policies and support innovation and small- and medium-sized enterprises. Public authorities will be able to base procurement decisions on the best life cycle cost, factoring in a product’s CO2 footprint. Procedures for the purchase of innovative products and services will stimulate innovation in key public sector areas, such as those of health services and education. In particular, a new procedure, “innovation partnership,” will allow public purchasers to select companies through competitive processes to develop tailored innovative solutions to specific problems. Finally, in recognizing that SMEs carry significant potential for job creation, growth, and innovation, the new dictates will encourage public purchasers to award contracts to several small businesses as opposed to a single, large company.

Source: European Commission website: http://ec.europa.eu/growth/single-market/public-procurement/index_en.htm.

The Central American-Dominican Republic Free Trade Agreement (CAFTA-DR)1 has also prompted some—albeit limited—normative and administrative changes at the national level to adapt the principles and mechanisms of the agreement. Honduras, for example, has eliminated a clause in its public procurement system that required foreign firms to act through national businesses to participate in national bids. The Dominican Republic has enacted a public procurement law that embodies clauses relating to transparency and nondiscrimination and that reduces requirements for national participation in construction works.

At a more general level, the renegotiation of the GPA and the creation of the World Trade Organization (WTO) in 1995, upon completion of the Uruguay Round of trade negotiations in 1994, have added to the transformation of public procurement at a global level. The GPA, which provides a multilateral framework for the procurement of goods and services that is based on transparency, openness, and nondiscriminatory principles has helped to increase world trade and strengthen economic integration, primarily among member countries of the Organisation for Economic Co-operation and Development (OECD) and the EU. Latin American countries, however, have yet to sign this agreement and have only contributed to discussions as observers.

The Model Law on Procurement of Goods and Services,2 originally published by the United Nations Commission on International Trade Law (UNCITRAL) in 1994, highlights the shortfalls of existing frameworks and their effect on the efficiency and effectiveness of public procurement. The most recent UNCITRAL Model Law, adopted in 2011, “contains procedures and principles aimed at achieving value for money and avoiding abuses in the procurement process. The text promotes objectivity, fairness, participation and competition and integrity toward these goals. Transparency is also a key principle, allowing visible compliance with the procedures and principles to be confirmed.” In particular, the Model Law reflects new practices that result from the use of electronic procurement methods.

The principles for public procurement, established under the GPA and the UNCITRAL Model Law on Procurement of Goods and Services, especially with regard to nondiscrimination, have been shaped by international financial institutions, such as the World Bank, Inter-American Development Bank (IDB), and other regional development banks. Discriminatory public procurement is characterized by a government’s tendency—explicitly or implicitly—to favor its own domestic firms over foreign ones. Explicit discrimination can take the form of domestic content requirements, where entities will award contracts to foreign firms under the condition that they buy components from domestic firms; or preferential price margins, where entities accept bids from domestic firms over foreign ones, as long as the difference in price does not exceed a preestablished margin.

Governments have tended to apply discriminatory practices to achieve a series of national policy objectives. For instance, they may favor domestic small- and medium-size enterprises (SME) or firms in declining industries that do not have the capacity to compete favorably in international procurement markets, given their poor production techniques, reduced scale of production, and lack of expertise. Governments may wish to protect their respective defense sector by contracting national security services locally. Finally, for products and services that are subject to information asymmetries and compliance issues, they may select those domestic suppliers that are located within their jurisdiction to reduce associated monitoring costs (Breton and Salman, 1995).

There is evidence that the practice of discrimination in public sector procurement is a barrier to trade and to the effective use of public resources. The general argument, endorsed by IFIs and the GPA, is that the increased competition, higher quality, and procurement and budgetary savings that result from open domestic and foreign competition lead to a more efficient and effective allocation of resources. Furthermore, domestic businesses will become more competitive and, ultimately, will have the potential to position themselves in the global marketplace, leading to increased employment in the long term. Finally, nondiscrimination is viewed as a mechanism to reduce preferential treatment and increase transparency in the public procurement process (Evenett and Hoekman, 2004).

Overall, information on the topic of discriminatory public procurement is relatively scant, particularly with regard to Latin American countries. Whether or not protection of the public procurement market enhances or hinders efficiency and social welfare requires further review.

Although the GPA and Model Law are significantly important and can potentially influence public procurement modernization, their influence in Latin America is limited. In general, reforms in the region have been conducted on an isolated basis and have initiated prior to the more recent GPA and Model Law revisions.

Electoral reform and the consolidation of democracy, as well as the advent of civil society organizations (CSOs), such as Transparency International and International Budget Partnership, have had an impact on procurement systems. The issues of transparency and anticorruption practices have been incorporated into national and international development agendas since the 1990s. A public procurement system that clearly specifies the content of tender documentation, collects procurement data, monitors contracts, and provides for fair and timely dispute resolution promotes an increase in transparency from the stage of the needs assessment to that of contract management and payment.

Modernizing procurement systems is also a result of the growth of government and the rising complexity of related activities. Beyond the procurement of simple goods and relatively standard civil works, systems now need to accommodate integrated business solutions; concessions and public-private partnerships (PPP); large-scale ICT systems; and major infrastructure projects (Allen, Hemming, and Potter, 2013). While the key focus of procurement officers has been to ensure compliance with procurement laws, regulations, and procedures, modern procurement now demands a greater degree of procedural and administrative discretion, such as a strategic and knowledge-based approach to determine government needs and contracting strategies; management of tender processing; evaluation of project risks; and appropriate use of technology to enhance effective governance and transparency (Schapper and Veiga Malta, 2011).

It is evident that public procurement, since the 1990s, has undergone considerable transformation due to the advent of ICT, economic integration and trade liberalization, and institutional development, although the extent of this impact varies across regions. In particular, the creation of a common market among European countries has substantially altered the way procurement frameworks and systems are designed and the way regulations are adopted across the board. The rising volume of public expenditure has also created the incentive to modernize procurement systems so as to accommodate such complex government activity.

Public Sector Procurement in Latin America

Procurement systems in Latin America have been influenced throughout the years, among other things, by the region’s legal heritage.3 In many countries, principles of Napoleonic or Roman law (civil law) are applied, by which codified rules and procedural formalities are strictly followed. Procurement contracts between the private sector and the state are considered public contracts that are ruled by administrative law and are subject to special judicial proceedings. Under this legacy, governments place a high degree of importance on the full accountability of public resources, both on revenue and on expenditure (Ladipo, Sánchez, and Sopher, 2009). As such, public procurement systems in Latin America are endowed with an emphasis on legalism, control, and procedural formality as opposed to discretionary decision making, economic efficiency, risk management, and commercial objectives. Furthermore, risk aversion is an important characteristic of Latin American procurement systems, triggering excessive rigor in the application of norms that stifle competition and increase the costs of doing business with government.

Public procurement reform, often triggered by cases of corruption exposed by the media, has normally been carried out in a hasty manner (Santos, 2011). In these cases, a cost-benefit analysis on the effect of regulation on the principles of procurement—efficiency, value for money, and transparency, to name the most important—is scarcely carried out. Under these circumstances, regulations and procedures have been stacked onto existing ones, often resulting in complex and contradictory procurement systems.

Nevertheless, ICT has been a critical driver of public procurement systems modernization in Latin America. It has improved the way public entities conduct procurement (ECLAC/EU, 2013), allowed governments to increase transparency throughout the different stages of procurement, and empowered social control mechanisms. Today, approximately 70 percent of public contracting is published via the internet (IDB, 2014). Furthermore, technological advancements have led to more efficient public tendering through methods such as reverse auctions, framework agreements, and commodity exchanges. The degree of competitiveness engendered by ICT reforms has contributed to considerable savings of public resources in Latin America, amounting to approximately US$33 billion in 2012 (IDB, 2014). Where procurement information was once fragmented, ICT has helped to aggregate information in centralized databases and improve the capacity of government to measure public procurement results.

Private sector groups in the region have also played a hand in reforming public procurement systems (Ladipo, Sánchez, and Sopher, 2009). Against recommendations by IFIs, together, professional and trade associations have pushed for the inclusion of protectionist policies to safeguard domestic businesses through the exclusion of foreign firms from bidding or by requesting price preferences and special treatment. Business groups have also pushed for the simplification of legal frameworks and reduction of procedures that result in excessive paperwork, affecting transaction costs.

Discussed in more detail in the following sections, procurement systems in Latin America have many common traits and features. They also face similar challenges. In light of the previous section on the changing nature of public procurement, governments must go beyond adopting technology and increasing transparency to fully transform systems in the region. This transformation will depend, of course, on the specific economic, social, and political context of each country and the relative volume of public expenditure that is procured. To be successful, however, reforms must seek to address the culture of formalistic control, multiplicity of regulations, and excessive burden of procedures. Reforms must also seek to promote coordination across entities and allow procurement agencies to oversee systems and improve their alignment with national strategic goals. Finally, governments must continue to prioritize access by civil society to procurement information and their involvement and oversight as a means to increase transparency, participation, and competition.

Legal and Regulatory Framework

Legal Norms and Regulations

In Latin America, all countries have autonomous norms in place that regulate public procurement and are separate from general public financial management norms. In the majority of Latin American countries, these are legal norms that can be materially considered a statute, enacted by the legislative body. These statutes provide stability to procurement policies and procedures given that they cannot be discretionally modified by the will of an individual policymaker. At the same time, this stability requires procurement systems modernization reform to be subject to legislative debate. These debates—which can sometimes be lengthy and politically charged—may hinder the ability of procurement systems to adapt to changing market conditions, international trade treaties, and new procurement techniques. In the case of Brazil, Colombia, Ecuador, and Honduras, procurement policies and procedures are stated in their respective constitutions, a norm of an even higher hierarchy. In the case of Argentina and Venezuela, however, they are regulated through delegated decrees that are issued unilaterally by the executive branch (Volosin, 2012).

The scope of procurement norms and regulations in terms of institutions is important to determine the extent to which they apply to public entities. Furthermore, regardless of whether or not nonlisted entities are governed by their own regulations, discrepancies between them can reduce transparency and deter businesses from participating in public tenders across entities due to higher transaction costs. In Latin America, all countries formally state the scope of procurement norms and regulations, though their coverage varies substantially (Table 8.1) (Volosin, 2012).

Table 8.1Scope of Application to Institutions
InstitutionsNumber of countriesPercentage
Central administration (ministries, departments, and agencies)18100
Provincial/state/local governments1689
Legislative and judicial branches1478
Public organisms created by law or autonomous (comptrollers, central bank, universities, etc.)1689
Public sector businesses or mixed businesses with majority state participation1478
Public entities or those with majority state participation739
Public or private entities that receive or use public funds844
Public-private partnerships without limits on majority state participation16
Special funds or trust funds422
Armed forces and police317
Source: Authors’ compilation, based on Volosín (2012).Note: Data include Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, Uruguay, and Venezuela.

In addition to stating the scope of institutions, procurement norms and regulations clearly state the scope by type of acquisition and contract. In the region, 15 out of 18 countries regulate the acquisition of goods and services and public works under a single regulation.4 The type of contract—supply of goods, general services, execution of public works, concessions, leasing, and consulting services—can also affect the level of dispersion of procurement information if the majority of contracts are excluded from regulation, thus reducing the level of transparency and competitiveness. With respect to contracts that are expressly included in procurement norms, all Latin American countries have regulations that cover them. With respect to contracts that are expressly excluded from procurement norms, only Bolivia does not regulate them (Volosin, 2012).

In most Latin American countries, the management and implementation of these norms and regulations occur at a decentralized level, such as by individual government entities and ministries. In most cases, regulations stem from a legal norm and its associated regulatory decrees. In the case of federal countries, such as Argentina, Brazil, and Mexico, each state and province has its own procurement laws and regulations, based on the federal law. Furthermore, stateowned enterprises have their own, including special arrangements that exist for autonomous corporations or for other specific purposes. Such regulations were conceived to facilitate and expedite procurement arrangements when existing national laws lacked momentum and flexibility (Ladipo, Sánchez, and Sopher, 2009); however, they can inhibit transparency and damage the integrity of public procurement systems if access to information on the special regulation is limited.

The decentralized nature of procurement has led to a multiplicity of regulations in the region, which has a direct impact on costs, since businesses may decide to only bid for contracts with a limited number of entities. This fragmentation not only reduces competition in the market, but can also lead to collusion among businesses that bid with similar entities. In addition to limiting competition, fragmentation can prompt a high degree of effort on behalf of businesses to meet the documentation requirements of various agencies, thus increasing administrative costs. In addition, the multiplicity of procurement regulations increases the legal risks associated with conducting business with the government. In light of these legal risks and the complexities and costs associated with legal arbitration in Latin American countries, businesses are either deterred from bidding or, in some cases, are forced to increase prices to absorb the risk.

To address the effects of the multiplicity of regulations highlighted above, countries in the region have started to push for regulations that focus on the clients of public procurement, public entities and private sector businesses, and seek to simplify procedures. Some countries, for example, have created procurement manuals that are intended to provide guidance on policies and procedures, and can quickly be updated and refined to reflect changes to policies and procedures.

Controls

Most of the norms and regulations mentioned above emphasize the application of controls and formalities, much at the expense of efficiency. Under this approach, explicit procurement regulations seek to influence the market through mechanisms such as mandatory requirements and specific prohibitions. This has resulted in complex, overregulated, and over managed systems that can sometimes inhibit bidders from submitting proposals. In Mexico, for instance, the domestic labor and material cost component of a bid must equal at least 50 percent of total cost. In Peru, in some cases, foreign firms are forbidden from participating in national competitive bids, irrespective of the firm’s product or its willingness to adhere to national procurement policies (Ladipo, Sánchez, and Sopher, 2009).

The excessiveness of controls in public procurement systems across Latin America goes hand in hand with procedural formality. Piecemeal processes—which many times have been added to systems to address weaknesses revealed by individual cases of corruption, mismanagement, or scandals—have led to systems that are overburdened with low-value and, at times, contradictory procedures. Rather than controlling for results, procurement systems in the region control for procedural adherence.

As a result, procured projects can be subject to delays, high transaction costs, and an environment that encourages corruption as a means to expedite the processing of contracts or circumvent regulation. Excessive procedures can also encourage agencies to break down large projects into small packages or simply resort to noncompetitive methods to avoid cumbersome procedures.

Institutional Architecture

Indicators of Methodology for Assessing Procurement Systems on Interagency Coordination

In most Latin American countries, the coordination of procurement policies is spread across many entities, such as the ministries of finance, planning, public works, and the comptroller’s office. Often, these entities have their own policy objectives and needs, resulting in a duplication of effort and sometimes even divergent systems, affecting the way in which procurement contributes to the management of public resources. In particular, public procurement would benefit from greater integration and/or interoperability with other PFM systems, such as budget planning and treasury management.

The OECD/DAC Methodology for Assessing Procurement Systems (MAPS)5 contains indicators that are intended to provide a harmonized tool for the assessment of procurement systems. Although MAPS is designed to assess central government and national systems, the baseline indicators upon which it rests only “present a ‘snapshot’ comparison of the actual system against the international standards that the BLIs represent” (OECD, 2010). Often, these indicators refer to the existence of procurement laws, legal frameworks, and procedures, rather than on the way in which said laws, frameworks, and procedures influence procurement results and the efficiency of public expenditure. Furthermore, it is important to note that MAPS for Latin American countries rely primarily on subjective professional judgments by country officials, and that they have been carried out in different moments in time. As such, the quality and comparability across countries may not be entirely uniform.

In examining whether public procurement systems are mainstreamed and well-integrated into public sector governance systems, MAPS indicator 3 helps to determine “a) its suitability to discharge the obligations prescribed in the law without gaps or overlaps; b) whether the necessary links with other sectors of government affecting procurement exist; c) whether procurement operations are constrained by other external institutional factors; and d) whether the managerial and technical capacity of the system are adequate to accomplish procurement without unnecessary cost or delay” (OECD, 2010) (Figure 8.1).

Figure 8.1Methodology for Assessing Procurement Systems, Indicator 3: Mainstreamed and Well-Integrated Public Procurement Systems

Source: MAPS assessment of each country.

Note: The years for the data are as follows: Peru: 2008; Colombia and Costa Rica: 2009; El Salvador, Guatemala, Honduras, and Nicaragua: 2010; Ecuador: 2011; and Dominican Republic and Paraguay: 2012.

In Latin America, the links between budget and procurement plans are weak. MAPS sub-indicator 3(a) assesses whether procurement planning and associated expenditures are part of the budget formulation process and whether they contribute to multiyear planning. Data show that public procurement plans are normally prepared based on the annual and multiannual operating plans, though not the majority of them; nor are they required to match the budgetary allocation available prior to expense commitment. In the case of Dominican Republic, Guatemala, and Honduras, procurement plans are drawn without any direct connection to budgetary planning exercises, and there is no requirement to match procurement plans with the availability of funds. This missing link between procurement and budgeting can result in uncertainty, late payments, and delayed contract completions, compromising the quality and efficiency of public expenditure.

Budgetary law and financial management procedures in Latin America are generally inadequate to meet procurement needs, according to MAPS sub-indicator 3(b), which assesses whether budget law and financial procedures support timely procurement, contract execution, and payment. On average, the time required to commit or appropriate budget funds once a contract has been awarded exceeds one week. In addition, the authorization of payments, following the approval of invoices or monthly certifications of progress, generally takes more than four weeks.

MAPS sub-indicator 3(c) assesses whether procurement actions are initiated without existing budget allocations. Data show that most Latin American countries have laws that require certification of availability of funds before the solicitation of tenders takes place. In addition, Colombia, Costa Rica, Ecuador, El Salvador, Nicaragua, and Paraguay have a system in place, such as paper or electronic interfaces between financial management and procurement systems, to ensure the law is properly enforced. This system has only been integrated in Paraguay, however.

MAPS sub-indicator 3(d) assesses whether systematic completion reports are prepared for the certification of budget execution and for reconciliation of delivery with budget programming. This feedback mechanism is “needed to ensure that information on contracts covering major budget expenditures is provided to the budgetary and financial management systems in a timely manner to support the overall PFM system.” In most surveyed countries, procurement systems generally do not provide this information. In Nicaragua, information provided is erratic or normally submitted with considerable delay after the fiscal budgetary period. Colombia, Costa Rica, and Ecuador are the only countries that provide information on the completion of the majority of large contracts and submitted in a timely and systematic way.

Procurement Agencies

Many Latin American countries have created regulatory agencies to oversee and further develop procurement policies and systems. The institutional and financial autonomy enjoyed by some of these agencies has allowed them to push significant reforms since they are not bound by the eventual scarcity of resources. These agencies are considered the second most important influence, together with ICT development, that have contributed to the significant modernization of procurement in the region.

Through the establishment of better regulatory frameworks, institutional structures, and control systems, procurement regulatory agencies can help to reconcile the multitude of regulations and procedures across entities through standard bidding procedures (Table 8.2). This, in turn, can help decrease the administrative costs associated with bidding with various public entities, which can become highly cumbersome and expensive, and result in higher prices or fragmentation. The existence of a single agency can also ensure that policies are not only aligned, but that they are also consistent with national policy objectives and development plans.

Table 8.2Functions of the Latin American Procurement Agencies
CountryAgencyYear agency was createdOrganizational autonomyBudget autonomyUpdate and manage procurement information systems, including e-procurementUpdate and manage electronic registry of suppliersDesign procurement policiesProvide technical training to agenciesProvide technical training to suppliersMitigate public procurement disputes
ArgentinaOficina Nacional de Contrataciones (ONC)1994
BrazilSecretaria de Logística y Tecnología de la Información (SLTI)2012
ChileDirección de Compras y Contrataciones Públicas (ChileCompra)2003
ColombiaAgencia Nacional de Compras Públicas (Colombia Compra Eficiente)2011
Costa RicaDirección General de Administración de Bienes y Contratación Administrativa2001
Dominican RepublicDireccion General de Contrataciones Publicas (DGCP)2006
EcuadorServicio Nacional de Contrataciones Publicas (SERCOP)2008
El SalvadorUnidad Normativa de Adquisiciones y Contrataciones de la Administracion Publica (UNAC)2000
GuatemalaDireccion Normativa de Contrataciones y Adquisiciones del Estado2008
HondurasOficina Normativa de Contratacion y Adquisiciones del Estado (ONCAE)2001
MexicoSubsecretaría de Responsabilidades Administrativas y Contrataciones Públicas2003
NicaraguaDirección General de Contrataciones del Estado (DGCE)2000
PanamaDirección General de Contrataciones Públicas2006
ParaguayDirección Nacional de Contrataciones Públicas (DNCP)2007
PeruOrganismo Supervisor de las Contrataciones del Estado (OSCE)2009
UruguayAgencia de Compras y Contrataciones del Estado (ACCE)2011
VenezuelaServicio Nacional de Contrataciones1999
Source: Authors’ compilation, based on IDB (forthcoming).

In addition to mitigating the proliferation of policies and procedures, these agencies oversee the development, performance, and maintenance of centralized e-procurement systems. They also offer technical capacity and evaluative trainings; develop initiatives to promote the use of these systems by agencies and vendors; disseminate procurement information; and, in some cases, mitigate disputes (Box 8.2).

Through the standardization of micro-processes, however, regulatory agencies sometimes are in conflict with procuring entities. Often, these entities neither have the resources nor technical capacity necessary to carry out the responsibilities and mandates set by agencies, nor are they able to apply their own personal insight and judgment to those tasks.

Box 8.2.Chilecompra

Created in 2003 under Public Procurement Law No. 19.886, Chile’s procurement agency, Dirección ChileCompra, administers the corresponding system in Chile. It operates under a single regulatory framework that is based on the principles of transparency, efficiency, universality, accessibility, and nondiscrimination. The e-procurement system has become one of the most advanced in Latin America. Despite initial setbacks resulting from lack of participation on behalf of purchasing agencies and suppliers, the site now facilitates over US$9.500 million worth of transactions annually, amounting to approximately 3.5 percent of Chile’s gross domestic product. Through the system, more than 850 state entities, from municipalities to hospitals to universities, transact with more than 100,000 businesses, large and small.

ChileCompra’s success can be attributed to the systems and services provided by its procurement agency. For example, public purchasers are able to conduct routine purchases in a more timely and efficient manner through ChileCompra Express by accessing goods and services provided by businesses that have previously enrolled in a standardized agreement. Located throughout the country, Chile’s procurement agency has also established a network of ChileCompra centers. These centers provide services to small- and medium-sized enterprises, ranging from technical support for ChileCompra to advice on business development, as well as how to participate in government tenders. Alternatively, larger companies and businesses have access to ChileCompra Training, a platform that provides users online access to technical manuals, information on accreditation programs, blogs, and course catalogues. In addition, a National Registry of Suppliers has been established to enhance national and international business opportunities for over 40,000 registered suppliers. ChileCompra’s Compras Sustentables product relates to an additional platform that provides information on sustainable public procurement (SPP) in Chile. It includes links to related legal and regulatory documents and news on SPP. ChileCompra also has a transparency portal, Analiza, which provides reports on current tenders and contracts, tools to analyze historical information, and monthly statistical reports.

Source: See www.chilecompra.cl.

Examples of such agencies in Latin America are the Directorate of Public Procurement and Contracts (Dirección de Compras y Contrataciones Públicas in Chile; Colombia Compra Eficiente; National Service for Public Contracts (Servicio Nacional de Contrataciones Públicas (SERCOP) in Ecuador; Sub-Secretary of Administrative Responsibilities and Public Contracts (Sub-secretaría de Responsabilidades Administrativas y Contrataciones Públicas) in Mexico; National Directorate for Public Procurement (Dirección Nacional de Contrataciones Públicas (DNCP)) in Paraguay; and Regulatory Agency for State Contracts (Organismo Supervisor de las Contrataciones del Estado (OSCE)) in Peru (Table 8.2).

At least five of these agencies have budgetary and financial autonomy (Chile, Colombia, Ecuador, Paraguay, and Peru) and this autonomy has likely contributed to maintaining sufficient investments to modernize electronic procurement in these countries during the last two decades. In terms of the other 12 countries in the region, although their agencies lack financial autonomy, many of them have had sufficient resources and government support to invest in electronic procurement modernization. As an example, the Secretary of Logistics and Information Technology (Secretaria de Logistíca e Tecnologia da Informação (SLTI)) in Brazil—using the fees paid by private businesses to register as a public supplier—has been able to improve the ComprasNet system.

Professionalization is critical to a well-functioning procurement system. As highlighted earlier in the chapter, the transformation of the nature of public procurement requires staff within procurement entities to have formal training, sufficient expertise, and discretionary power to carry out knowledge-based tasks, such as risk management; and to discern contracting strategies and market factors throughout the entire procurement cycle. Furthermore, the impact of ICT on procurement systems demands a highly technical staff that can work on the technological aspects of e-procurement systems within the regulatory agencies that develop and manage the systems and within the entities that must adopt the system. In Latin America, this kind of institutional capacity is limited.

Although procurement regulatory agencies have grown in number over the past couple of decades, and their contribution to the modernization of procurement systems in the region has been significant, there still exist substantial differences in the autonomy and functions performed by these agencies. In some countries, particularly those in Central America, future reforms aim to allow procurement agencies greater autonomy—legally and financially—a more professionalized staff, and the capacity to fully manage e-procurement systems.

e-Procurement

Electronic government procurement systems (e-GP or e-procurement) have been responsible for the main advancements in the area of public procurement in the region. Defined as the use of ICT in public procurement, e-procurement generally covers all stages of purchasing, from planning to bidding and awarding to contract management. The comprehensiveness of coverage has the potential to increase the efficiency of public procurement by simplifying procedures and fostering competition and transparency, resulting in tangible financial savings. It can also increase the effectiveness of public procurement by linking a greater number of suppliers with purchasing entities and increase the volume and quality of goods and services provided. E-procurement systems also provide information to citizens.

Today, most Latin American countries have developed an e-procurement system that centralizes information at one single location on the Internet.6 This system, such as ChileCompra, and Brazil’s ComprasNet (Box 8.3), display essential information and provide tools to automate procurement. In most cases, this information relates to procurement regulations, responsibilities of procuring and contracting entities, and ongoing bidding processes and contracts by modality and sector.

According to the unpublished 2013 OECD Survey on Public Procurement, to which 11 Latin American countries responded,7 users are also able to search and download tender documents and browse e-catalogues, defined as a listing of available products and services that can be viewed and bought in electronic format, including illustrations, prices, and descriptions of the product or service. As evidenced by the survey, Latin American e-procurement systems offer a greater share of services, on average, than OECD member countries. For instance, only 27 percent of OECD member countries have e-procurement systems that contain e-catalogues compared to 73 percent in Latin America. In addition, 82 percent of Latin American e-procurement systems also offer online training materials compared to 36 percent in OECD member countries.

Although not as widespread, some e-procurement systems have transactional capabilities that relate to the tendering phase, such as the electronic submission of bids, reverse auctions, and payment schemes; and they can generate significant savings to the public sector (Box 8.4). Considering the 12 most common services offered by e-procurement systems, identified in this survey (Figure 8.2), it is clear that in 10 of these services, Latin American countries have better country coverage than do OECD member countries.

Figure 8.2Most Common Services Offered by the Single-Entry Procurement Website (2013)

Source: OECD and IDB (2014).

Notes: Data for Chile and Mexico refer to 2010 and were published in OECD (2011).

Box 8.3.Electronic Framework Agreement and Reverse Auctions

The purchase of goods and services by government entities can be conducted in different ways, depending on a country’s procurement strategy and market conditions. Understanding competition levels, market structures, suppliers, and the government’s market power can assist officials to design purchasing strategies that observe procurement principles and avoid market distortions. In Latin America, the two most prominent methods of contracting are “framework agreements” and “reverse auctions.”

A framework agreement is a general term for agreements with a provider(s), selected through public tender, that set out standardized terms and conditions under which specific purchases (call-offs) can be made throughout the term of the agreement. They are used for products, works, or services in which specifications and prices are needed on a repetitive basis.a ChileCompra relies heavily on framework agreements for the bulk of its purchases. Once framework agreements have been made, entities in Chile can simply browse an e-catalogue for goods and services and place the order directly with the preapproved supplier. This method is particularly useful, because once a framework is established, the process for awarding individual call-offs is faster and less costly than would be the case if the purchase was procured separately. From the point of view of the suppliers, the larger the volume the better, because it reduces time and costs associated with conducting multiple bids.

In Brazil, on the other hand, the primary method of purchase is through electronic reverse auctions (online, real-time dynamic auctions) that are completed within eight working days. This method, adopted in May 2000, is a process of “selling in reverse,” in the sense that it is the purchasing entity that drives the event. Once the entity advertises to purchase a particular good or service in the online procurement portal, interested and qualified suppliers are allowed to submit and resubmit bids virtually by providing successively lower-priced or better ranked bids (Allen, Hemming, and Potter, 2013). The main advantages are to increase competition among suppliers, lower prices, and reduce procurement cycle time. Electronic reverse auctions also enhance objectivity and equal access to information during the course of tenders, given that the system provides a single channel of information and communication during the bidding process. Furthermore, the selection of suppliers is processed automatically, ensuring strict neutrality (Carter et al., 2000; Segal and Taylor, 2001; Wyld, 2001; Moon, 2005). From the perspective of the supplier, reverse auctions allow businesses to participate in a wide range of bids and to challenge incumbent suppliers. The short cycle also reduces the time and costs associated with the bidding process. Reverse auctions, however, require entities to plan better and provide accurate specifications upfront for the goods and services they want to buy.

a See www.gov.uk/government/uploads/system/uploads/attachment_data/file/62059/guide-buyingframework-agreements.pdf.

The use of e-procurement can also help to reduce corruption and mismanagement of public resources by generating strategic information and allowing for systematic data mining that can be used to detect abnormal transactions. E-procurement can also reduce corruption by mitigating information asymmetries between purchasing entities and suppliers, since entities are provided access to wider information on options and market availability. In addition, the strategic information generated by e-procurement systems can be helpful in detecting market trends, measuring the effects of public procurement policies in promoting domestic industry, and preparing procurement strategies (Allen, Hemming, and Potter, 2013).

Box 8.4.Savings Achieved Through Paraguay’s Electronic Reverse Auction

Using Brazil’s procurement system as an initial reference, Paraguay adopted the use of electronic reverse auctions in 2008 with the support of IDB.a The adoption of this technology is part of the government’s attempt to modernize the public procurement system.

Since the first purchase that was made through the electronic reverse auction system in November 2008, the absolute value of public procurement has increased significantly, reaching close to US$2 billion in 2011, approximately 34.3 percent of total public expenditure.b Of this, approximately 18.6 percent (US$376 million) corresponds to goods and services procured through electronic reverse auctions, and more recent data of 2012 to 2014 indicates that the use of electronic reverse auctions is still increasing. In terms of categories, the primary purchases were of fuels and lubricants (29 percent), construction (15 percent), and medical equipment (14 percent).

Savings achieved through the use of electronic reverse auctions in Paraguay have been substantial. The government estimated in 2011 that these auctions reduced final prices by 19 percent compared to initial offerings, and 12 percent compared to the amount initially estimated in the call for tenders. These figures, however, may not reflect economic savings, since they compare the starting or estimated prices with the final price of acquisition or purchase. The comparison that would, however, provide an estimate of savings produced through electronic reverse auctions is that of prices with and without auction, for the same good or service, in a specific period in time.

To do so, Paraguay’s procurement agency, Dirección General de Contrataciones Públicas, analyzed and compared prices for the four items that have the greatest weight in Paraguay’s public procurement system: (i) fuels and lubricants; (ii) equipment, accessories, and computer programs for office, education, printing, communications, and signaling; (iii) medical and laboratory equipment, products and instruments, health care services and supplies; and (iv) paper, cardboard, and printed products. Together, these items make up approximately 50 percent of total procured goods and services. Results indicate that electronic reverse auctions reduced prices by approximately 7.5 percent compared with other purchases of the same product in the same period of time, when procurement was not conducted through electronic reverse auctions (IDB, 2012).

a Decree No. 12.453 of July 14, 2008.b Total public expenditure excludes debt payments and payroll.

Despite advances made in the realm of e-procurement, there is still room for gain. In some countries, procurement regulatory frameworks must be updated to continue progressing with the implementation of e-procurement systems. Entities may also resist transferring over to an unfamiliar, centralized procurement portal, given the costs associated with learning and adopting new technologies. In Chile, for example, a lack of participation on behalf of government entities and suppliers created severe problems in the initial phases of ChileCompra. To mitigate the problem, Chile’s procurement agency conducted long-term dissemination efforts and provided technical assistance and training to entities and businesses.

Decentralization efforts over the past decade may have also hampered the success of a single e-procurement portal if a migration to a national procurement system is considered a violation of decentralization and autonomy efforts. Such is the case not only in Chile, but also in Guatemala (Ladipo, Sánchez, and Sopher, 2009).

To improve the way governments manage public resources, particularly along the expenditure side, the integration of e-procurement systems with other PFM systems, such as integrated financial management information systems (IFMIS) and treasury single accounts (TSA), is critical. The primary objectives of IFMIS are to allow the public sector to plan, execute, and monitor the budget, facilitate treasury operations, and perform the necessary debt operations, while safeguarding the quality of financial information produced by the system. An IFMIS is thus made up of a set of subsystems of information that operate in an interrelated manner, and that take a comprehensive approach to financial management.

Public procurement systems that are integrated with such systems can also help to increase the efficiency of procurement spending. For example, requiring paper documents from bidders to certify compliance with tax obligations is an area that could benefit substantially from systems integration. Transforming this certification into a real-time, electronic process can reduce the administrative costs associated with producing such documents on the part of businesses. This form of integration also precludes nontax compliant businesses from participating in tenders and facilitates the review and validation of official documents for those businesses that are eligible. Procurement systems can also be integrated with cost systems—such as the one described in Chapter 6 relating to the State of São Paulo—to maximize the use of available procurement information to ultimately improve budgeting and resource allocation decisions. Furthermore, integration through IFMIS—discussed in Chapter 7—can help to facilitate and make public con-tract payments and modifications.

Considering that many countries in the region have now developed their own IFMIS with particular emphasis on budgeting, treasury, accounting, and public debt management, the creation of appropriate interfaces between e-systems should be easier. The integration of procurement systems, however, has yet to fully materialize. In most Latin American countries, the lack of interoperability between procurement and IFMIS stems from the budget execution module.

It is important to note that difficulties in greater integration or interoperability of these systems are not caused by ICT complications; rather, they result from institutional and political reasons. It is common for procurement agencies to fight for greater autonomy, whereas ministries of finance tend to push for procurement modules and databases within their own systems. This kind of dispute generates problems when it comes to conflicting agendas and strategies for the modernization of e-procurement systems.

Access to Information

In the last decade, many Latin American countries have sought to reform public procurement systems to increase the availability, quality, reliability, and timeliness of procurement information. Efforts in this area have centered on publishing information related to norms, operations, and outcomes to prevent waste and misconduct, which drain taxpayer resources, distort the market, and delegitimize procurement systems (OECD/IDB, 2014). At the same time, procurement information is essential to assess procurement systems’ aggregate performance, ensure official compliance with procedure, and strengthen accountability.

Data collected in the Survey on Public Procurement of the Organisation of Economic Co-operation and Development (OECD) and Inter-American Development Bank (IDB) show that information regarding the pre-tendering and tendering phases of the procurement cycle is almost always proactively disclosed; that is, government officials make information publically available to citizens without any specific request. This information includes procurement norms, general information for potential bidders, tender documents, and selection and evaluation criteria. This information is critical to leveling the playing field for bidders and, ultimately, increasing market competition. Areas in which governments could more proactively provide information include procurement plans and post-award documents, such as justification for awarding contracts to selected contractors, tracking of procurement spending, and contract modifications during execution. Modifications of contracts are more common in infrastructure investment contracts and may result in substantive price increases if not closely monitored. In Argentina, for instance, corruption in the health sector was reduced by publishing prices of all purchases made throughout the hospital system, as corrupt deals that resulted in higher prices were quickly made evident (Klitgaard, 2014).

In comparison to OECD countries, Latin American countries disclose a higher share of procurement information at the central level. For example, 73 percent of surveyed Latin American countries disclose procurement plans of anticipated tenders in comparison to 50 percent of OECD member countries. With regard to general information for potential bidders, 91 percent of Latin American countries always provide this information in comparison to 76 percent of OECD member countries. In terms of the tracking of procurement spending, 73 percent of Latin American countries always provide this information in comparison to only 18 percent of OECD member countries (Table 8.3).

Table 8.3Public Availability of Procurement Information at the Central Level of Government (2010 and 2013)
Laws and policiesGeneral information for potential biddersSpecific guidance on application proceduresProcurement plan of anticipated tendersTender documentsSelection and evaluation criteriaContract awardJustification for awarding contract to selected contractorContract modificationsTracking procurement spending
Argentinaߋߛߋߋ
Brazilߋ
Chile
Colombiaߋ
Costa Rica
Dominican Republicߛߋߋߋߋ
Ecuador
Honduras
Mexico
Paraguay
Peruߋ
Total Latin America (2013)
Always1110108111010898
η Upon request0010000100
¤ Sometimes0001010000
m Not available0102001223
OECD total (2010)
| Always3426191718212113116
n Upon request01105101076
¤ SometimesG71314ICr137IC5
m Not availableGG3G4c17
Source: OECD/IDB (2014).Notes: Data for Chile and Mexico pertain to the year 2010 and were published in OECD (2011).

Most countries in Latin America publish procurement information through central e-procurement systems, providing easy access for citizens, CSOs, and businesses. Ecuador, which has made considerable efforts to modernize its procurement system, publishes 100 percent of the procurement information referenced in Table 8.3 through its central e-procurement system, Portal de Compras Públicas del Ecuador. Similarly, Mexico públishes 100 percent of its procurement information through CompraNet. In this regard, Latin American countries differ substantially from OECD member countries, where the central procurement website does not play such a significant role. Furthermore, the share of information published through a contracting entity website is much higher, on average, in OECD member countries than in Latin America (Figure 8.3).

Figure 8.3Online Availability of Select Procurement Information (2013)

Source: OECD/IDB (2014).

Notes: Data for Chile and Mexico refer to 2010 and were published in OECD (2011).

Anticorruption Measures

On average, general government spending via public procurement in Latin America is significant. Given the magnitude of these expenditures, bribery or the mismanagement of public resources could be very high and, similarly, potential savings achieved through the prevention of such behavior could be substantial.

Corruption can manifest itself throughout the different phases of the procurement cycle and in many different ways. In the needs assessment phase, goods or services may be unjustifiably overestimated to favor a particular provider. Later in the procurement cycle, agents may design a process that favors a particular bidder in the preparation phase. During the selection and award phase, legally confidential information regarding bidders may be leaked. While a contract is being implemented, false or inexistent claims may be filed. Finally, during the project close-out phase, accountants and auditors may be willing to support false certificates (OECD, 2007). Most commonly, corruption in procurement takes the form of bribery, in which monetary compensation is provided to public officials in return for favorable decisions, or cartels, in which bidders try to manipulate award decisions in favor of one of their members.

Although the degree and form of corruption in public procurement is by nature complex and varies widely, some countries in Latin America currently have measures in place to preserve the integrity of their procurement systems. Based on various MAPS, Latin American countries fare moderately well under the pillar of integrity, which examines the nature and scope of a country’s anticorruption control measures and mechanisms in procurement, though not at their actual application and effectiveness at deterring and managing cases of corruption.

According to MAPS assessments, Latin American countries tend to have a legal system that includes reference to other laws that specifically deal with anticorruption legislation, in general, and the same treatment is given to its consequences. The surveyed countries,8 on average, have yet to define responsibilities, accountabilities, and penalties for individuals and firms within the procurement framework that have been found to have engaged in fraudulent or corrupt practices. In many cases—although sanctions are usually included in such frameworks—few countries enforce them in practice.

With regard to regulatory frameworks properly addressing corruption, fraud, conflicts of interest, and unethical behavior, surveys show that in most cases, procurement norms specify this as a mandatory requirement. However, they do not stipulate in a precise manner how to incorporate the matter in tender documents, leaving this up to the procuring entities. Tender documents generally cover this, although they are inconsistent.

There is substantial room for improvement in the creation of codes of conduct or ethics for participants involved in public procurement, and which call for the disclosure of those in decision-making positions. Of the surveyed countries, only two (Colombia and the Dominican Republic) have codes that meet minimum requirements; however, they are only recommended codes on “good practices,” with no consequences for violations unless covered by criminal codes.

Data suggests that surveyed countries, on average, have isolated anticorruption activities that are not properly or sufficiently coordinated to be considered an effective, integrated program (Figure 8.4). In the region, governments can seek to implement a comprehensive anticorruption program that includes all stakeholders in public procurement, assigning clear responsibilities to them and assigning a high-level body with sufficient standing and authority to coordinate and monitor the program (OECD, 2010). As part of this comprehensive approach, the function that internal and external control systems and audits play with regard to deterring, unearthing, or facilitating corruption in procurement must also be addressed.

Figure 8.4Methodology for Assessing Procurement Systems, Indicator 12: Ethics and Anticorruption Measures

Sources: MAPS assessment of each country.

Note: The years for the data are as follows: Peru: 2008; Colombia and Costa Rica: 2009; El Salvador, Guatemala, Honduras, and Nicaragua: 2010; Ecuador: 2011 and Dominican Republic and Paraguay: 2012.

Public Procurement: A Tool to Promote Social, Economic, and Environmental Policies

Given its scope and share of GDP in the region, public procurement is increasingly viewed as a strategic policy tool. The design of procurement policies is no longer a technical matter; it is now one that seeks to incorporate social, economic, and environmental objectives. In doing so, governments can align procurement with strategic policy objectives. In the case of economic policy, promoting the participation of SMEs in procurement contracts can be a way to increase their contribution to aggregate output. In the case of social policies, public procurement can be a tool to promote gender equality and women-owned businesses. Finally, public procurement can help to strengthen national policies that seek to protect and promote the environment.

The use of public procurement as a strategic policy tool, however, involves a major challenge insofar as it could violate the principles of efficiency, value for money, and transparency. Policies in favor of awarding contracts to businesses owned by women—irrespective of their bid price—would, for instance, result in an award contract that does not uphold the principles of value for money. Sustainable public procurement (SPP), therefore—defined as “the process whereby organizations meet their needs for goods, services, public works, and utilities in a way that achieves high performance based on an analysis of the entire life cycle that results in benefits not only for the organization but also for society, the economy, and the environment” (UK, 2006)—must strive to align economic, social, and environmental policy objectives at a national level with the principles of public procurement. If such policies violate principles of public procurement, such as value for money, the effect of such policies should be explicitly calculated and taken into account.

SMEs can play an important role in the growth and development of countries. They have the potential to become significant exporters, to promote economic growth, and to alleviate poverty among various groups in a society (Badrinath, 1997; Badrinath and Kirpal, 1997). There are, however, various barriers that SMEs face with regard to public procurement, such as (i) lack of access to information regarding public tenders; (ii) insufficient production capacity to satisfy tender requirements; (iii) lack of sufficient financing; (iv) delays in contract payments that affect SMEs with limited financial capacity; (v) collateral requirements/guarantees for specific contracts that limit participation of SMEs that do not have those particular instruments; and (vi) informality (Rozenwurcel and Drewes, 2012).

Governments can correct biases against SMEs and remove barriers to their participation in public procurement through (i) transparent legal frameworks that “enforce contract and property rights and that alleviate information problems” (UNCTAD/WTO, 2002); (ii) subdividing contracts into different lots to help alleviate production limitations; (iii) facilitating coordination and association among SMEs to take advantage of joint economic, financial, and technical capacity; (iv) requiring proportionate guarantees and preventing their excessive retention; and (v) providing technical assistance-subsidized or unsubsidized—that aims to facilitate the understanding of procurement procedures, systems, and methods (Rozenwurcel and Drewes, 2012). These methods can help to promote SME participation, although they neither constitute a direct subsidy or preference nor do they violate the principles of public procurement. Governments, however, may choose to give direct price preference to SMEs or mandate, target, or set-aside public tenders specifically for SME involvement (UNCTAD/WTO, 2002).

In the case of Brazil, public procurement is a vehicle for the promotion of SMEs. According to Brazil’s Differentiated Procurement Regime (to promote regional and local economic development), a SME receives direct preference once a reverse auction is concluded if its closing bid price is up to 10 percent higher than that of its non SME competitor. Furthermore, should the SME’s bid price exceed the 10 percent price differential, the SME can lower its price.9 In this way, SMEs are not only able to effectively compete for public contracts through open and transparent auctions; they are also afforded a second opportunity once the reverse auction is concluded.

In Chile, SMEs participate actively in the country’s public market, Chile-Compra, with over 38 percent of business transactions attributed to them compared to only 18 percent participation in national economic activity. With the objective of leveling the playing field, Chile’s procurement agency has created centers (Centros ChileCompra) to promote SME involvement in procurement tenders through free and easy access to web-friendly computers, board rooms, and technical assistance. ChileCompra also provides advanced payment schemes, or credit against purchase orders, through partnerships with financial institutions to help SMEs satisfy resource needs for public procurement contracts (Concha and Anrique, 2011).

Research shows that there is a positive correlation between gender equality and a country’s GDP per capita, competitiveness, and rank in the Human Development Index (ITC, 2014). According to the World Development Report (World Bank, 2012), “when women’s labour is underused or misallocated—because they face discrimination in markets or societal institutions that prevents them from completing their education, entering certain occupations, and earning the same incomes as men—economic losses are the result.” Public procurement is increasingly viewed by Latin American countries as a way to address some of the barriers faced by women, helping not only to promote gender equality but also to engender inclusive growth.

Currently, women-owned businesses have been largely excluded from the sizeable public procurement market (ITC, 2014). Because they tend to be smaller, often less experienced, have less access to human financial and social capital, and tend to be in less profitable sectors (ITC, 2014), the barriers faced by women-owned businesses are similar to those faced by SMEs; namely, insufficient tender information, demanding technical and financial qualifications, large contract sizes, and delayed payments.

To overcome these barriers, governments can start by defining women-owned businesses and the necessary criteria, such as ownership and control by women, to facilitate the certification and registration of their businesses. Furthermore, procurement policies can seek to level the playing field as much as possible by requiring the publication of all procurement opportunities in e-procurement systems, tailoring the technical and financial qualification requirements to the size and complexity of the opportunity, deconstructing large procurement contracts into smaller ones, and providing technical and capacity assistance to women-owned businesses.

Public procurement can also play an important role in the preservation and protection of the environment if governments use their purchasing power to choose environmentally friendly goods, services, and pubilc works. Green Public Procurement (GPP)–defined as “a process whereby public authorities seek to procure goods, services, and works with a reduced environmental impact throughout their life cycle when compared to goods, services, and works with the same primary function that would otherwise be procured” (EU, 2008)—can, therefore, contribute to more sustainable production and consumption.

Current literature highlights various benefits associated with GPP. First, it allows public authorities to more easily reach environmental targets, such as deforestation rates, through “the purchase of wood and wood products from legally harvested and sustainably managed forests;” greenhouse gas emissions through “the purchase of products and services with a lower CO2 footprint throughout their life-cycle;” and sustainable agriculture through the purchase of “organically produced food.”10 GPP can also help to raise awareness of environmental issues by publishing information on the benefits of GPP policies and identifying the impact of certain goods and services on the environment. Furthermore, GPP can provide an incentive for industries to develop innovative “green” technologies and products.

A number of challenges and barriers exist to GPP, however. These challenges include (i) a lack of political support; (ii) the perception that “green” goods, services, and public works can cost more; and (iii) a lack of legal expertise in applying economic and environmental criteria when purchasing a particular good or service.11

Overall, the practice of using public procurement as a tool to promote economic, social, and environmental policy objectives is still nascent in the region. As of 2012, only five countries have incorporated environmental sustainability principles in procurement policies and contracts. Environmental criteria have been added to general tender evaluation criteria in the Dominican Republic, Honduras, and Mexico. Venezuela is the only country to have established a social responsibility commitment within its procurement framework (Table 8.4).

Table 8.4Normative Framework of Sustainable Public Procurement in Latin American Countries (2012)
Prohibition/regulation in the acquisition of determined goodsIncorporation of environmental sustainability principles in procurement policies and contractsObligatory use of environmental impact assessmentsEnvironmental criteria in tender evaluation criteriaEstablishment of a social responsibility commitment
Brazil
Costa Rica
Dominican Republic
Ecuador
El Salvador
Granada
Haiti
Honduras
Mexico
Nicaragua
Peru
Uruguay
Venezuela
Total35331

There are several challenges that face the region in terms of incorporating elements of economic, social, and environmental sustainability into public procurement frameworks. A survey in nine Latin American countries suggests that the most common concern is the lack of information and knowledge on SPP (Table 8.5). Furthermore, government officials cite a lack of sufficient offers from suppliers as another barrier to sustainable procurement. The lack of offers from suppliers, however, can stem from the inability to determine the demand of goods and services from the government that fulfills economic, social, and/or environmental objectives. In addition, little information is available to governments regarding the range of goods and services and production capacity of the businesses they seek to promote or preference, such as SMEs and women-owned businesses.

Table 8.5Barriers to Sustainable Public Procurement in Latin America (2011)
BarriersTotal number of countries in agreement with statement
Lack of information and knowledge on sustainable public procurement9
Lack of sufficient offer from suppliers6
Lack of legislation or internal rules5
Higher prices for sustainable goods, services, and pubilc works4
Main selection criterion is price3
Lack of interest and commitment from procurement system users3
Resistance from suppliers2
Supply is only available in international markets1
Procurement system is inadequately equipped to handle sustainable procurement1
Lack of general regard for the environment1
Difficulty in gaining approval from auditing/accounting officials0
Source: Beláustegui, V. (2011).Note: The barriers to sustainable procurement stem from a survey (coordinated by author V Beláustegui) that was administered to countries through a thematic task group. The survey was complemented by interviews and consultations with key actors in the procurement process. The 9 out of 11 countries that responded to the survey were Chile, Colombia, Costa Rica, Ecuador, El Salvador, Nicaragua, Paraguay, Peru, and Uruguay.

Civil Society Oversight

Given that a substantial amount of public funding is spent to acquire goods and services, and that citizens are directly affected by corruption and mismanagement of resources through poor-quality goods or inefficient service delivery, the monitoring of public procurement by civil society is paramount. By helping to prevent, detect, and expose corruption, CSOs can help not only to prevent the theft and diversion of public funds, but also to engender reforms through the dissemination of their findings. On the other hand, governments are now recognizing that CSO participation in procurement monitoring can also help to increase the legitimacy and credibility of procurement systems.

In Latin America, the degree of civil society participation in monitoring government is inconsistent and generally weak across countries. CSOs in the region face challenges in the form of legal mandates and technical deficiencies (Tranparencia Mexicana, 2012).

Precise legal mandates that call for civil society participation in monitoring government procurement provide strong incentives for CSO oversight. Not only do the mandates guarantee that reliable and timely information be granted to CSOs, but they also guarantee that their involvement will be respected by government officials and bidders, making monitoring easier and safer, in general (Transparencia Mexicana, 2012). In Latin America, however, few countries have legislation that explicitly allows procurement monitoring by CSOs. Although substantial progress has been made in Mexico with regard to formalizing CSO participation in procurement monitoring, other countries still struggle to implement legal mandates enacted in 2003 (as in the case of Colombia, with regard to its Law No. 850) on the role, rights, and obligations of CSOs. In Argentina, CSOs such as Poder Ciudadano are invited to participate in monitoring major procurement processes or when the impact of procurement projects have important social implications (Box 8.5).

Many CSOs in the region also lack the technical capacity to conduct basic social oversight activities. Procurement is a highly technical topic that requires knowledge of laws, regulations, and monitoring and evaluation techniques, as well as sector-specific information. Although many Latin American countries have a clear norms that require government officials to disclose and disseminate procurement information—primarily through e-procurement systems—CSOs may not be able to easily understand information contained in reports, given their technical complexity. Furthermore, if information is fragmented, CSOs may lack the resources to monitor all systems, increasing the likelihood that procurement processes go unnoticed and unmonitored.

To overcome limitations in technical capacity, CSOs can work together to aggregate individual efforts associated with monitoring and evaluating public procurement. In Colombia, for example, a program—Columbié-monos—has linked and empowered local CSOs to increase their oversight of procurement in the health sector. Coordination among CSOs can also occur across countries. Open Government Partnership (OGP), launched in 2011, is an initiative that seeks to achieve a greater degree of efficiency through the adoption of strategies related to transparency, access to information, citizen participation, and the use of ICT to tackle five major challenges: improve the quality of public goods and services, increase public integrity, improve the management of public resources, create safe communities, and increase corporate-social responsibility and accountability. Though the OGP is sponsored by the governments of the participatory countries, it also relies heavily on CSOs for its structure, purpose, and decision making. In Colombia, for example, the Plan of Action that was approved for a period of two years by the OGP was elaborated by government officials in partnership with eight

Box 8.5.Participation of Civil Society Organizations in Monitoring Public Procurement

Poder Ciudadano in Argentina and Observatório Social de Maringá in Brazil are two civil society organizations (CSO) that actively monitor public procurement contracts, publish procurement-related information and facilitate dialogue between public officials and citizens.

Poder Ciudadano, based in Buenos Aires, Argentina, is a nonprofit, nonpartisan organization that was started in 1988. In a country that is currently in the midst of an institutional legitimacy crisis, as evidenced by its significant drop in rankings in Transparency International’s Corruption Perception Index (from 57 in 2001 to 104 in 2014), Poder Ciudadano’s work focuses on promoting civil society oversight, transparency, and access to information to strengthen democratic institutions through collective action.

Procurement has proven to be a field in which Poder Ciudadano has managed to generate a high degree of influence. Through its program, Transparent Public Procurement (Programa de Contrataciones Públicas Transparentes), the organization focuses on promoting two key components, integrity pacts and public audiences, to generate best practices in terms of transparency and social control. Integrity pacts are designed to curb irregular or corrupt practices via explicit agreements between the state and all bidders for the selection, evaluation, and awarding of a specific contract.

The hearings, on the other hand, are organized and advertised by government authorities and provide a venue for businesses, CSOs, experts, community members, and the media to voice opinions and concerns relating to public procurement transactions. Over the years, these discussions have ranged from hearings relating to the different aspects of the bidding process for the construction of Argentina’s “H” subway line (1999) to hearings on community support and justification of an international tender for municipal waste management in the municipality of Morón (2006).

The Observatório Social de Maringá (OSM) is a CSO that operates out of Maringá, Brazil. OSM was created in 2006 to provide society with opportunities that promote social cohesion through transparency and diligence in the management of public resources. Today, OSM is comprised of professionals from different fields, such as lawyers, economists, businessmen, and students. OSM’s volunteers first undergo training, provided by the municipal Comptroller General and the Court of Auditors, and then conduct educational campaigns and monitor spending through procurement.

To promote citizen participation and fiscal responsibility, OSM conducts educational campaigns through its Ethnically Responsible Society program (Sociedade Eticamente Responsável) on the benefits of taxation and the use of public resources. Their formal and informal campaigns are carried out in innovative ways through plays, essay contests, tax fairs, poetry, and seminars. One of SER’s first projects, for example, was the Seminar on Fiscal Education of Paraná (Seminário Paranaense de Educação Fiscal) that took place in 2004 and focused on the socioeconomic benefits of taxation and importance of overseeing the use of public resources.

OSM also monitors public procurement in Maringá in three different phases: publication of bidding documents, analysis of processes, and delivery of products and services. Over the past decade, OSM has been able to detect and report bidding irregularities that have resulted in substantial savings. One of the most striking achievements of OSM, however, has been the creation of Maringá’s Control and Inventory Law that has helped to reorganize supply warehouses, computerize inventory management, reduce the waste of stored goods, and improve the planning of future acquisitions.

Colombian CSOs that, together, have formed the OGP Civil Society Platform. The Plan of Action, approved in 2012 and subsequently revised in 2012 and 2013, contained 27 concrete action items and commitments, such as the improvement of Colombia’s e-procurement system, Colombia Compra Eficiente (Klitgaard, 2014).

Conclusions

Public procurement is a vital part of PFM and can have long-term effects on society and the economy. As one component of PFM, procurement both influences and is influenced by other components of PFM. On the one hand, procurement affects whether budgets are efficiently and effectively executed, generating reliable and timely information that can facilitate internal audits and controls. On the other hand, a lack of integration between public procurement and treasury can result in late payments and contract delays, compromising the efficiency of procurement systems.

The nature of public procurement has undergone a significant transformation over the last two decades, prompted by ICT, an increase in economic integration, trade liberalization and institutional developments. The development of ICT tools have helped to modernize public procurement through framework agreements and reverse auctions, as well as the online adoption of e-catalogues and online supplier repositories. The creation of a single common market within the EU has highlighted the need to align procurement systems under a single directive to facilitate trade and integration and serve as an inspiration to other regions. In Latin America, the creation of Mercosur and CAFTA-DR has also influenced the development of common procurement principles, though to a lesser extent.

Latin American countries have made considerable progress in the realm of public procurement systems in the last two decades. Aided substantially by ICT tools and the creation of procurement regulatory agencies, many countries in the region have adopted e-procurement systems that aim to increase the efficiency, value for money, and transparency of public procurement by simplifying processes and fostering competition. As a result, entities are able to purchase a wider variety of goods and services in a more timely and cost-efficient manner. E-procurement has also facilitated the collection of timely and reliable information regarding regulatory frameworks, processes, manuals, and guides for agencies and businesses. Furthermore, some e-procurement systems also generate analyses and reports on open tenders, existing contracts, and procurement statistics, which can be used to assess adherence to budget allocations, facilitate internal audits, and aid the role of CSOs.

The procurement agencies created in the region—some of them with institutional and financial autonomy—to some extent, have allowed the countries to push significant reforms in the area of public procurement. In addition, these agencies have helped to mitigate the proliferation of policies and procedures by overseeing the development of more integrated ones and standardizing those already in place. To facilitate and increase the adoption of new ICT tools, many of these agencies have also institutionalized technical capacity trainings for entities and suppliers, online and in training centers, which have increased significantly the success of e-procurement systems. The lack of technical capacity exhibited by procurement officials, however, can pose significant challenges to the success of agencies in pushing for the modernization of procurement systems.

In establishing better regulatory frameworks and control mechanisms, however, some countries in Latin America have focused on processes as opposed to results. As a consequence, procedural formality has superseded efficiency, with control agencies focusing on compliance as opposed to risk identification and mitigation, value for money, and the impact and results of procurement operations. It is fundamental to develop methodologies, standards, and indicators to measure and analyze performance and results (Allen, Hemming, and Potter, 2013).

Sub-indicator 5(d) in the MAPS assessment verifies the “existence, relevance and comprehensiveness of the quality assurance and standards for processing procurement actions, and ensures their systematic application to provide for monitoring of performance” (OECD, 2010). At a minimum, these types of standards should “Provide quality assurance standards and a monitoring system for procurement processes and products, provide for a staff performance evaluation based on outcomes and professional behaviors, and ensure that operational audits are carried out regularly to monitor compliance with quality assurance standards” (OECD, 2010). In the region—and to a limited extent—only Ecuador, El Salvador, and Paraguay have adopted quality control standards. Although these standards can vary across countries and levels of government, examples might include response times to process inquiries or a length of time to prepare tender documents.

Budget planning, cash forecasting, allocation and procurement systems need to work in tandem to improve the management of public resources (Allen, Hemming, and Potter, 2013). In many countries in the region, public procurement systems are scantily integrated with other PFM systems. This misalignment increases time and resources spent by entities procuring goods and services. Furthermore, the lack of integration between procurement systems and cash management systems can substantially affect the efficiency of procurement when cash forecasts or cash rationing forces agencies to delay or break up procurement contracts.

To incorporate economic, social, and environmental elements into public procurement systems, while at the same time respecting the fundamental three principles of procurement, remains a continuing challenge in most Latin American countries. Currently, data show that few countries have exploited public procurement as a tool to promote SMEs and address gender and environmental issues. This is due to a lack of information and knowledge on sustainable procurement, offers from suppliers, legislation, or internal policies on the matter.

Increasing the role of civil society oversight in public procurement is a powerful incentive to promote political accountability. In the area of public procurement, CSOs have the potential to independently prepare proposals for reforms, mediate and promote strategic alliances between the private and public sectors, and compile databases through research and surveys. Although some CSOs (e.g., in Argentina and Mexico) participate in procurement activities, overall, their participation in the region is still limited. The obstacles faced by CSOs vary across countries; however, in many cases, they stem from the fact that only a few countries have formalized their role in monitoring procurement operations and ensuring efficient delivery of goods and services. As a result, CSOs enjoy limited access to procurement information and financial and technological support.

The progress of Latin American countries in public procurement during the last two decades has been significant. This progress, however, has centered mainly on the procurement of goods and general services; not on the procurement of large infrastructure projects. As infrastructure investment becomes critical to the competitiveness and economic growth of the region, governments also must focus on improving the efficiency, value for money, and transparency of procurement in infrastructure projects as well. One of the main problems governments can seek to address is to ensure that businesses bidding for public infrastructure projects meet preestablished qualification criteria, such as price, quality, and delivery time of the construction itself, and the acquisition of related goods and services. Reliable financial flows should be established and subsequently guaranteed for large infrastructure projects to avoid price escalation due to budget shortfalls. Furthermore, contracts should also specify information that must be disclosed (e.g., selection of projects and their design, implementation, monitoring, amendments, and evaluation), to increase transparency and competition in the procurement process in terms of infrastructure investment. By requiring contractors to provide and publically disclose such information, regulators also will be better positioned to cope with information asymmetries (Fay and Morrison, 2007).

Another option to be considered in this case is to further explore PPPs for large infrastructure investment projects. There are various designs for PPPs that can better distribute risks between contractors, operators, and the government. For instance, when the contractor that builds the infrastructure work is the same firm that will operate and will receive payment for the use of the work—as an investment return—it should complete the work as soon as possible to start receiving payments for its use. Such a practice would be a good incentive for efficiency and value-for-money.

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CAFTA-DR is the first free trade agreement between the United States and Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua.

In the context of this chapter, Latin America includes Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, the Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, Uruguay, and Venezuela.

The exceptions are Argentina, Chile, and Mexico. In Argentina, the general regulations of the law are still applicable to public works, although only in a secondary manner.

The indicators contained in the OECD/DAC MAPS “are intended to provide harmonized tools for use in the assessment of procurement systems, and has been designed to enable a country to conduct a self-assessment of its procurement system. The scoring system ranges from 3 to 0 for each baseline sub-indicator. A score of 3 indicates full achievement of the stated standard. A score of 2 is given when the system exhibits less than full achievement and needs some improvements in the area being assessed. A score of 1 is for those areas where substantive work is needed for the system to meet the standard. A rating of 0 is the residual indicating a failure to meet the proposed standard.”

Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, and Uruguay.

The 2013 OECD Survey on Public Procurement (unpublished), conducted in Latin America and the Caribbean in coordination with the Inter-American Development Bank, was used as input for OECD and IDB (2014). The 11 Latin American countries that responded to the survey were Argentina, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, Honduras, Mexico, Paraguay, and Peru. Data for the 34 OECD member countries correspond to the 2010 OECD Survey on Public Procurement.

Colombia, Costa Rica, the Dominican Republic, Ecuador, Honduras, Paraguay, and Peru.

Lei Complementar 123/2006 and Decreto 6.204/2007. In the case of reverse auctions, this differential is 5 percent.

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