(Practical) Hints in Designing Flexible Strategies for Centralized

Public Procurement

Tirana – May 24, 2012

Gian Luigi Albano, PhD

Head of Research and Development

Consip S.p.A., The Italian Public Procurement Agency

e-mail: gianluigi.albano@consip.it

Roadmap

Centralized public procurement through Framework Agreements

1

The pros and the cons of flexible tools: Some hints for implementation

3

2 A conceptual approach to Framework Agreements

4 Let’s-get-started kind of concluding remarks (with a look at the near future)

Introduction - Motivation

• Framework Agreements (FAs) recognized as a potentially effective tool for implementing flexible strategies of centralized public procurement

• FAs allow public agencies to aggregate demand and streamline procurement processes, while keeping some degrees of flexibility.

Today’s talk aims at

surveying the main pros and cons of aggregating public demand;

discussing the importance of “knowing your chickens” before setting up two-stage procedures;

providing some hints on the concrete design of FAs

1

Framework Agreements: General Features (1/2)

General definition

arrangements whereby a procuring entity and provider(s) establish the terms on which purchases may or will be made over a period of time. The procuring entity makes an initial solicitation of offers against set terms and conditions; selects one or more providers on the basis of their offers; places periodic orders as particular requirements arise

EU Procurement Directive (2004/18/EC)

Similar tools in the US: IDIQ Contracts, Multiple Award Schedules, …

FAs for goods and services only, no civil works!

1

Framework Agreements: General Features (2/2)

1

Two basic common features:

aggregation of demand

2-stage procedure

1. FA is concluded with certain number of economic operators (on the basis of a “master contract”)

2. Specific contracts are awarded call-offs

Main “Families” of Framework Agreements (1/2)

• 4 “families” of FAs:

• 2 relevant classes:

1. Complete Framework Agreements with 1 supplier

(“Framework Contract”) Competition entirely concentrated at

the first stage

2. Incomplete Framework Agreements with n suppliers (“strictu

sensu”) Effective competition can (and should!) take place at

both stages

1

completeness of the contract

number of

economicopera

tors

• 1 operator• complete

• 1 operator• incomplete

• n (3) operators• complete

• n (3) operators• incomplete

Main “Families” of Framework Agreements (2/2)

In general, useful in two broad sets of circumstances:

• repeated purchases by a single contracting authority

• central purchasing body or buyers consortia procuring for several contracting authorities

1

completeness of the contract

number of

economicopera

tors

• 1 operator• complete

• 1 operator• incomplete

• n (3) operators• complete

• n (3) operators• incomplete

A simple qualitative analysis of FAs (1/4)2

Focus on Frame Contracts: Pros

Minimization of the process cost (for both buyers and

suppliers):

• issuing of purchasing orders in a few minutes

• benefit from efficient use of expertise and information

Maximization of competition:

• economies of scale (mind the number of lots!)

• standardization

• Buyers’ higher bargaining power

• Potentially strong effects on competing firms’ market share (if few

lots)

A simple qualitative analysis of FAs (2/4)2

Focus on Frame Contracts: Cons

No flexibility

• Risk of lock-in by public agencies if overstretched contract length

+ risk of favoring quasi-monopolistic positions (if contract covers

a sizeable fraction of public demand)

• standardization may imply “loose tailoring” or no tailoring at all

Risk of adverse selection (please forgive some economic

jargon…)

A simple qualitative analysis of FAs (3/4)2

(Multiple award) incomplete Framework Agreements

Main goal: aggregate demand and streamline process + leeway for flexibility

Pros

Accommodate for heterogeneous needs/preferences

personalization and customization, delivery conditions, physical

location, different bundles of the same commodities, intrinsic

characteristics as buying entities (timeliness of payments,

managerial skills, purchases taking place at different points in time,

suppliers’ inventories…)

Suppliers’ selection targeting single specific contracts allocative

efficiency

A simple qualitative analysis of FAs (4/4)2

(Multiple award) incomplete Framework Agreements

Cons

Require reopening of competition higher process cost

Overall, reduced competition potentially higher purchase prices

Reduced number of competitors interacting repeatedly risk of

collusion

Some suppliers’ strategic behaviour can distort expected

competition

Need for careful and accurate design

An overarching picture for decision making

2

Choosing the appropriate class of FA

Multiple suppliersIncomplete

Supply side

Demandside

Heterogeneous demand

Concentrated

Standardized

Fragmented

Specialized

Homogeneous demand

Multiple suppliersComplete

1 supplierIncomplete

Framework AgreementsSimple contractsSimple contractsSimple contractsSimple contracts

Framework Contracts1 supplierComplete

High effort for POs

Low effort for POs

Flexibility

Centralization

3

Basic trade-off

administrative efficiencyadministrative efficiency higher competitionhigher competition

higher process cost savingshigher process cost savings lower quality/price ratiolower quality/price ratio

vsvs

Main drivers

flexibilityflexibility

contract tailoring

efficient allocation

contract tailoring

efficient allocation

demand side

demand side

market sidemarket side

demand heterogeneitydemand heterogeneity

market structuresuppliers heterogeneity

market structuresuppliers heterogeneity

Nuts and Bolts of FAs (1/3)

Nuts and Bolts of FAs (2/3)3

Balancing competition in the two selection stages: main drivers

1. Degree of completeness of the “master” contract

Establish at the first stage (virtually) all dimensions/clauses which are likely to be common across all SCs to be awarded during the FA

Establish at the first stage (virtually) all dimensions/clauses which are likely to be common across all SCs to be awarded during the FA

If CAs wish to buy the same homogenous good, but require different delivery conditions and SLAs, then:• Let suppliers compete on the good price at the first stage

(conditional on some minimal quality standards); and• Let selected suppliers compete on delivery conditions and

SLAs to award specific contracts at the call-off stage

Nuts and Bolts of FAs (3/3)3

2. Number of economic operators (n) part of the agreement

The lower the number suppliers selected to enter the agreement…• …the higher the competition for entering the agreement• … the lower the flexibility (if firms are somewhat specialized)

n should increase with:- the expected number of SCs- the degree of heterogeneity of

the SCs

n should increase with:- the expected number of SCs- the degree of heterogeneity of

the SCs

Ideally, one should select those suppliers having a good chance of serving at least one SC!

Balancing competition in the two selection stages: main drivers

When should we worry about FAs? (1/2) 3

• Highly incomplete “master” contract

• Loose selection of economic operators at the first

stage

• No competition to award specific contracts

• “Life-long” FA

If the conditions below are simultaneously satisfied:

Closed “suppliers list”

Risk of corruption (firms may compete in bribes)

Inability to properly assess different public agencies’ performance in terms of achieved value for money

Example 1

When should we worry about FAs? (2/2) 3

• Lay down all conditions in the “master” contract

• Opt for a loose selection of economic operators at the first

stage

• Award specific contracts not on the basis of the first-stage

ranking

When looking for multi-brand supplies, CAs may

Fake competitive process

Brand-driven and not performance-driven choice

Potentially high variance in quality-price conditions

Example 2

4 Main messages

• Each contracting authority may pretend “the size of its

suit” being different from any other’s some degree of

contract standardization, at least at early stages of a

centralization process, ought to be imposed

• Knowledge of both sides (the chickens!) of the market

is as indispensable to the design of FAs as water to life!

• Simple design pays off “essential” FAs + few

dimensions of differentiation

• Participation criteria at the first stage ought to be set

so as to favor the participation of SMEs

4 New developments round the corner

The new Directive in 2014 inspired, among other things, by:

Increasingly important of role of Central Purchasing

Bodies

(Enhanced) Flexibility of procurement procedures

Will “essential” framework agreements eventually see the light?

complete but amendable master

contract

Main Reference

Albano, G.L. and Sparro, M., (2010), “Flexible Strategies for Centralized Public Procurement,” Review of Economics and Institutions, 1 (2), Article 4. doi: 10.5202/rei.v1i2.4.

Downloadable from http://www.rei.unipg.it/rei/article/view/17