Government procurement or public procurement is the purchase of goods, works (construction), or services by the state, such as by a government agency or a state-owned enterprise. In 2019, public procurement accounted for approximately 12% of GDP in OECD countries. In 2021, the World Bank Group estimated that public procurement made up about 15% of global GDP. Therefore, government procurement accounts for a substantial part of the global economy.
Public procurement is based on the idea that governments should direct their society while giving the private sector the freedom to decide the best practices to produce the desired goods and services. One benefit of public procurement is its ability to cultivate innovation and economic growth. The public sector picks the most capable nonprofit or for-profit organizations available to issue the desired good or service to the taxpayers. This produces competition within the private sector to gain these contracts that then reward the organizations that can supply more cost-effective and quality goods and services. Some contracts also have specific clauses to promote working with minority-led, women-owned businesses and/or state-owned enterprises.
Competition is a key component of public procurement which affects the outcomes of the whole process. There is a great amount of competition over public procurements because of the massive amount of money that flows through these systems; It is estimated that approximately eleven trillion USD is spent on public procurement worldwide every year. To prevent fraud, waste, corruption, or local protectionism, the laws of most countries regulate government procurement to some extent. Laws usually require the procuring authority to issue public tenders if the value of the procurement exceeds a certain threshold. Government procurement is also the subject of the Agreement on Government Procurement (GPA), a plurilateral international treaty under the auspices of the World Trade Organization.
History Public procurement occurred in Europe in various forms since at least the 18th century, even if it lacked regulations and strict procedures. Nonetheless, the need to regulate public procurement procedures and to constrain the powers of heads of administrative departments began to be deemed necessary as early as the French Revolution (1789). Noteworthy in Italy is the first regulation on public procurements, dating back to the time of the Kingdom of Italy of Napoleon Bonaparte and dated May 1, 1807. This regulation contains many terms and principles typical of modern codes on public procurement.Bollettino delle leggi del Regno d'Italia - Decreto per le aste negli appalti delle opere di acque, ponti e strade - 1° maggio 1807Raccolta_1785, p. 54
Overview Need for government procurement Government procurement is necessary because governments cannot produce all the inputs for the goods they provide themselves. Governments usually provide public goods, e.g. national defense or public infrastructure. Public goods are non-rival and non-excludable, which means that one individual's consumption does not diminish the quantity or quality of the commodity available to others, and individuals cannot be prevented from freely consuming the commodity, or "free-riding". Consequently, private markets cannot provide public goods. Instead the government provides those goods and finances them by raising taxes from all citizens.
In addition to public goods, governments often also provide merit goods, such as education or health care. Merit goods are private goods which are rival and excludable and are therefore provided by private markets. Nevertheless, governments also provide merit goods because of reasons of equity and fairness and because they have positive externalities for society as a whole. In order to provide public and merit goods, the government has to buy input factors from private companies, e.g. police cars, school buildings, uniforms etc. This process is called government or public procurement.
Scope and impact Government procurement practice impacts on all public works, services and supply contracts entered into by a public authority, and the markets from which these are purchased. Public procurement regulations normally cover all works, services and supply contracts but there may be exceptions. These most notably cover military acquisitions, which account for large parts of government expenditure, some aspects of health care,Local Government Association, 'Lord Young' reforms, published on 20 January 2016, archived on 16 March 2017, accessed on 17 January 2025 and low value procurement.Scottish Government, Procurement Journey: Route 1, accessed 25 December 2023
The GPA and EU procurement law allow for exceptions where public tendering would violate a country's essential security interests. Additionally, certain politically or economically sensitive sectors, such as public health, energy supply or public transport, may also be treated differently. Government procurement is linked to economic growth, protection and enhancement of competitive market conditions, policy achievement, and innovation promotion. The United Kingdom's Office of Fair Trading, as it then was, commissioned a review addressing the impact of public sector procurement on competition, which reported in 2004. The review found that
Contract types used in government procurement include fixed-price contracts, cost-plus contracts, time-and-materials contracts and indefinite-quantity contracts.
Economics of public procurement The economics of public procurement is an applied subfield of economics that studies how procurement rules and the decisions of public buyers and suppliers determine what is bought and on what terms, whether it is delivered and how well, and how these decisions propagate from individual contracts to firms, industries and the wider economy. It draws on auction theory, contract theory, industrial organization and political economy, and takes the individual contract over its life cycle, rather than aggregate government spending, as its unit of analysis.
The subfield analyses the behaviour of three actors whose choices interact across the procurement process.
Centralized procurement designer: a central authority that sets the rules of the system, such as the procurement law, the admissible procedures and the monetary thresholds that trigger them; Decentralized public buyers: the contracting authorities, such as ministries, municipalities or public hospitals, that turn a need into a tender, run the competition and manage the resulting contract; and Firms: the suppliers that decide whether to bid, how to bid, and how to perform once a contract is awarded.
These actors meet across five stages that together form a procurement cycle.
Demand planning: deciding whether and what to buy; Tender preparation: writing the specifications, dividing the work into lots and setting the award criteria; Bidding and allocation: firms compete and a winner is selected; Contract execution: the work is delivered, monitored and, where needed, renegotiated; and Economic consequences: the effects that outlast delivery, on firms, markets and public value.
The stages are interrelated rather than self-contained, so a choice made at one commonly reshapes outcomes at the others: how a tender is written, for instance, shapes who competes for it and how well the contract is ultimately performed.
A central organising concept is the public procurement wedge, which arises across these stages. It is the gap between the value an efficient procurement process could deliver and the value procurement actually realises; rather than being measured directly, it surfaces as poorly chosen projects, weak competition, inflated prices, cost overruns, delays, poor quality and forgone firm growth, and can accumulate from one stage to the next.
The economics of public procurement is an active area of economic research.
Strategic purchasing One of the consequences of the 2008 financial crisis was an attempt to reduce public spending in order to control public debt. This trend affected government procurement for its significant share in public spending. Therefore, various purchasing strategies were implemented to increase quality and to decrease cost of government procurement. These strategies include public e-procurement, centralized purchasing or framework agreements. A United States federal memorandum issued in 2005 created an expectation that the procurement, finance and IT functions within federal government departments would work together to generate savings through a process of strategic sourcing.Johnson, C., Implementing Strategic Sourcing, Memorandum for Chief Acquisition Officers, Chief Financial Officers, Chief Information Officers, published by the Office of Management and Budget, 20 May 2005, accessed 22 July 2023
Public e-procurement
Public e-procurement stands for replacing various phases of public procurement with electronic means. Purpose of using e-tools is reducing administrative costs by automation. E-procurement can also mitigate some barriers to entry for smaller suppliers, consequent increase of competition can reduce price of procurement.SEIDL, Pavel. Veřejné zakázky se zaměřením na ICT. Praha, 2017. 60 s. Diplomová práce (Mgr.) Univerzita Karlova, Fakulta sociálních věd, Institut sociologických studií. Katedra veřejné a sociální politiky. Vedoucí diplomové práce Prof. PhDr. František Ochrana, DrSc.
Public procurement and innovation The large buying power of the public sector has led to the consideration of using public procurement as a stimulus to foster innovation. The activities of public procurement and innovation intersect in three specific areas: public procurement for innovation, public procurement of innovation, and innovative public procurement. First, multiple studies have established that public procurement for innovation is a viable and efficient tool to stimulate innovation as a demand - side tool in the innovation policy mix. Second, public procurement may also be used to innovate the public sector itself (public procurement of innovation), through the inclusion of "innovativeness" as a procurement goal (often as a secondary criterion). Third, novel procurement approaches (such as eProcurement or Public-Private Partnerships) may be introduced to innovate public procurement processes and entities.
Centralized purchasing in public procurement Centralized purchasing means awarding procurement contracts on behalf of one or more procuring entities. This method has been used to gain various benefits emerging from demand aggregation. Centralized procurement can be done by ordinary contracting authorities or established central purchasing body. Centralized procurement is regulated by local legislation. For instance, directives 2004/17/EC and 2004/18/EC are dealing with this issue in the EU. Commonly mentioned benefits of procurement centralization are as follows:
Final unit price decrease – Higher procurement value coming from demand aggregation can increase buyers bargaining power and decrease final price. Moreover, higher value can attract more companies to bid in the tender, increased competition might lead to better price as well. Transaction costs reduction – Key objective of centralized procurement is preventing duplication of some procedures. Contracting units can reduce their transaction costs in cooperating with other entities. This aspect is often considered as most relevant argument for procurement centralization. Knowledge sharing – Cooperation in purchasing can also result in sharing best procurement practices. Some central procurement bodies also perform research activities.