Summary article LCS Feasibility PROCUREMENT 28 Jan 08

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KHNET
The LCS-URBACT Procurement study
A report on the feasibility of targeting public procurement policies and methods
to promote territorial economic growth and social cohesion: France & Germany
The LCS- URBACT feasibility study on public procurement concludes that affirmative local
government procurement policies can promote territorial economic growth and social cohesion
Providing 80% of all jobs and most local economic growth, businesses with fewer than 50 employees are
the lifeblood of urban economies. Yet current local government procurement policies and methods often
exclude this pool of local talent and provide no support for this dynamic sector. City managers’ lack of
understanding of the potential for an affirmative procurement policy for creating and supporting jobs is
responsible for a virtual hemorrhage of public monies that could be injected in the local small business
economy.
Most managers believe that public procurement law makes this unavoidable. They are wrong. LCS
Project research demonstrates that local government can empower public procurement professionals to
promote territorial economic growth and social cohesion through better management of the global
procurement process, increased staff professionalism and affirmative small-business friendly policies and
procedures. These changes enable qualified businesses with fewer than 50 employees - often excluded by
current procedures - to respond to competitive tenders and to win.
Such policies stimulate competition; they increase the quality of purchases and lower overall procurement
costs. They respect current legislation. Over time they improve regional markets for goods and services,
because when integrated with outreach, training and other business-support programs and backed by
adequate information systems, these policies can promote the professionalism of small businesses and
expand their ability to win new private and public clients. The same methods and systems support other
local economic and social development goals, including promoting sustainable development, the
reduction of long-term unemployment, and urban planning objectives of many sorts. The data needed to
manage this global procurement function is also needed to manage territorial economic development
overall.
A new generation of public procurement managers understands the problems and is eager to create
solutions. By more professional management of the global procurement process and by partnering among
cities within economic regions, local governments can create policies and methods to empower
Procurement Units so that they can promote equitable growth through expansion of the small business
economy, with increased social cohesion and new jobs
--------------------
The LCS Project develops practical policy options for equitable growth, actionable by local governments
and subject to governance by their citizens.1 This is a summary report on an exploratory LCS-URBACT
Procurement study on public procurement policies in 5 French and German cities.
1
The theoretical basis for the study was provided by KHNET, Inc., whose staff also conducted the current feasibility
study. This research informed 2007 – 2013 URBACT program decisions. It is available at www.khnetonline.com.
In addition to public procurement, LCS focuses on 4 other local government services: Local services and
amenities; Regulatory design and enforcement; Public information services and Governance.
www.khnetonline.com - [email protected]
KHNET, Inc. Administration -19528 Ventura Blvd, # 364 - Tarzana, CA - 91356 - USA 
KHNET en France - B.P. 62 77192 Dammarie-les-Lys CEDEX - (331) 64-39-62-38 - cell (336) 19 46 50 28
KHNET
Methods
The study was conducted from March through December, 2007, with the collaboration of procurement
directors from 5 European local governments in France and Germany. The French city of Roubaix
participated in the study entirely at its own expense. Part of the cost of participation of the other local
governments was subsidized by the European Commission’s URBACT program: The regional local
government of Greater Lyon and the cities of Saint Etienne and in Germany, the cities of Rostock
(URBACT Lead City) and Leipzig.2
The goal of the LCS procurement study was to ascertain the feasibility of affirmative, economically- and
socially-targeted procurement policies and methods. Procurement directors from the network retained the
following definitions:
We use the term “affirmative” to indicate proactive methods and policies designed to meet the
needs of a supplier sector targeted by a territorial economic development plan;
We consider “economic and social” those small-business friendly procurement policies that help
low- and high-tech businesses employing fewer than 50 people win competitive public tenders:
- These businesses represent an investor group that is most likely to invest in at-risk areas,
- They are most likely to be locally-owned,
- They are most likely to include members of ‘social’ and minority groups.
- Small businesses provide the majority of jobs.
We define as “feasible” those changes in procurement policy that produce net financial gain for
local governments and measurable economic and social gains for their local territory, while
respecting three conditions:
- No modification of current procurement regulations
- No modification of local government attributions or organization
- Active support from local procurement professionals and elected officials.
The inter-city and intra-city seminars were valuable for the study for two reasons:
1. Poor public data. As public authorities do not maintain adequate data for analysis, we were able
to use consensus among procurement experts to establish credible estimates. As an example,
while many cities can show that up to 60% of tenders go to small businesses (less than 250
employees), they have no way of knowing what percentage of small businesses (<50 FTE)
respond to their tenders, how many win tenders nor of these, how many are local. 3
2. The need to reveal the large margins of initiative within the procurement process: Bringing
together procurement managers with radically different practices, but who believe they all apply
the same regulations precisely, eyes are opened. The seminars reveal the very large margins of
initiative possible in well-managed procurement.
1. The current situation: Procurement is a key lever for territorial development, too often ignored
by local administrations
2
The procurement feasibility study is an operational complement to several URBACT and other networks, including
EcoFinNet, Europolis as well as work on procurement and sustainable development conducted through Euro-cities.
3
Public data in France does not distinguish between a small business with 2 employees and one with 250. German
prequalification data is similarly weak, and in addition excludes companies who do not pay to join. Such data
cannot be used for outreach to businesses with fewer than 50 employees. Procurement managers cannot use it to
identify potential suppliers from this target group who do not bid, nor why their tenders fail.
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KHNET
According to Europe’s Eurocities network of large cities, public procurement by local governments
throughout Europe in 2000 amounted to over 2 trillion Euros. What may be the largest budget item of
local government outside wages is essentially unmanaged in terms of its huge impacts on territorial
economic and social development. While the European Union has made efforts to open large tenders to
International competition, and in spite of recent decisions to mandate sustainable development, it still is
safe to bet that in no single European economic basin are these enormous sums of money spent with any
oversight as their economic, environmental or social impact.
For historical reasons the management of procurement has been limited to reducing legal risks (ensuring
compliance with codes and avoiding corruption); to obtaining competitive prices and quality and to
responding quickly to operational needs. In order to reduce delays procurement has been decentralized,
but without centralizing the data necessary to manage buyers, measure quality and cost-over-time of
products and services or supervise compliance with social policies. As much as 40% of all municipal
procurement escapes any supervision by professional procurement experts. In spite of efforts by local
procurement experts to use every opportunity to improve tenders, expand competition, opportunities for
oversight are often limited to contract reviews, data is insufficient to analyze the quality of market
response to tenders.
Because of these limitations, in most cities public procurement experts cannot develop the professional
specializations enabling them to support policy. As a result elected officials have no clue as to whether
procurement practice supports or hinders the economic development policies they develop, whether
procurement supports economic growth, social cohesion and sustainable territorial development. Cities
and their economic basins do not have a single, unified view of procurement nor of territorial suppliers
markets.
Rapid economic and social gains are possible
Given this point of departure, local governments can expect quick and large economic and social gains
from more-professional procurement departments. The group of experts in our study agreed that a target
of <15% average savings on the overall procurement expenditures of local governments is reasonable
over several years.
Internal cost savings: One example: At the level of the “Communauté Urbaine” the full internal
cost of a failed tender is approximately 40 000 Euros.4 The 5 cities in our panel had failure rates
ranging from 2% to 30% of all tenders.
Lower prices: Private-sector benchmarks indicate that internal savings are small compared to
lower prices that come from improved competition. It is possible to evaluate these savings against
current benchmarks given adequate data, but the cost of doing this in each city far exceeded the
study budget
Social gains: Meaningful estimates of increased response by, and awards to, SME’s of under 50
employees can only be made using data that is currently unavailable to cities and thus to this
study. The LCS expert panel did not object to an assertion that a starting hypothesis might be that
less than 10% of number of current tenders might be won by <50 FTE small businesses under
more professional management of the procurement process as a whole. International experience
demonstrates considerable success in promoting minority owned small businesses and
employment through the use of public procurement methods similar to those proposed here.
4
A failed tender is declared when too few adequate responses are received to a call for tender. A “Communauté
Urbaine” is a regional local government uniting cities within a larger territorial or economic region, its tenders are
generally larger than most municipal tenders.
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KHNET
Current tender procedures exclude competent local small businesses
Few, and poor quality responses to tenders correspond to poorly designed tenders including lot size
and/or poor outreach to potential suppliers. Larger companies have specialized tender units, which lower
the cost of winning bids, without supplying better products and services. Competent small local
businesses frequently abandon bidding altogether after their bids are eliminated not for reasons of cost or
capacity to respond, only for reasons of non-compliance with bidding procedures. This is an example of
“small-supplier fatigue” that reduces competition for tenders, raises prices for cities. These problems are
well known to buyers, but as the global procurement function has no unified management, they are unable
to impose system-wide solutions on line managers.5 Case-by-case remedies may let one small business
win one bid, but not for the sector as a whole.
Social and economic gains are linked
That current tender procedures and outreach generate insufficient competition can be seen from the weak
responses to tenders, and this notably from local <50 FTE small businesses. Few cities track the “smallsupplier fatigue” that results from poor management of the global procurement process. Yet it drives up
prices, as it excludes precisely the small businesses that correspond to the economic and social
development goals of cities. In addition, the lack of territorial coordination among public procurement
officials ( no common procedures, no shared data on suppliers, no coordination in planning tenders)
means frequent competition among them for the same short list of local suppliers. This in turn means
delays and along with the cyclical nature of public spending, creates boom-bust cycles notably in building
trades (making investment difficult, even dangerous for small entrepreneurs that do bid for tender). This
further raises supply costs.
Lack of outreach
Local governments supply their buyers with little operationally useful information on local supplier
markets. What local information buyers have access to is often insufficiently up to date, and is not usable
in pre-selection of potential new suppliers.6 As a result, for a buyer to find a new supplier requires extra
effort on the part of procurement staff: meetings, calling colleagues, publicity. And to expand the list of
known suppliers it is necessary for buyers to constantly test new suppliers. But in addition to the extra
effort, testing new suppliers involves risk. To take these risks requires management policy. For without
strong management support, trying new suppliers is a risk many buyers don’t take.
Existing social and environmental mandates are underused due to lack of City implication.
Current national laws and European regulations allow considerable leeway in imposing social criteria in
bidding: Anti-discrimination, long term employment, sustainable development, diverse standards of
urbanism. Some of these are pass-through, and can be imposed on private suppliers. As these require
some courage to impose on suppliers, most local governments exert no pressure on buyers to use them to
capacity. Two promising exceptions to this dim picture: French Départements can require suppliers to
hire long-term unemployed with letters of understanding (clauses d’insertion) and do so to save
unemployment and welfare payments. Sustainable development mandates are having widely diverse
5
The procurement quality program of Greater Lyon, by analyzing the procurement process in detail discovered that
many of these incomplete bids could be saved by counseling bidders and simplifying procedures. Other
procurement officials were convinced – incorrectly - that such affirmative intervention was prohibited by law.
6
French buyers do not report using data from local regional Public Information Agencies nor from Chambers of
commerce. German buyers do benefit from a pre-qualified list of suppliers, the cost of this system excludes some
smaller suppliers, and in practice use of new suppliers has regularly been considered a professional fault among
some supervising authorities in German Laender.
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KHNET
impacts on local economies: carbon, renewable energies, and especially green building standards
mandated through permitting and through new and rehab construction tenders.
2. Recommendations for short-term results
Relatively rapid improvements can be obtained by better management of the global procurement process,
including improved professional skills for buyers in 6 areas (below), organization and reporting to
establish adequate oversight of the global procurement process, harmonized procedures and better
coordination among regional public procurement departments.
IMPROVING THE PROFESSIONALISM AND THE ORGANIZATION OF THE GLOBAL PROCUREMENT
PROCESS
THE PROCUREMENT PROCESS
(Activities regulated under European and national procurement rules)
☺
Advertising
strategies
Process
optimization
Identification of
needs.
Specifications,
tender terms and
clauses
Supplier
evaluation
Bid evaluation
Evaluation of
supplier
execution and
delivery
6 key professional skill areas for buyers
Recommended actions include:
Simplifying and improving procedures and benchmark costs, quality, supplier response (review
the quality of global procurement processes),
Oversight of the global procurement process
Fully applying opportunities for socially and economically preferential tender terms (Contract
terms and letters of understanding for social enterprises, employment, sustainable development,
urbanism),
Improving outreach and education to small businesses and with local professional organizations
Coordinating and harmonizing methods among procurement departments within a territorial
basin.
Potential short-term economic and social gains through procurement policy
The following short-term financial and social gains can be realized with adequate management of the
global procurement process and reasonable territorial coordination among public procurement
departments:
Reducing overall procurement budgets (a <15% target)
through more competition in bids
through better tenders and clauses
through better evaluation of suppliers
through lifetime cost-of-use evaluation of offers
through buyer coordination and improved lead time in tenders
Reduction of long-term unemployment & discrimination
thousands of jobs for the long-term unemployed (France)
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KHNET
reduction in job discrimination (UK, Scandinavia)
open procurement markets to bids from new and minority businesses
Making better use of territorial supply markets
Designing business-friendly procedures and tenders
Correcting the reasons for small business absence from the bidding process in order to
increase responses from qualified local suppliers and improve competition
Freeing public funds for social programs
3. Important mid-range improvements in territorial economic and social development can come
from integrated management
Given the advantages, it is difficult to understand why most local governments have not already
“empowered” procurement to contribute to regional economic and social development. Professional,
empowered procurement has every reason to collaborate with other city departments charged with
promoting economic and social development. Global management of the procurement process requires
an operational understanding of territorial suppliers markets in order to increase sustainably their capacity
to bid and to supply better quality goods and services sustainably. These suppliers’ markets precisely
correspond to the economic basins which local and regional governments’ economic development and
social units are charged with developing.
The need for management integration seems obvious. It is principally hindered by the lack of recognition
on the part of City Administrators of the role that procurement can play, and therefore their lack of
support (empowerment) for integrating procurement criteria and goals into the programs and management
of other public authorities. Once done, it can contribute substantially to optimize territorial economic and
social development. In this way preferential programs to help local business can be integrated into public
procurement department resources without violating National or European regulations. This external
support for procurement can take 4 major forms:
OPERATIONAL UNDERSTANDING OF LOCAL SUPPLIERS’ MARKETS
SUPPORT FROM PUBLIC PROGRAMS
(Activities unregulated by procurement laws)
Assess the
territorial
marketplace
Structure ongoing
communication with
suppliers and other
SMEs
“Organize a dialogue
with the private
sector”
Information Systems
1. Procurement process
and systems
2. The territorial
Marketplace
Partnerships and
networks among
territorial
purchasing
departments
Key areas of external support for global procurement management
Integrate procurement expertise into small business promotion programs
To promote better competition in tenders at a regional level requires active programs to identify, rate and
educate potential bidders: this is fully within the purview of the procurement mission. Laws prevent
procurement officials from preferentially promoting local small suppliers, but preferential policies are
fully within the purview of other public programs. Procurement experts should therefore actively
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KHNET
participate as experts in programs to promote small businesses, notably in establishing pre-qualification
criteria that correspond to the highest professional standards for submission of tenders.
Share resources at the territorial level to develop scale and share expertise
Professional expertise and specialization needed may be too expensive for smaller cities taken
individually. However many of the basic costs of improvement can be shared among cities and other
public procurement departments (legal expertise, revised methods and procedures, better information on
local small businesses, Information systems and improved data on current suppliers and product quality,
new supplier training and outreach). This is possible with ad-hoc legal structures, without modifying
current attributions of cities, public agencies and other local governmental structures.
Active involvement of the private sector
Professional organizations and associations can relay procurement goals. Various kinds of public-private
partnerships can provide support for improved, targeted procurement and other public policies. By
breaking down barriers between public authorities and local small businesses, improving dialogue, both
economic and political gains can be important.
A territorial vision of the supplier market is needed to implement territorial economic development
policies
Procurement departments can furnish information that is needed to support territorial economic and social
development strategies. This includes identifying, rating, measuring responses from local small
businesses, tracking product and service quality, tracking respect of social and environmental contract
clauses. “Local” suppliers are found throughout an economic basin, not necessarily within the boundaries
of one city. But procurement managers also need information that is available to other agencies. The
economic and social effects of procurement optimization are measurable at the territorial level: they
should be coordinated and tracked at that level. Implementing territorial economic and social policy
requires operationally useful information for buyers, but also for city and territorial policy makers.
Mid-range gains from integrated procurement policies
Considerable international experience demonstrates that the following classes of gains can be generated
by integrated procurement policies:
Improved local markets for goods, services & jobs
Improve the competitiveness and skills of local SMEs
Open other markets to new and minority entrepreneurs
Lowered transfer payments and subsidies
Contract clauses shift costs to the private sector (hiring, urbanism, etc.)
Create a tool for supporting territorial ‘cluster’ strateges
Cleantech & green buildings (Germany, US, UK)
Other new markets in sustainable development
New business opportunities, investments
through local government capacity to manage integrated services (attractiveness)
Improving local government revenues
For further information
Feasibility studies and implementation plans for each city are made available following validation by each
city. This process is completed in 3 cities, and underway in 2 others. Each city will determine whether
these plans are to be made public. The completed LCS-URBACT Feasibility Study on procurement will
be available at WWW.URBACT.EU and at WWW.KHNETONLINE.COM.
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Summary article LCS Feasibility PROCUREMENT 28 Jan 08

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