3. Enhancing the effectiveness of centralisation of procurement in the State of Mexico
This chapter analyses the current structures, mechanisms and practices for centralising public procurement in the State of Mexico with a view to strengthening its effectiveness. It identifies areas for the expansion of centralisation to further increase its efficiency and effectiveness. Further, it focuses on the use of framework agreements as efficiency tools to effectively reap the benefits of centralised public procurement, including creating greater competition in the market. Finally, the chapter examines organisational structures that are most conducive to results when it comes to centralisation of procurement.
With shrinking public budgets in times of fiscal austerity, government administrations are looking for ways to rationalise public spending and to achieve more with less. Considering the size of public procurement expenditure—an average of 12% of GDP in OECD countries—public procurement presents opportunities for such efficiency gains (OECD, 2019[1]). With a procurement expenditure of MXN 71 968 million in 2019 representing 24.7% of the expenditures budget of the state1, the government of the State of Mexico is responsible for making sound use of taxpayers money. Significant savings can be generated by streamlining, rationalising and consolidating expenditure carried out through public procurement. A number of tools and techniques are used within OECD countries to achieve better value for money.
Centralisation of public procurement expenditure is a key tool used to this end. It involves aggregating procurement demand from different entities by using various efficiency tools, notably centralised purchasing and framework agreements.
While centralisation provides clear benefits to a procurement system, it also needs to be carried out effectively to deliver on the savings and rationalisation that are associated with it. In fact, putting in place a centralising institution without proper knowledge, tools, processes and the institutional framework may not produce desired results.
This chapter analyses how the State of Mexico could enhance its current institutional structure, processes and tools to further reap the benefits of increased centralised spending. This chapter argues that centralisation can only be effective to the extent that appropriate institutional structures, efficiency tools and governance systems are in place. Beyond that, centralisation provides opportunities to increase competition, and thereby generate further value for money in public procurement in the State of Mexico.
VII. RECOMMENDS that Adherents develop processes to drive efficiency throughout the public procurement cycle in satisfying the needs of the government and its citizens.
To this end, Adherents should:
i. Streamline the public procurement system and its institutional frameworks. Adherents should evaluate existing processes and institutions to identify functional overlap, inefficient silos and other causes of waste. Where possible, a more service-oriented public procurement system should then be built around efficient and effective procurement processes and workflows to reduce administrative red tape and costs, for example through shared services.
ii. Implement sound technical processes to satisfy customer needs efficiently. Adherents should take steps to ensure that procurement outcomes meet the needs of customers, for instance by developing appropriate technical specifications, identifying appropriate award criteria, ensuring adequate technical expertise among proposal evaluators, and ensuring adequate resources and expertise are available for contract management following the award of a contract
iii. Develop and use tools to improve procurement procedures, reduce duplication and achieve greater value for money, including centralised purchasing, framework agreements, e-catalogues, dynamic purchasing, e-auctions, joint procurements and contracts with options. Application of such tools across sub-national levels of government, where appropriate and feasible, could further drive efficiency
Source: (OECD, 2015[2])
With a population of approximately 16 million, the State of Mexico is the most populous state in the country. From an administrative perspective, it is divided into 125 municipalities. Its urban area is in close proximity to Mexico City; namely, 59 municipalities are considered part of Mexico City’s suburban area. From an economic point of view, the State of Mexico compares well to other states with an economy that represents approximately 8.7% of total GPD of the Mexican Federation (INEGI, 2019[3]). Its economy is primarily characterised by manufacturing and industry. As a large state composed of many procuring entities, the overall procurement system presents good opportunities for centralisation.
To ensure efficiency and value for money, sufficient capacity to carry out procurement must be present at all levels of government. Typically, this is a major challenge across OECD countries, as capacity of procurement staff tends to be weak at regional and local level. Indeed, very often civil servants at lower levels of government only conduct procurement occasionally and therefore lack the necessary skills and specialisation.
In this context, maximising the centralisation of public procurement often via a dedicated authority and the use of appropriate efficiency tools can be of great value. This lifts the burden of public procurement from entities that are not specialised, and achieves greater value for money through economies of scale generated by the aggregation of demand.
Across the OECD, many countries have recognised the benefits of centralisation of public procurement and are increasing efforts to streamline their procurement systems by aggregating needs. The benefits of centralisation are primarily linked to savings (OECD, 2019[4]). Specifically, these savings occur from better prices through economies of scale, as well as lower transaction costs. Indeed, by aggregating the demand of multiple contracting authorities, greater spending power is achieved. Limiting the number of authorities conducting procurement transactions also rationalises expenditure. At the same time, concentrating the public procurement function into one organisation generates improved capacity and specialised expertise, leading to even better results and savings.
Not least, centralisation contributes to a more efficient procurement system by creating a central point of contact for suppliers and public entities. Namely, centralisation is most often achieved through the set-up of a central purchasing body (CPB), i.e. a contracting authority that acquires goods, services or works on behalf of other contracting authorities. In fact, while many countries opt for establishing a CPB or similar centralising institution, the degree of centralisation may vary depending on the institutional and administrative culture. In some countries centralisation is made mandatory, e.g. Lithuania or Chile. Other countries may have a preference for a decentralised system that gives more flexibility to single public buyers and entities. This is the case in the Netherlands, where the emphasis lies on raising the level of skills and competencies of buyers across levels of government.
The benefits from centralising procurement expenditure have also been recognised in the State of Mexico, since reforms to purchase more centrally have been ongoing for several years. Centralisation is particularly relevant in a large state composed of many procuring entities. As detailed in Chapter 1, procurement expenditure on goods and services at central level is centralised via the DGRM of the Ministry of Finance. However, the overall centralised expenditure by the Ministry of Finance represents approximately 68% of its total procurement expenditure, indicating that there are further opportunities for streamlining and rationalisation2.
Furthermore, current austerity policies put the government of the State of Mexico under increasing pressure to achieve greater efficiency and value for money. Policymakers and procurement practitioners should have a clear understanding that centralisation can support this effort, if carried out effectively. However, this requires a solid grasp of the expected benefits, the necessary reform steps, and a precise overview of the inputs and preconditions necessary to obtain the overall objective.
Importantly, centralisation needs to be adapted to the local context to work effectively. It is clear that consolidating public procurement strips some authorities of decision-making abilities over its purchases and related budget. Pressuring local authorities into a mandatory centralised scheme may not be a wise reform option if there is a strong independent administrative culture among municipalities. In this case, setting up a voluntary scheme may be a more appropriate strategy. In other cases, authorities may be glad to give up tasks that they consider burdensome. This can be the case if an authority faces serious consequences in case of procurement irregularities at audit (e.g. personal liability or sanctions). The incentives under such circumstances may be aimed at limiting the amount of procurement conducted, as it represents a potential liability for an organisation.
Despite being widely recognised as beneficial, centralisation also brings about a number of disadvantages that should be weighed against the benefits and potential savings. Academic research points to higher co-ordination and set-up costs, loss of relationships with local suppliers, potential barriers to SMEs for larger centralised procurements, complex co-ordination and inefficiencies (Albano and Sparro, 2010[5]). One of the greatest limitations pertains to the fact that the specific needs and unique requirements of contracting authorities may not be fully met (OECD, 2019[4]). With respect to the market, centralised procurement also brings about the risk of higher market concentration and the development of monopolies, as larger volumes disproportionately benefit large suppliers and may create barriers to market entry (OECD, 2018[6]).
Thus, each country or regional administrative entity needs to strike the appropriate balance between centralisation and autonomy of contracting authorities.
As discussed in Chapter 1, a significant degree of centralisation is already ongoing in the State of Mexico, particularly for goods and services at central level. Namely, the DGRM acts as the CPB for goods and services for ministries of the state government (dependencias). The ministries are obliged to purchase via the DGRM with the exception of contratos pedidos, i.e. purchases of less than MXN 570 000 (USD 29 640) carried out via direct awards. Otherwise, the DGRM executes all other purchases of goods and services required by the dependencias.
In contrast, auxiliary bodies and municipalities are allowed to carry out procurement of goods, services, and public works independently. This also applies to entities that have a decentralised status, such as entities under the portfolio of a particular state ministry. It should be noted that these entities are allowed to join centralised purchases by the DGRM, upon signature of a co-ordination agreement.
The type of procurement by the DGRM includes so-called centralised purchases, i.e. goods and services that are requested by multiple organisations. The following are examples of product groups requested by more than 15 different users:
Centralised purchases make up 44.9% of procurement of goods and 89% of procurement of services. The combined share of goods and services purchased under the centralisation scheme amounts to 68.1%.
With an established CPB, the State of Mexico is already reaping some of the benefits of centralisation and efficiency. However, opportunities for greater centralisation are still available and could be exploited. These are particularly significant when looking at the size of procurement of goods and services that is currently outside the centralisation scheme of the DGRM. As of 2019, the DGRM holds 87 co-ordination agreements with decentralised and autonomous bodies. This number has increased from 52 in 2018, demonstrating the growing interest in such centralisation. The agreements cover product and service categories that are often subject to centralisation, such as cleaning, telephone, printing services as well as car leasing. Two particular categories have generated strong interest in 2019, namely computer leasing and insurance (Figure 3.1). The increased interest in procurement of computers is linked to the strategy for the technological upgrade of the entire government of the State of Mexico.
Nevertheless, two main areas of additional procurement expenditure emerge when examining the overall procurement expenditure in the State of Mexico, namely procurement conducted by auxiliary bodies and by municipalities. The following sections outline how these areas of expenditure could be further included in the centralised procurement by the DGRM to further reap the benefits of increased centralisation across the State of Mexico (e.g. savings, value for money, efficiency in transactions, etc.). It is worth noting that municipalities and auxiliary bodies have budgetary autonomy, allowing them the choice to determine whether to adhere to this purchasing system. To integrate these entities more fully in the centralised purchasing scheme, the DGRM would need to set up a dedicated structure that is capable of analysing their specific needs and offering them attractive conditions. This would require a broader concerted reform action by several stakeholders in the State of Mexico providing the resources and the capacity to the DGRM to take a bigger role in centralising public procurement across more purchasing entities.
Source: Data provided by the Ministry of Finance
3.2.1. Auxiliary bodies could be included more firmly in the centralisation scheme of the Ministry of Finance
Auxiliary bodies play a significant role in the public procurement system in the State of Mexico. There are in total 90 auxiliary bodies dealing with many different policy areas. Specifically, these consist of 84 decentralised entities, three trusts, one state participation company and two civil associations. Among those, eight are particularly important with respect to public procurement, as their combined procurement expenditure amounts to MXN 21.5 billion in 2018. For comparison, this is more than the annual expenditure of the DGRM MXN 14 billion for the same year.
Auxiliary bodies are responsible for essential services to citizens, such as water management, healthcare, road infrastructure, social security, among others. Some of the most relevant entities in terms of their function and procurement spending are listed here:
ISSEMYM – Institute for Social Security of the State of Mexico and Municipalities
SEIEM – Integrated Educational Services of the State of Mexico
IMIFE – Institute for Education Infrastructure of the State of Mexico
SAASCAEM - System of Highways, Airports, Services and Auxiliary
SITRAMYTEM - Massive Transport System and Funicular of the State of Mexico
Given their role and activities, these auxiliary bodies oversee significant procurement expenditure often in the area of public works. However, by analysing the procurement expenditure of these entities, it emerges that goods and services make up the vast share of their overall spending (74.9% in terms of value in 2018), as depicted the table below. Given its high share, it is conceivable that parts of this expenditure consists of standardised items and could lend itself to centralisation.
While formally having some degree of autonomy, auxiliary bodies and municipalities are legally entitled to participate in the scheme of centralised purchases of the Ministry of Finance by signing co-ordination agreements. To date, the Ministry of Finance holds 87 co-ordination agreements with decentralised bodies. These agreements typically define the engagement of the two parties with respect to public procurement, which can consist of participation in centralised purchases for one or multiple goods, or refer to a specific purchase that is requested to the DGRM.
It is common for auxiliary bodies to participate in the centralised purchase of standardised goods and services, such as telephone services, printing services and similar low-value product groups. The degree to which auxiliary bodies participate in centralisation varies from organisation to organisation. From the discussions with the OECD team, it emerged that auxiliary bodies do not approach the decision of ‘outsourcing’ parts of their procurement in a strategic way, e.g. by measuring the costs and benefits of either choice. As discussed in Chapter 1, the value proposition of centralised procurement is often not clearly communicated and thus these entities are not able to compare scenarios (e.g. quality and prices offered under a centralisation scheme), and make decisions accordingly. It follows that participation in centralised purchases is often a product of an established practice, and the perception of the effectiveness of the DGRM. Some auxiliary bodies consider it beneficial to enrol in the scheme for selected product groups, while others express a strong preference for their own procurement procedures, including for goods and services that are not essential to their function.
Nonetheless, as described in Chapter 1, the DGRM holds regular talks with the heads of administrative units in ministries and auxiliary bodies and informs them in a timely manner about the benefits of centralisation and the goods and services that are subject to such centralisation.
With strong discretion regarding the participation to the centralisation scheme, large chunks of auxiliary bodies’ expenditure appears to be outside of it. While this is certainly a sensible choice for the individual organisations, from a systems-perspective, further centralisation would increase the overall efficiency of the procurement system.
Despite being largely independent in their procurement processes, auxiliary bodies are formally required to request authorisation from the DGRM when purchasing a number of products listed in the POBALINES (see Table 3.3). This authorisation is in accordance with the provisions of the Austerity and Containment Measures for public spending of the executive branch of the Government of the State of Mexico for fiscal year 2019 (Measures Number 17 and 33).3 For these product groups, auxiliary bodies are by default participating in the centralised purchases of the DGRM. In the fact-finding mission, auxiliary bodies commented that as a general principle they would be denied the permission to purchase independently for these goods and services. Obtaining this validation required lengthy discussions with the DGRM to explain their specific needs that would justify an independent procurement. In addition, for a number of goods and services, auxiliary bodies must seek a technical opinion and approval of the technical specification by the relevant line ministry (Chapter 1, Table 1.2).
Overall, the current system presents a number of drawbacks from the perspective of auxiliary bodies, which emerged from discussions with a sample of auxiliary bodies during the OECD fact-finding mission. As discussed, these entities lack information on potential savings or other benefits of participation in a centralisation scheme. Hence, they are unable to make an informed choice about participation. At the same time, there is limited visibility on the value-added of procurement carried out by the Ministry of Finance. Finally, if auxiliary bodies make the decision to purchase independently, for some product groups they face a lengthy approval process that may jeopardise their operations.
Not surprisingly, the incentive system for auxiliary bodies is geared towards carrying out procurement independently, as it gives them more control and flexibility over the process and the results. In order to increase centralisation of procurement expenditure by auxiliary bodies it is key to consider factors affecting their decision-making, and present them with a service offer that is appealing to them. This entails delivering clear savings on procurement, particularly on those product categories that do not represent an essential activity for organisations. Furthermore, offering choice before the entities have to engage in the purchasing process would be advantageous for them. In other words, procurement officers are interested in being able to know what the service offer looks like prior to committing to purchasing through the DGRM. Framework agreements present a suitable tool to respond to this need, as discussed further in section 3.3. The Italian CPB, Servizi Informativi Pubblici (Consip), has taken an interesting approach to balance centralisation on the one hand, and flexibility on the other (see Box 3.2).
It is worth mentioning that the DGRM maintains constant communication with those organisations that participate in centralised purchases. Namely, there is a directorate in charge of being in direct contact with these decentralised organisations in order to streamline procedures. Furthermore, to avoid putting the operations of auxiliary bodies at risk, an annual procurement programme must be prepared, in which the auxiliary bodies plan and schedule their purchasing procedures.
The participation to the framework agreements of Consip, Italy’s CPB, can be either mandatory or voluntary depending on the type of organisation and the product group. Namely, procurement of certain categories of supplies are mandatory (e.g. fuel, mobile telephony) for central and local authorities. Central government authorities are mandated to procure via Consip.
All other types of contracting authorities (e.g. health sector, local authorities, schools and universities) are not mandated to participate in Consip’s framework, however, they must respect the so-called ‘meet or beat’ rule. This rule implies that contracting authorities are able to opt out of Consip’s centralised framework agreements provided they are able to demonstrate better prices on their own. The comparison of prices is carried out based on a quality/price benchmark. Specifically, Consip publishes prices and other features of its framework contracts on the e-procurement platform.
This scheme provides an incentive for Consip to make its framework agreements as competitive as possible. At the same time, it gives contracting authorities the flexibility to look for solutions that best fit their needs.
Source: (European Commission, n.d.[7])
Given their significant procurement expenditure, there is large potential for centralising the procurement of auxiliary bodies within the centralisation scheme of the DGRM. This requires a number of actionable steps, particularly related to making centralisation as attractive as possible to auxiliary bodies. As mentioned, expanding the centralisation scheme also requires a broader reform that gives the DGRM a mandate to set up a dedicated structure to engage with the centralisation of purchases by more auxiliary bodies. Indeed, as a first step, the Government of the State of Mexico could request a detailed study into the market opportunities presented by such centralisation. With a clear view of the opportunities for centralisation, the government could endow the DGRM with the mandate and resources needed to expand the current centralisation scheme, including engaging in awareness raising and information activities.
Furthermore, to make a wider centralisation scheme operational, the DGRM would need to focus on understanding the needs of auxiliary bodies to ensure that its current offer of centralised purchases matches their demand. The DGRM could also focus on providing auxiliary bodies with an estimate of potential savings to be achieved through its centralisation scheme. This is likely to generate interest in centralisation, in particular for product groups that are not essential to the core tasks of auxiliary bodies. Making use of appropriate efficiency tools would also allow for the expansion of centralised procurement in an effective way that creates value for all users of the DGRM. Finally, awareness-raising and information activities regarding the benefits of centralisation would need to underpin this reform.
3.2.2. Municipalities present an additional opportunity for centralisation
Although permitted by the legal framework, municipalities de facto do not participate in the centralisation of public procurement by the DGRM, as they are autonomous in their procurement decisions. In part, this could be linked to budget matters, as the budgetary cycles at local and state level are not aligned. In fact, local authorities have a strong culture of autonomy and may therefore be reluctant to co-operate more closely with the state administration.
Despite the cultural and operational factors, which may present a barrier in establishing greater co-operation with the municipal level, the opportunities from achieving greater centralisation at local level should not be dismissed. Firstly, the State of Mexico has one of the highest number of municipalities in the Federation. This is likely to lead to duplications and inefficiencies, as municipalities face basic needs regarding their IT systems, furniture, cleaning services, and similar repetitive goods and services. Furthermore, the economic argument of centralisation should be looked at as well. In fact, procurement expenditure at local level is considerable in the State of Mexico.
Secondly, limiting the procurement activities at municipal level would allow freeing up resources for other productive activities. It is often the case that local authorities, particularly small ones, lack specialisation in public procurement. This leads to poor results and presents a risk for irregularities and mistakes. Therefore, providing municipalities with easy solutions and tools to obtain specific categories of goods and services is likely to be well received, particularly if on a voluntary basis.
Other OECD members have introduced centralisation at municipal level and reaped the benefits of this type of centralisation throughout various levels of government. The example of Schleswig-Holstein, one of the federal states in Germany, is a good case to analyse (see Box 3.3). Here, public procurement was entirely centralised with the creation of a central purchasing body, namely the Building Management Schleswig-Holstein (Gebäudemanagement Schleswig-Holstein – GMSH). Despite initial scepticism, the GMSH delivered value to its users, and increasingly authorities started to make use of its centralised procurement. Importantly, other states in Germany followed suit introducing their own regional CPBs.
Prior to the introduction of the central purchasing body GSMH, the German federal state of Schleswig-Holstein counted 380 procurement departments. This set-up was inefficient and costly, due to the large number of transactions, duplications, and errors that resulted from procurement being carried out by a large number of non-specialised procurement officials.
Furthermore, given the fragmented demand, each of the entities was able to exercise only limited market power. Similarly, most entities lacked know-how in specific product categories, such as electronic procurement, or procurement techniques, such as vendor management or in-depth market analysis. Complex cases requiring in-depth knowledge of tender law also presented a challenge for these procurement units.
To address this situation, the GMSH was established as a state owned company in 1999 with the task of centralising public procurement and delivering facility management. The objective of centralisation was to create economies of scale and reduce inefficiencies and redundancies.
The primary customers of the GMSH are entities from the state administration. However, GMSH’s mandate gave it legal authority to operate for any public entity within Schleswig-Holstein, including small municipalities. Specifically, all direct public administrations in Schleswig-Holstein were mandated to procure via the GMSH. Instead, indirect public administrations and municipalities could choose whether to opt-in to centralised procurement.
Since its creation, the share of centralised procurement carried out for authorities choosing to opt-in rose steadily, as entities increasingly gathered a better understanding of the value of centralisation. To date, the GSMH registers a yearly spend of EUR 350 – 400 million per year and provides procurement services for approximately 1 500 other customers.
Source: Information provided by GMSH; (OECD, 2019[4])
Once again, similarly to the auxiliary bodies, the incentive system of centralisation needs to resonate with municipal leaders. Centralisation should present them with an opportunity to facilitate their daily tasks by taking away a difficult job that did not provide value added. If procurement is made simple through centralisation, thereby allowing them to deliver value for money, they are likely to join in.
It should be noted that the same calculus might not apply to all local authorities. In larger entities, such as the capital Toluca, there is already a degree of specialisation in public procurement. The municipality has a dedicated team for procurement and already consolidates its own repetitive expenditure. In this case, centralisation via the DGRM needs to demonstrate more attractive conditions than their own procurement practices. These could be monetary, such as savings, but other factors, such as greater transparency, could provide selling points to municipal stakeholders.
In short, flexible mechanisms of centralisation based on voluntary participation (e.g. framework agreements) can prove beneficial to local authorities, and thereby increase the overall efficiency of the procurement system. The DGRM could start with gathering an overview of recurrent needs from municipalities, and actively reach out to them about the benefits of centralised public procurement.
The goal of centralisation is to reach better results—either in terms of lower prices or better quality—than each of the contracting authorities would have been able to do on their own. Several dimensions need to be taken into account when ensuring the effectiveness of a CPB. From an operational perspective, the CPB should use appropriate efficiency tools to maximise value for the final user. From a market perspective, the CPB needs to ensure it has the right structure to understand market dynamics and react to them with a view of achieving value for money.
For instance, if a CPB offers attractive prices, but its processes are too lengthy or cumbersome and users experience delays, the centralisation effort may prove to be of limited value for final users. Similarly, if the CBP has a limited overview of the market, it may be faced with low levels of competition and relatively higher prices.
Thus, to fully benefit from centralisation, it is key to ensure effective operations of the central purchasing body. This entails making use of appropriate efficiency tools (e.g. e-procurement, framework agreements) and having structures and processes in place that encourage efficiency.
The following section examines how the DGRM could enhance its operations to better serve current users as well as expand operations, e.g. to potential new users.
3.3.1. Increasing the level of competition is paramount and requires multiple actions
As a CPB, one of the goals is to maximise efficiency using competitive forces in the market to generate the best value for money. However, ensuring competition is not always an easy task, particularly when procuring large quantities of goods and services. For instance, smaller suppliers such as SMEs may not be in a position to deliver such contracts.
The use of competitive procedures is the starting point for ensuring maximum competition. These procedures place no restrictions on the market and therefore facilitate the largest participation. Procedures that limit competition such as a restricted tender or even direct award should be reserved for exceptional circumstances. It should be noted that the General Directorate of Material Resources makes heavy use of non-competitive procedures, particularly with respect to the use of exceptions to directly award a service contract. Indeed, over 50% of service contracts awarded in 2016 were awarded directly via the use of an exception (Figure 3.2). The trend has been decreasing over the past years, but direct award via exceptions is still comparatively high (37.9% in 2018). For goods, there has been a drastic reduction in this kind of direct award from 40% in 2016 to 5.1% in 2018. According to officials at the DGRM, the exceptions used represent the best option due to the characteristics of the purchase (security, confidentiality, etc.). Chapter 5 explores the use of exceptions in the State of Mexico in greater detail.
Source: Data provided by the Ministry of Finance
Source: Data provided by the Ministry of Finance
Widening the pool of suppliers can be an important source for efficiency for the DGRM. In fact, by analysing a sample of 196 service purchases of years 2015-2019 representing 50.4% of the yearly average number of procedures by the DGRM4, it emerged that the supplier pool is often small and tenders often receive only one bid. For 2018, the average number of bids received amounted to 2.4 and 1.7 for goods and services, respectively. In addition to a low number of bids, frequent technical and economic disqualification and void bids also limit the competition in contracts by the DGRM. In contrast, bids at federal level have much higher average participation rates. From 2010 to 2018, on average 4.3 bid proposals were received for each open tender conducted in CompraNet (OECD, 2018[8]). During the fact-finding mission, authorities confirmed that federal tenders often receive a much higher number of bids compared to local ones. Greater participation could be linked to the fact that the market at federal level is more open internationally, but also that the use of e-procurement simplifies participation for suppliers. Conversely, low levels of participation may also be linked to the possibility of collusion as well as low administrative capacity, which can translate into payment delays.
During the OECD fact-finding mission, officials from the DGRM argued that centralised procedures receive limited participation from bidders in part due to the fact that only a limited pool of suppliers has the capacity to deliver the volume of the requested goods and services. However, the approach to market research and market engagement followed by the DGRM is not designed to determine the size of the market or gather an overview of potential bidders. Investing in the tender preparation phase and market research would allow to more accurately determine whether participation in DGRM’s tenders is proportionate to the market capacity. Similarly, if the market analysis reveals that only a small pool of suppliers can deliver on the contract at local level, the DGRM would be able to take appropriate measures, such as facilitating the participation of suppliers at national or international level. More details on practices for market research and market engagement are discussed in Chapter 5.
The detailed analysis of 196 tender services procedures conducted by the DGRM between 2015 and 2019 shows that close to 60% of tenders receive no more than one offer. The remaining procedures are competitive in the sense that more than one suppliers bid for the tender5.
The level of competition, however, can be considered even lower than that of this initial analysis. In fact, by further studying a sub-set of the sample which includes only competitive tenders (a total sample of 64 procedures representing 16.5% of the yearly average of tenders by the DGRM), it emerges than in many instances there is much less competition than it could be expected, as shown in Table 3.5. Namely, only 6.6% of tenders that received more than one bid can be considered competitive. The remaining tenders that received more than one bid resulted in disqualification of the bidder (4.1%) or were void (4.6%). A significant number of procedures (13.3%) are competitive on the surface, but actually show multiple bidders competing (and winning) different lots of the same procurement procedure. This can be linked to the fact that various bidders offer lots that do not overlap, or that bidders are disqualified for one or more lots leaving only one qualified bidder per lot. In this sense, there is very limited competitive pressure for a sizeable share of tenders.
Officials from the DGRM pointed out that publicity given to each procedure complies with the provisions of the legislation on the matter. Indeed, calls for tender are published in one of the newspapers with the largest circulation in the State Capital and in one of the newspapers with the largest national circulation, as well as through COMPRAMEX. With this dissemination established by law, it is expected that all bidders considered capable of meeting the requirements indicated in the call for tender are able to participate. Yet, procurement officials in many OECD countries go beyond the publicity requirements stipulated by law. For instance, as described in Box 3.4, many OECD countries have put in place strategies that actively seek to facilitate suppliers’ access to procurement markets, including electronic procurement markets, through training and outreach, particularly for SMEs.
OECD countries have put in place specific strategies to increase access to tenders, targeting specifically SMEs. These practices focus on training suppliers to participate in procurement markets, either by focusing on their access through the e-procurement system (Italy’s example) or by providing dedicated training on how to submit tenders (Ireland).
Italy - Supplier Training Desks
To facilitate access to its digital marketplace (“MePa”), the Italian CPB Consip has set up supplier training desks (“Sportelli in Rete”) in cooperation with supplier associations. The scheme consists of a network of dedicated trainings desks operated throughout the country that provide SMEs with assistance on the use of electronic procurement tools. Consip operates in a ‘train-the-trainer’ approach: it provides direct training to its partner associations, which in turn train SMEs at no charge.
Approximately 60 000 SMEs are suppliers to the public e-marketplace for low-value purchases. This high rate of participation has been achieved, among others, thanks to the training received by the procurement training desk. This initiative has also allowed to change Consip’s perception in the market, as an organisation that provides business opportunities in transparent and competitive market.
Ireland – Go-2-Tender Programme for SMEs
The Irish agency InterTradeIreland organises the Go-2-Tender Programme, namely a two-day practical tendering workshop designed for SMEs. The workshops address theory and practice of how to successfully submit tenders, covering a wide range of topics such as bid/no bid decision, drafting proposals, as well as registering on the procurement portal. The trainings are provided by procurement specialists, and include guest speakers from central government or large public sector organisations. Workshop participants have to meet various eligibility criteria and are required to pay a EUR 100 fee for participation. The programme has been very successful by gathering over 900 companies since its introduction in 2007, which have been able to win procurement contracts worth EUR 69 million.
Source: OECD (2016), Public Procurement Toolbox, OECD Publishing, Paris, http://www.oecd.org/governance/procurement/toolbox/search/supplier-training-desks-std-str-italy.pdf; and European Commission, Teach SMEs how to tender, https://ec.europa.eu/regional_policy/sources/good_practices/GP_fiche_10.pdf.
Patterns in which the level of competition is dwindling throughout the procedure can also raise a red flag with respect to potential collusion. Collusion refers to illegal agreements amongst suppliers to determine a price or divide a particular market with the goal of increasing profits from public contracts. This practice is difficult to detect, as it can be subtle. Procurement officials need to be aware of the potential red flags and be informed about the administrative procedure to take if they suspect any issues. A 2012 study by the OECD provides recommendations to limit potential bid rigging and enhance competitive practices in the State of Mexico. For instance, this includes introducing unpredictability in the way tenders are carried out, e.g. choice of procurement procedure (use of reverse auction), timing of the tender, extent of centralisation and splitting of contract into multiple awards (OECD, 2012[9]).
The OECD is active in working on preventing bid rigging through a number of measures, such as spotting red flags, and increasing reporting by procurement officials. The Box 3.5 below provides an overview of OECD instruments to fight bid rigging.
In 2009, the OECD introduced the Guidelines for Fighting Bid Rigging in Public Procurement as a comprehensive strategy to support contracting authorities in the design of tenders to limit the risk of bid rigging, as well as in the detection of potential collusive patterns. Specifically, the Guidelines entail a checklist for detecting bid-rigging, which emphasises watching for the following elements red flags, among other recommendations for action:
Warning signs and patterns when businesses are submitting bids: This refers to patterns that seem at odds with the logic of competitive markets. It can include red flags such as geographic allocation in the winning of tenders, regular suppliers not bidding for tenders, certain companies submitting bids but never winning, submission of a joint bid between two companies that could have responded on their own.
Warning signs in all documents submitted: Documents submitted can include indications of potential collusion, for instance there can be evidence that the bids were prepared by the same person. This can include identical mistakes, similar handwriting or stationary, identical miscalculations, bids containing less detail and last minute adjustments.
Warning signs and patterns related to pricing: Pricing can be an indication for bid rigging as companies coordinate on their pricing strategy and price increases. Patterns and red flags include sudden and identical price increases that cannot be explained by market factors, disappearance of discounts or rebates, identical prices especially when prices were the same for a long time period or were previously different, a large price gap between the winning bid and the other bids.
Suspicious statements: Companies may make suspicious statements that suggest coordination among themselves, such as reference to an agreement in spoken or written, statement that certain firms do not operate in particular areas or to particular customers, justification of prices by referring to “industry suggested prices”, “standard market prices” or “industry price schedules”.
Suspicious behaviour: Contracting authorities should pay attention to reference to any meetings or event amongst suppliers, where they could discuss prices. Suspicious behaviour includes private meetings before the submission of bids, regular socialisation amongst suppliers and submission of a bid by a company incapable of completing the contract.
Procurement officials are asked to be aware about bid rigging law in their jurisdiction, keep records of suspicious activity and behaviour, contact the relevant authorities and discuss with internal legal teams if appropriate to continue with a tender in case of suspicions.
Source: (OECD, 2009[10])
Research shows that the cost of foregoing competition is high. In fact, a study on the impact of transparency in public procurement in the European Union found that single bidder contracts are on average 7.1% more expensive than contracts with two or more bidders (Czibik et al., 2017[11]). If this number is multiplied by the value of the single bid contracts of the DGRM, the cost of foregone competition becomes evident.
There are multiple factors linked to limited responses to a tender. For instance, the contracting authority may not be successful in publicising opportunities through the right channels, i.e. businesses are not aware of the calls for tender issued by the public administration. A limited number of bidders for a contract may be also linked to the market structure, as it is the case in monopolistic and oligopolistic markets. At the same time, the features of the contract may not be attractive for potential suppliers. Late payments by the public administration are also a factor that may reduce supplier participation. Finally, collusion among suppliers could also play a role in limiting the number of suppliers participating in a tender.
Healthy competition is at the centre of procurement, as it is the best guarantee for value for money. Competition is even more important in the context of centralised purchasing, as the goal of centralisation is to achieve better value for money. Considering the central role the DGRM plays in procurement in the State of Mexico, it is essential that it actively promotes competition in its tenders. This will require a series of actions tackling multiple causes for low participation, including a legislative reform that would give the DGRM greater flexibility to engage with suppliers. In fact, the current legislative framework foresees tender publication requirements in at least one of the most widespread newspapers in the State of Mexico, in COMPRAMEX, and in a national newspaper. The DGRM could move beyond these channels of advertising procurement opportunities by focusing on market engagement activities, including providing dedicated training to suppliers to increase access to procurement opportunities.
As discussed in the Chapter 5 on Efficiency, often low levels of competition can be prevented through thorough market engagement and market research. These actions allow strong insight into what makes a contract attractive to suppliers. At the same time, market engagement can shed some light to identify potential negative perceptions of the contracting authority by suppliers, e.g. red tape or payment delays. Market analysis also allows the contracting authority to determine whether the market is large enough, and whether it should seek to expand to additional markets, such as in a different state. Not least, facilitating access to procurement procedures via greater use of e-procurement could also enhance competition. Access to tenders should be as open as possible. Thus, the DGRM needs to ensure increase the share of competitive procedures and limit direct award to exceptional cases, in which they are appropriate.
Furthermore, an analysis of the underlying factors for the limited competition of the DGRM may shed light onto how to improve its processes to enhance competition for its tenders, and thereby achieve greater efficiency. This could include an analysis of frequent disqualification of bidders (see Chapter 5). Indeed, this would allow the DGRM to determine potential approaches to prevent such occurrence, e.g. simplification of administrative requirements or better communication to the market.
Finally, the DGRM needs to hinder any potential collusion through awareness raising, investigation and sanctioning. The OECD Guidelines for Fighting Bid Rigging in Public Procurement also provide recommendations on how to design tenders that minimise the risk of potential bid rigging (OECD, 2009[10]).
3.3.2. Centralised purchases show limitations due to delays and limited planning by the DGRM
The DGRM makes use of centralised purchases for procurement on behalf of other public entities. The procurement categories and its overall yearly procurement plan are decided based on a plan that integrates the procurement planning of all ministries and other entities relying on the DGRM for their procurements. For 2018, the DGRM concluded 246 procurement contracts for goods worth MXN 6.6 billion (USD 344.9 million) and 159 contracts for services worth MXN 7.3 billion (USD 382.4 million). Among the most common product groups are goods such as food and uniforms, and services such as vehicle leasing.
To define the overall procurement needs, auxiliary bodies and ministries must send their procurement requirements to the DGRM by 31 January every year. An internal system for data exchange (Plataforma Mexiquense de Contratación Pública, PMCP) facilitates the exchange of information via electronic means. Based on the input collected, the DGRM consolidates demand into various categories and forms its annual procurement programme. This information is fed into the so-called catalogue of goods and services managed by the DGRM.
To order a specific item (either through centralised or other procurement procedures), users within the various ministries need to first send a request to the DGRM’s Market Research Department, after having validated their own budgets. This allows them to receive a price estimate for the good or service in question. Once this price is obtained, the users finalise the order by specifying the desired quantities. The Procurement Co-ordination Department maintains contact with the users throughout the procurement procedure, in particular to define technical specifications. The DGRM interacts with a procurement co-ordinator within each ministry to ensure that processes are streamlined.
This strategy brings about a certain level of centralisation and rationalisation of the sizable procurement expenditure, but current processes show a number of opportunities for improvement, as reported during the OECD fact-finding mission. For instance, the DGRM could provide beneficiaries with greater visibility on when they will receive the requested goods and services, and inform them ahead of time if delays are expected. This would reduce practices in which beneficiaries inflate their procurement needs to have a greater stock available, as they anticipate delays for receiving the goods and services needed. Furthermore, state ministries and other entities also resort to contratos pedidos if their urgent needs are not met on time by the centralised purchases of the DGRM. Introducing framework agreements would also support greater flexibility in meeting beneficiaries’ needs.
3.3.3. Framework agreements could address some inefficiencies and duplications of centralised purchases
At present, framework agreements are not defined in the legal basis of the State of Mexico, and authorities within the State of Mexico are largely unfamiliar with their modalities of application and the benefits they can bring to the centralisation of public procurement. In contrast, internationally including in some Latin American countries, framework agreements have established themselves as indispensable tools to be used for conducting procurement in an aggregated form. At federal level in Mexico, framework agreements, though not widely used, are included in the legal basis, as per Article 17 and 41, bullet XX, of the Law on Acquisitions, Leasing and Services of the Public Sector and Article 14 Bylaws on Acquisitions, Leasing and Services of the Public Sector. It should be noted that the DGRM has gathered experience with framework agreements by applying the national law. Awareness about the opportunities presented by framework agreements is growing, as demonstrated by keen interest in international good practice exchanges.
As per the EU’s legal definition, a framework agreement is an agreement with one or more economic operators for the supply of goods or services. It establishes the terms for contracts to be awarded by one or more entities during a given period (i.e. maximum price, minimum technical specifications and, where appropriate, the quantities envisaged) (European Parliament, 2014[12]).
Chile, for instance, has longstanding experience in making use of framework agreements in the context of its central purchasing body ChileCompra. Similarly, Colombia has introduced the use of framework agreements in 2013 through its central purchasing body (CPB) Colombia Compra Eficiente. The use of framework agreements in Colombia allowed to drastically reduce the time for ordering goods and services from several months to just a few hours (OECD, 2018[6]).
Framework agreements involve the advertisement of an opportunity by a contracting authority, which will then enter into a contract with one or more suppliers for goods, services or works over a pre-defined period of time. While framework agreements are most commonly used in combination with centralised purchasing (i.e. carried out by a CPB), this is not a pre-requisite. Framework agreements may also be put in place by single contracting authorities that want to reduce the transactions for standardised and repeated purchases.
Depending on the centralisation model adopted by the country, framework agreements can be mandatory or voluntary. Both options have their advantages and disadvantages that need to be considered and adapted to local circumstances. Mandatory frameworks are well-suited to gathering additional demand and achieving greater economies of scale, but may lock-in final users with goods and services that do not fully meet their needs. At the same time, the centralising authority may have less of an incentive to be client-oriented if its ‘customers’ have no option to seek alternatives. Similarly to centralised purchases, framework agreements generate efficiencies and economies of scale, as they allow to aggregate demand from various entities and reduce the number of individual transactions. In contrast to centralisation as carried out by the DGRM, framework agreements give sufficient flexibility to both meet heterogeneous needs as well as adapt to undefined quantities of goods and services to be procured.
International good practice shows that selecting the appropriate efficiency tools allows generation of savings whilst meeting user needs, thereby creating value for money. Indeed, framework agreements could help the DGRM to optimise some of the aspects that lead to inefficiencies when implementing centralised purchases. For instance, framework agreements can provide increased flexibility to meet various types of demand over longer periods of time, thereby alleviating pressure to have a predefined amount of goods and services available at specified times. Framework agreements would also allow for greater visibility of available goods and services upfront. Contracting authorities such as auxiliary bodies or municipalities could make an informed decision on whether centralisation via framework agreements is of value to them. This has been highlighted as a key success factor for the participation in framework agreements by several stakeholders in the OECD fact-finding mission.
Moreover, framework agreements reduce the number of procurements to be carried out each year, as they are usually drawn up for longer periods of time. This would further allow the DGRM to streamline its operations, shifting efforts from conducting repetitive procedures to creating well-designed framework agreements for its users. Other common benefits of framework agreements result from the faster procedure to receive goods and services for final beneficiary.
Positive results from the use of framework agreements are often reported by public buyers. A survey conducted in Denmark, showed that a majority of public buyers experienced price reductions, less resource-intensive procurement process and a good match of supply and user demand as a result of framework agreements (Danish Competition and Consumer Authority, 2015[13]).
As discussed, the strength of framework agreement as an efficiency tool lies in their flexible use, which can be adapted to achieve multiple objectives based on the product category at hand and the related shape of the market. However, it should be noted that not all goods and services are suitable for the use of framework agreements. Goods and services under a framework agreement should be fairly standardised and represent sizeable demand in terms of needs aggregation.
Goods and services suitable for framework agreements
Looking at the product categories that the DGRM purchases most often, as listed in Table 3.7 and Table 3.8, it emerges that there is strong potential to generate further economies of scale beyond the currently ongoing centralisation. In fact, the most purchased products by the DGRM are among those that are often purchased via framework agreements.
Typical product groups for framework agreements consist of the following:
As displayed below, many of the goods and services procured most by the DGRM are suitable for framework agreements.
Setting the right parameters
Beyond looking at product categories, it is important to be aware about the different type of framework agreements. As discussed, these efficiency tools can be used flexibly and to achieve different goals. In part, this is linked to the various modalities of the use of framework agreements. There are four main types of framework agreements that are each more adapted to specific market conditions and user requirements (Figure 3.4). To choose the right type of framework agreement thus requires detailed knowledge of the market and product group, as well as a strong view of user needs. Experienced buyers that make use of framework agreements are therefore often specialised by product categories. This level of specialisation can be acquired in a body or structure that is fully dedicated to purchasing, such as a CPB.
Source: (OECD, 2014[15])
The first type is also referred to as framework contract. It is characterised by the fact that the agreement is concluded with a single supplier and all terms of the contract fixed. This type of framework agreement is suitable when procuring standardised goods and the good is characterised by high fixed costs. This supplier has an incentive to provide his best price to access the full framework contract.
The second option for a framework agreement is also ‘complete’ meaning that all terms are fixed, but it is concluded with multiple suppliers. This type of framework agreement works best in cases where the expected participation is high and the fixed costs are low.
Framework agreements can also be designed as ‘incomplete’, i.e. not all terms laid down, with a single supplier. Incomplete framework agreements are most suited in cases where the market is very flexible and products tend to become obsolete quickly.
Finally, framework agreements may be designed as multi-supplier arrangements that do not set out all the terms of the arrangement. This entails a second step, the so-called ‘mini-competition’ in which suppliers present offers each time the contracting authorities launches a specific contract under the framework agreement.
Table 3.9 below summarises some of the parameters to take into consideration when designing a framework agreement.
While the benefits of framework agreements have been documented across many cases, it is important to note that these efficiency tools need to be calibrated attentively to market conditions and user needs. They are complex instruments that require a skilled procurement workforce, as well as careful analysis of market and needs.
Framework agreements: impact on competition
In the State of Mexico, the introduction of framework agreements could have a positive impact on competition, in addition to the benefits in terms of processes and customer orientation. Framework agreements are found to produce positive effects on competition provided that they are designed effectively.
A key aspect in strengthening competition through framework agreements rests on the attractiveness of the framework for suppliers. Several factors play into the attractiveness of a framework agreement. The uniform terms and conditions for purchases, for instance, reduce costs for suppliers and thereby make a framework appealing. In contrast, if the framework agreement requires too many goods and services, it makes it more difficult for suppliers to present a bid. Importantly, one of the main characteristics of the attractiveness of framework agreements rests on the certainty of revenue stemming from the agreement. Conversely, if revenue flows are perceived as uncertain, it poses a barrier for suppliers to bid. Another effect of revenue certainty is the price offered in their bids. Enterprises are more willing to give a discount when they have confidence in the revenue generated from the framework agreement (Danish Competition and Consumer Authority, 2015[13]).
It should be noted that the use of competition-friendly procedures for awarding a framework agreement is the starting point for greater participation. Beyond that, several considerations also need to be taken into account, such as determining the overall size of the framework agreement as well as the appropriate allotment strategy. Market analysis and market engagement are essential to determine the parameters of a framework agreement that maximises competition. Namely, the contracting authority needs to have a strong view of what conditions are attractive for the market suppliers to set the right incentives for participation. Not least, it should also keep in mind that participation has a cost for suppliers, and therefore the procedure should be as simple as possible from an administrative point of view.
The Italian Central Purchasing Body, Consip, makes use of an internal research unit to address specific aspects of the design of framework agreements, ensuring thereby that this efficiency tool is best adapted to market conditions.
The research unit is staffed with five specialists that provide in-house economic consulting. In particular, the research unit supports the sourcing team on what is the best strategy to reap the benefits of competition. For instance, the research unit provides input on the appropriate tool, the allotment strategy, the award criteria and scoring rules, as well as contract incentives to achieve better outcomes with the framework agreement.
Source: Consip, Presentation at South Asia Region Public Procurement Conference, 20-23 February 2017 http://pubdocs.worldbank.org/en/126381490813164358/Framework-Agreements-Gain-Luigi.pdf
Steps towards the implementation of framework agreements
Framework agreements are a key tool to operationalise centralisation in an effective manner. In the State of Mexico, they could contribute to capturing additional procurement expenditure from auxiliary bodies and municipalities, particularly as they can be set up as voluntary instruments. Furthermore, by designing framework agreements appropriately, the DGRM can expand its product offer, generate savings for its users as well as achieve operational savings for its own organisation.
However, implementing framework agreements requires an enabling environment. At present, a key obstacle to the use of framework agreement in the State of Mexico is the lack of a legal basis. Thus, as the first step to take advantage of the benefits of framework agreements, authorities in the State of Mexico need to reform the law to allow the use of this efficiency tool.
Furthermore, as there is little direct experience with implementation of framework agreements, organisational readiness and capacity also need to be considered. This involves developing specific expertise for the design of framework agreements, i.e. reinforcing capacity on market research and needs analysis, as well as enhancing capacity during the contract management phase. Indeed, when an organisation uses framework agreement, significant effort shifts to managing the contractual relationship with the supplier. The organisational structure of DGRM as a central purchasing body may therefore need to evolve accordingly, as elaborated further in the section below.
Internal processes play an important role in reaching an organisation’s wider goals. This applies strongly in the case of centralised public procurement, as the organisation needs to be structured to deliver value for money for its users. Indeed, the greater the procurement expenditure of the organisation, the more its internal processes need to be set up to best contribute to efficiency gains arising from aggregation. Furthermore, an organisation should ensure that information between various units and functions flows smoothly and internal data is used effectively.
Efficient processes should span over the full procurement cycle, in particular:
Gathering and understanding the needs of other contracting authorities;
Planning and designing centralised purchases and framework agreements including conducting market analysis;
In the context of potentially expanding operations and introducing new efficiency tools, ensuring the effectiveness of its operations is paramount for the DGRM. The following section examines what elements it could take into account to further strengthen its organisational efficiency.
3.4.1. Tailoring the organisation to specialise in procurement functions
Currently, the DGRM is organised in several procurement areas covering various functions related to public procurement. The Procurement Co-ordination Department oversees the purchasing sub-departments, the Market Research Department, and the directorate responsible with liaising with auxiliary bodies and other decentralised entities. Additional functions of the DGRM include regulatory and asset control, as well as property administration and management of special events and general services.
In terms of tasks and functional set-up, the main functions typically covered by CPBs include needs analysis, market analysis, legal and contract management. Often CPBs are organised per product category to take advantage of specific expertise needed for each product serviced. Overall, the DGRM is structured to address these functions. However, several functions could be further strengthened to tailor operations to the procurement function at hand, and thereby increase efficiency.
Notably, the DGRM does not specialise its procurement functions around product groups, as is usually done in CPBs. Instead, the DGRM relies on the product expertise of users, in particular for complex procurements. Once an organisation has reached a large enough scale, it can specialise effectively by setting up dedicated expertise for its main product groups. This allows the CPB to have detailed market and industry knowledge on the goods and services it procures, which in turn leads to better results in terms of value for money.
It should be noted that organisational functions are closely linked to the capacity and skills needed to fulfil each of the functions, which in turn plays a major role in the overall performance and efficiency of the organisation. The specific skills and competencies needed for ensuring adequate capacity throughout the procurement cycle are discussed in detail in Chapter 6 on capacity.
Making the most of the contract management function
Effective contract management contributes to overall efficiency gains in public procurement. This is particularly important in the case of a large purchaser, such as the DGRM, that concludes approximately 400 contracts in a given year. With effective structures in place, buyers can ensure that suppliers deliver on the requested performance, or corrective action can be taken on time. Conversely, the lack of appropriate contract management increases the risk of sub-optimal results, as depicted in Figure 3.6 below. Currently, the focus of contract management as conducted by the DGRM lies heavily on compliance with contractual requirements. Instead, the DGRM could enhance its contract management function to focus on delivering good performance in co-operation with the user areas. In accordance with the regulations established to date, the user areas are responsible for the monitoring, compliance and payment of the contracts made by the DGRM. Furthermore, the contract management function becomes particularly important in the context of the implementation of framework agreements.
Source: (OECD, 2017[16])
Within the organisational structure of the DGRM, there are several so-called Departments of Contracts dedicated to contract management according to product groups. These departments are responsible for preparing and signing contracts derived from purchasing procedures, as well as keeping track of them, ensuring for example compliance or archiving.
While the most basic functions of contract management are ensured by the presence of these departments, it is less clear whether contract management is understood as a function where value can be generated. Evidence from the fact-finding mission suggests that there is room for improvement in terms of capacity of staff and co-ordination, as well as specific guidelines for contract management.
Contract management activities can be broadly grouped into three areas: delivery management, relationship management and contract administration.
Delivery management ensures that whatever is ordered is actually delivered with the required level of quality and performance, as stated in the contract. Delivery management may include checking the nature, quantity and quality of:
Relationship management seeks to keep the relationship between the economic operator and the contracting authority open and constructive. The aim of this is to resolve or ease tensions, and identify potential problems at an early stage while also identifying opportunities for improvement. Relationships should be professional, and should include a professional approach to managing issues and dispute resolution.
Contract administration covers the formal governance of the contract and any permitted changes to documentation during the life of the contract. This area of contract management ensures that the everyday aspects of executing the contract effectively and efficiently are taken care of.
Source: OECD (2011), SIGMA Policy Brief “Contract Management”, http://www.sigmaweb.org/publications/Contract_Managment_Public_Procurement_2011.pdf.
Indeed, during the fact-finding interviews, a number of specific areas emerged that could be addressed by improved contract management, namely:
Payment delays: In the State of Mexico, the payment schedule is set at 45 days after the receipt of an invoice. Suppliers, however, complain that almost all payments are delayed by 30 to 90 days, as reported during the fact-finding mission. This may be attributable to poor co-ordination between the end users and the payment division. The management of payment delays is a critical aspect, because it is often one of the causes that discourages suppliers, and especially SMEs, to participate in public tenders.
Receipt of goods and services: While the form of delivery of goods or provision of services is established in the contracts and is defined by users at the time of preparing the tender specifications, users have reported lacking clarity about receipt and acceptance of goods and services. For instance, the DGRM does not put in place clear standards for delivering a certification of goods and services. Often staff do not have full view on what goods they are supposed to receive and upon what basis they need to accept them. Clearly, this represents an area where processes can be improved and made more efficient and straightforward.
Guidelines for contract management: Staff involved in contract management are often left without precise instructions on how to handle common situations regarding supplier management, such as minor delays in the receipt of goods.
Limited interaction with suppliers: The contract management function is meant to generate value during the implementation of the contract by solving issues and problems through effective supplier relationships. In the State of Mexico, the culture of supplier relationship is not strongly developed. If issues arise, formal complaints are filed, allowing no margin for negotiation to settle minor disputes directly with the supplier.
The box below shows how contract management can support the performance of a procurement system. As outlined below, an important aspect of contract management lies in anticipating potential issues by strengthening the relationship with suppliers and taking a risk management approach. With such an approach, sub-optimal results and inefficiencies are minimised. Users can be supported by dedicated guidance, such as the one provided by Queensland Government in Australia (see Box 3.8). Furthermore, it is important for users to be able to easily access the contract specifications, as well as the administrative terms and conditions to be able to determine whether goods and services should be accepted or penalties should apply. Establishing relationships with suppliers also allows to solve potential issues with dialogue ahead of resorting to contractual penalties. Finally, the feedback from users on contract performance (stemming, for example, from simple indicators as illustrated in Box 3.8) should be used to inform any new contract.
Effective contract management in the DGRM needs to be structured around its organisational set-up, taking into account the fact that users play an important role in the execution of the contract. Indeed, contract follow-up is mostly handled by users, with support by the DGRM, as defined in article 127 of the Bylaws of the LCPEMyM and POBALIN-062. Similar set ups are in place in OECD countries when implementing framework agreements. Namely, in the majority of cases, CPBs delegate contract management activities to entities carrying out the purchase orders. Nevertheless, CPBs also tend to provide guidance to their users. This approach could be valuable for the DGRM, too. It could define guidelines and minimum standards that should be applicable for entities procuring through the DGRM (OECD, 2018[17]). Guidelines need to be comprehensive to establish a shared understanding of the contract management function. To be effective they should also enter into concrete operational detail, such as requirements for inspection (OECD, 2018[17]). It should be noted that any modification of the contract management function in the State of Mexico would entail the reform of the aforementioned regulations.
The Government of Queensland, Australia, has developed a practical guide to support supplier performance monitoring for the benefit of procurement departments across Queensland. The guide is addressing the role of supplier performance management during the implementation of the contract, while acknowledging that effective performance management should inform the whole procurement process.
In a concise manner, the guide covers several key elements related to contract management, such as determining a contract management plan, establishing supplier performance monitoring, monitoring and managing supplier performance, establishing key performance indicators (KPIs), and dealing with poor performance.
As part of the guide, a checklist has been developed to support contract managers in identifying dimensions to be monitored to determine supplier performance. Procurement officials are invited to use the checklist as a starting point for their performance monitoring, adapting it to their specific procurements.
For effective performance, a contract management framework typically includes the following elements:
Contract administration, including the definition of roles and responsibilities for managing the contract
Performance reporting and monitoring: This should include access to relevant standardised information that facilitate controls and support decision-making
Relationship management, aimed at creating a long-term relationship of mutual benefit between the parties. The main purpose of relationship management is to effectively anticipate risks
Governance and integrity mechanisms that set the framework for interactions with suppliers
Knowledge sharing and information management. This allows accessing relevant information to the project to key parties, as well as facilitating compliance with information-related obligations (e.g. disclosure)
Change management focused on managing and accepting risks from change events
Review of the framework itself to adapt to the needs of the organisation
Source: (OECD, 2017[16])
Enhancing communication channels with internal clients
As an organisation dedicated to offer a service to others, the success of a CPB depends on their ability to meet customer needs (OECD SIGMA, 2011[18]). In this respect, setting up internal processes that make sure to capture these needs is critical for a CPB. This can also include channels of continuous feedback from its internal customer to constantly align its practices with the needs of the end-users. Currently, the DGRM holds meetings with its stakeholders every four months approximately. In addition to that, follow-up via official letters is also an option to communicate with the DGRM.
Despite such established practices, stakeholders considered that these channels for feedback to the DGRM are not always effective in addressing some of their issues of concern. For instance, during the fact-finding interviews, some stakeholders considered approval processes by the DGRM too long for their own operational activities. Namely, auxiliary bodies must receive approval for procurement of certain product categories, prior to being able to launch the tender. Similarly, the lack of up-to-date information on the status of their procurement requests was an issue reported by some stakeholders, which sometimes resulted in the duplication of procedures with entities deciding to purchase on their own via contratos pedidos. As reported by stakeholders, the main opportunity to provide feedback is to file a complaint whenever the goods received do not correspond to those requested.
Instead, strengthening the available mechanisms to better capture needs, concerns and feedback from users would allow avoiding or addressing such inefficiencies. In this respect, the DGRM could explore whether more frequent meetings would provide value to its stakeholders, or whether these meetings should focus more explicitly on improving the co-operation between DGRM and its users. Alternatively, the DGRM could consider setting up a channel for anonymous feedback, such as a mailbox for ideas or a regular satisfaction survey.
3.4.2. Generating value from the use of data and KPIs
Another important element to improve efficiency of the operations of the DGRM is by making use of internal data for decision-making, performance measurement and tracking, as well as communication with stakeholders. At present, the DGRM makes limited use of an established system of key performance indicators (KPIs) that would allow specific target setting and performance measuring. Furthermore, gathering insight from its internal data seems cumbersome. If such data is available only internally, the process of accessing it appears to be lengthy and cumbersome.
Importantly, stakeholders in the State of Mexico seem to have limited awareness on the value of easily accessible internal data for the purposes of analysis and decision-making. In fact, measuring some key indicators gives quick insight on the performance of an organisation with respect to its targets. Managers and decision-makers are able to identify which areas need further attention and are able to take action quickly. For instance, an indicator on the number of bids received may be tracked. If the number is below a certain threshold, procurement officials can analyse the causes for this, compare with tenders in other product groups or beyond the state borders, and take corrective action. Similarly, easily accessible historic data is valuable for the purposes of market research and understanding the pricing strategies of suppliers. Finally, KPIs should also allow for the measurement of savings or other key benefits of centralised purchasing (e.g. number of days to conclude a contract). These kinds of indicators are valuable in the communication with users or potential users, notably to provide them with incentives for participation in centralised procurement.
To this end, a performance evaluation system should be in place, showing the results of the procurement process periodically and consistently, and generating insights for areas of improvement. Such a performance system built on the regular monitoring of relevant KPIs and based on consistent, up-to-date and reliable information could ideally stem from digital sources such as the e-procurement system.
In fact, the OECD 2015 Recommendation of the Council on Public Procurement calls on members to develop indicators to measure performance, effectiveness and savings of the public procurement system (Box 3.10).
X. RECOMMENDS that Adherents drive performance improvements through evaluation of the effectiveness of the public procurement system from individual procurements to the system as a whole, at all levels of government where feasible and appropriate.
To this end, Adherents should:
i. Assess periodically and consistently the results of the procurement process. Public procurement systems should collect consistent, up-to-date and reliable information and use data on prior procurements, particularly regarding price and overall costs, in structuring new needs assessments, as they provide a valuable source of insight and could guide future procurement decisions.
ii. Develop indicators to measure performance, effectiveness and savings of the public procurement system for benchmarking and to support strategic policy making on public procurement.
Source : (OECD, 2015[2])
According to the responses of the OECD fact-finding questionnaire, in the State of Mexico no organisation has a performance framework in place dedicated to measuring the efficiency of their procurement system. In this sense, the concept and value of performance evaluation seem to lag behind. Nevertheless, on an occasional basis, some organisations are subject to quality management standards or perform evaluations mandated by the Senior Management6. These exercises, however, are not embedded in the procurement process on a consistent basis.
Currently, the performance of the DGRM is assessed on the basis of annual operational targets, which focus on the number and value of public procurement procedures to be executed each year. Specifically, yearly objectives of the DGRM involve the definition of the total number of tenders and the number of open tenders, as well as the budget for the foreseen tenders. A comparison of planned and actual is carried out each year. In addition to this internal reporting, the DGRM provides the Ministry of Finance with a yearly report on its activities.
It is interesting to note that there is wide discrepancy between the projection and the actual execution for the years 2017 and 2018. Overall, the DGRM vastly underestimates the effort required each year, as there is a strong gap between the planned target and the realisation. This could pose challenges in estimating the resources needed to carry out activities, e.g. the DGRM could risk being understaffed for its operations if planning is constantly below actual.
This exercise of establishing performance targets could be substantially expanded to capture many dimensions of the operations of a CPB. As discussed in the OECD Report on Productivity in Public Procurement (OECD, 2019[19]), the measurement of the effectiveness of a CPB can cover direct inputs and outputs, but also broader impacts, such as environmental or social impacts. The table below provides an overview of simple indicators that could be the starting point for a performance measurement framework for the DGRM.
The DGRM could make better use of its internal data for understanding, tracking and improving the performance of its own organisation. This would also allow it to communicate this performance, notably savings from centralised procurement, to the entities that make use of its services, thereby potentially increasing its portfolio and achieving larger-scale savings. Operational effectiveness as well as the contribution to strategic policy goals could also be part of the framework for measuring the performance of the DGRM.
The State of Mexico introduced centralisation of public procurement by centralising the procurement function under the DGRM of the Ministry of Finance. While this is an important step, there is room for improvement to fully benefit from centralisation in terms of savings, administrative simplification and competition. The following recommendations aim to be helpful in further expanding centralisation of public procurement, as well as enhancing its effectiveness.
Expanding the scope of centralisation in the State of Mexico
The DGRM could work actively to expand the scope of its centralised purchases to include new users (i.e. municipalities) as well as to increase the share of centralisation of auxiliary bodies that already take part in the centralisation scheme. To do so, the DGRM could adapt its service offer to the needs of these contracting authorities, namely propose voluntary framework agreements for standardised goods and services. In practical terms, this could entail the organisation of focus groups with procurement officials from auxiliary bodies and municipalities to have a clear picture of the needs of these public entities. A conference to raise awareness could be envisioned as well.
Improving centralised purchases through the use of framework agreements
Centralisation could also be made more efficient through the use of framework agreements. These instruments allow aggregating the expenditure of all potentially interested parties, as the specific parameters do not need to be set in advance. If offered on a voluntary basis, entities can decide on an ad-hoc basis whether the offer of the framework agreement fits their needs. As the first step, the State Legislature would need to reform the current legal framework to allow for framework agreements.
Once such a reform is adopted, the DGRM could strengthen the capacities of the unit for market research and engagement to best tailor framework agreements. This organisational unit would also be tasked to ensuring that framework agreements gain sufficient participation from the market.
Generating competition to deliver value for money with centralised procurement
Increased competition to the DGRM’s tenders is key to achieve benefits from centralisation in the State of Mexico. As such, the DGRM needs to take a comprehensive approach tackling multiple aspects related to low levels of competition. As the first step, the DGRM should focus on acquiring a precise understanding of the causes behind low levels of competition, including frequent disqualifications and void tenders. It could review its procurement process to identify potential areas that repeatedly lead to disqualifications and take appropriate action (e.g. supplier trainings). Increased digitalisation through the expansion of e-procurement could offer an important course of action for increasing supplier participation. Where possible, the DGRM could consider advertising its tenders in other markets, either at federal level or in neighbouring states. To facilitate for such broader market consultation, a reform of the current legal framework may be envisaged. The DGRM also needs to privilege the use of competitive procedures throughout its tenders, limiting direct awards only to strict exceptional circumstances. Not least, procurement officials could be trained to identify red flags on collusion and design tenders that reduce the risk of bid rigging.
Strengthening internal processes to reflect procurement specialisation and contract management
The structure of an organisation contributes to the overall efficiency and effectiveness to carry out its mission. In this respect, the DGRM, in cooperation with Institute for the Professionalisation of Public Servants, could consider investing in the specialisation of procurement officials according to dedicated functions through tailored training. Within its own organisation, the DGRM could consider expanding contract management, as well as creating specialised expertise for purchasing by product categories. Specifically, it could also provide detailed guidance to its users on contract management practices to ensure a harmonised approach to contract management, which promotes performance instead of compliance.
Making use of data for performance assessment and continuous improvement
Internal data is highly valuable for the management of an organisation, including the definition of performance targets and assessing performance. To this end, the DGRM could set up a framework of KPIs that establish its organisational goals beyond its current practice. On a yearly basis, it could evaluate its performance based on these metrics to ensure continuous improvement of the organisation, as well as the larger impact of its activities. KPIs also simplify communication with users and stakeholders, allowing to highlight the performance of the organisation.
References
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Notes
← 1. Answers to OECD fact-finding questionnaire provided by the State of Mexico.
← 2. Data provided by the Ministry of Finance
← 3. See https://share.sisop.edomex.gob.mx/archivos/facfae6c384534897aba75b2f9f4040d.
← 4. The average number of procedure was calculated based on data from 2016, 2017 and 2018 including tenders for goods and services. Data provided by the Ministry of Finance.
← 5. Analysis of COMPRAMEX data by the OECD team.
← 6. Survey questionnaire : Evaluation principle Q4