PROMOTING COMPETITION

IN PUBLIC PROCUREMENT

IN COLOMBIA

The OECD Experience

Antonio Capobianco

Senior Competition Law Expert

Competition Division, OECD

Antonio.Capobianco@oecd.org

STRUCTURE OF THE PRESENTATION

• The Importance of Public Procurement

• Public Procurement is a High Risk Government Activity

• Importance of an Efficient and Competitive Public

Procurement System

• The OECD and Best Practices for Public Procurement

• Best Practices for a More Competitive Public

Procurement in Colombia

2

Government procurement as share of GDP and of total govt. expenditures

(4.3 trillion EUR spending per year)

Source: OECD National Accounts Statistics. (2013)

PUBLIC PROCUREMENT MATTERS

… IN THE OECD AREA

Estonia

Hungary

Netherlands

Korea

Japan

Ireland

Luxembourg

Czech Republic

Germany

New Zealand

Canada

Israel

Slovak Republic

Finland

United Kingdom

Sweden

Turkey

Belgium

Austria

Denmark

Switzerland

Spain

Poland

OECD(UWA)

Norway

France

United States

Mexico

Italy

Portugal

Greece

Slovenia

28.1

0 10 20 30 40 50

13.0

0.05.010.015.020.025.0

as % share of total government expenditureas % of GDP

3

PUBLIC PROCUREMENT MATTERS

… GLOBALLY

4

On a global scale public procurement estimated at US$ 9.5

trillion/year

Value of public procurement in

2015 approx US$ 37bn

While the proportion of GDP

attributed to public procurement

in Colombia is slightly below the

OECD average (12.5%), public

procurement makes up a larger

share of government

expenditure (35.7).

PUBLIC PROCUREMENT MATTERS

… IN COLOMBIA

5

Source: OECD (2015)

Public Procurement is a Government

Activity

at High Risk

6

PERCEIVED LEVEL OF BRIBERY

1

2

3

4

5

6

7

Awarding of public contracts

and licenses

Imports and exports

Obtaining favorable judicial

decisions

Annual tax payments

Public utilities

7 =

very

com

mon

1 =

neve

r occ

urs

Source: 2012-2013 Executive Opinion Survey from the World Economic Forum for the Global

Competitiveness Report

Public procurement is the government activity most vulnerable to waste, fraud

and corruption due to its complexity, the size of the financial flows it generates

and the close interaction between the public and the private sectors.

57% OF FOREIGN BRIBERY CASES

RELATE TO PUBLIC PROCUREMENT

8

Data available in the

OECD Foreign Bribery

Report 2014

How large is the 'Global Corruption Industry', measured in terms of financial amounts per year worldwide?

Corruption is a very large 'industry'. Yet until very recently, it was virtually impossible to venture an estimate of the

extent of corrupt annual transactions. In fact, only a few years ago, corruption was regarded as impossible to measure.

Thanks to the 'explosion' in measurement approaches and actual data in this field, at least it is now possible to estimate

rough orders of magnitude. Our focus is on measuring the extent of bribery from the private sector (firms and

individuals) to the public sector.

A conservative approach to such measurement gives an estimate for annual worldwide bribery of about US $1

trillion dollars (US $1,000 billion.). We obtain figures on bribes from worldwide surveys of enterprises, which ask

questions about bribes paid for the operations of the firm (licenses, regulations, etc.), as well as bribes paid to get

favorable decisions on public procurement. Further, an estimate on bribes paid by household users of public services is

derived from governance and anti-corruption diagnostic surveys.

There is a margin of error in all these estimates, so we should regard them as preliminary orders of magnitude. But the

main point is that this is not a relatively small phenomena of a few billion dollars - far from it.

SIZE OF WORLDWIDE BRIBERY (WB)

9

SIZE OF WORLDWIDE BRIBERY

(OTHERS)

10

Loss of public procurement money due to corruption in

the EU app. € 120 billion/year = budget of the EU

Globally: 20 – 25 % of procurement money lost to

corruption = US$ 2 trillion/year

OECD member countries’ development aid is US$ 133

billionSource: Transparency International 2014, OECD

Conservative estimates of harmful effects:

Source: OECD Guide for helping competition

authorities assess the expected impact of their

activities, April 2014,

http://www.oecd.org/daf/competition/Guide-competition-impact-assessmentEN.pdf

If “only” 10 % of all pp bids are rigged and the

overcharge is “only” 10 % = US$ 95 billion

damage/year

HUGE SUMS LOST TO BID RIGGING

11

EU – DG

Comp

US DoJ UK OFT

(now

CMA)

Dutch

NMa

(now

ACM)

Price

Effect

10 – 15 % 10 % 10 – 15 % 10 %

-40

-30

-20

-10

0

10

20

30

40

50

60

70

80

90

100

-40

-30

-20

-10

0

10

20

30

40

50

60

70

80

90

100

% in 2012 (right axis) Percentage point change 2007-2012 (left axis)Percentage points

%

CONSEQUENCE: DECLINING TRUST IN

GOVERNMENTS

Confidence in national government in 2012 and its change since 2007

Source: Gallup World Poll12

Importance of an Efficient and

Competitive Public Procurement

System

13

• Aggregate economic benefits:

– Short-term for consumers, and other buyers including public sector

– Longer term: innovation and growth

• Distributional benefits

– Inequality

– Poverty reduction

– Employment

• Social benefits

– Fighting corruption

BENEFITS OF COMPETITION POLICY

FOR THE NATIONAL ECONOMY

CONSUMER BENEFITS AND HARM

FROM CARTELS

15

• On average 1990 – 2013, discovered

international cartels affected US$750bn

commerce per year, overcharge 40%

(Connor, 2014)

• Just one international cartel on vitamins

1990-1999 resulted in overcharges to

importing countries of US$2.7bn

Source: Estimates from Clarke and Evenett 2002

SURVEYS OF CARTEL OVERCHARGES

Reference Number of

Cartels

Mean

Overcharge

(percent)

Median

Overcharge

(percent)

Cohen and

Scheffman (1989)

5-7 7.7-10.8 7.8-14.0

Werden (2003) 13 21 18

Posner (2001) 12 49 38

Levenstein and

Suslow (2002)

22 43 44.5

Griffin (1989) 38 46 44

OECD (2003),

excluding peaks

12 15.75 12.75

Weighted

average

102-104 36.7 34.6

Source: Connor and Bolotova (2006)16

SURVEYS OF CARTEL OVERCHARGES

Reference Number of

Cartels

Mean

Overcharge

(percent)

Median

Overcharge

(percent)

Cohen and

Scheffman (1989)

5-7 7.7-10.8 7.8-14.0

Werden (2003) 13 21 18

Posner (2001) 12 49 38

Levenstein and

Suslow (2002)

22 43 44.5

Griffin (1989) 38 46 44

OECD (2003),

excluding peaks

12 15.75 12.75

Weighted

average

102-104 36.7 34.6

Source: Connor and Bolotova (2006)17

CONSUMER BENEFITS - CHEAPER

PUBLIC PROCUREMENT

0

20

40

60

80

100

120

140

160

180m

ar.

-03

may.-

03

jul.-0

3

sep.-

03

nov.-

03

en

e.-

04

ma

r.-0

4

may.-

04

jul.-0

4

sep.-

04

nov.-

04

en

e.-

05

ma

r.-0

5

may.-

05

jul.-0

5

sep.-

05

nov.-

05

en

e.-

06

ma

r.-0

6

may.-

06

jul.-0

6

sep.-

06

nov.-

06

en

e.-

07

ma

r.-0

7

may.-

07

jul.-0

7

sep.-

07

nov.-

07

L002 L014 L007 L001 L015 L012

Winning bids for one pharmaceutical product, IMSS Mexico Collusion between bidders

IMSS consolidates purchases, attracts new bidder

Other bidders adjust, start competing

This single change (following OECD recommendations) saved an estimated EUR 250m.Overall, IMSS estimated savings at EUR 700m/year

PRODUCTIVITY AND GROWTH -

MECHANISMS

19

• “The most competitive firms experienced productivity

growth rates 3.8 - 4.6 percentage points higher than the

least competitive.”

Nickell, Quarterly Journal of Economics 1996

• More competition could increase productivity growth in

South Africa by 2 – 2.5 percentage points per year

Aghion, Review of Economics and Statistics, 2009

PRODUCTIVITY AND GROWTH: UK,

SOUTH AFRICA

DISTRIBUTIONAL OUTCOMES

21

COMPETITIVE MARKETS CREATE

JOBS

22

• Long term: clearly more competitive economies are more dynamic, creating more jobs

• Liberalisation can create jobs:

– More competition from European Single Market reduces profits 3%, reduce unemployment 0.5%. Griffith et al Economic Journal 2007:

– Regulatory restrictions reduced retail employment in France by 10%

NBER Working Paper No. 8211

• But of course there can also be short-term job losses as inefficient businesses close

… AND IT’S NOT JUST ECONOMIC

OUTCOMES

Monopolies and rents corrupt the political process

IMPORTANCE OF COMPETITIVE

PROCUREMENT

• A competitive procurement system will:

– Drive prices to marginal costs

– Will minimize costs for firms and the government

– Will drive innovation, as firms learn from one another and

thereby to continuously improve products.

• And competitive public procurement system will accrue

benefits to the whole economy as public procurement

often involves key infrastructure (highways, railways,

electricity, etc.) for other industries.

24

INTERNATIONAL EXAMPLES

The improvement of procurement procedures led to

significant savings in a number of countries (OECD 2003):

– 47% saving in the procurement of certain military goods in Colombia

– 43% saving in the cost of purchasing medicines in Guatemala

– USD 3.1 ml savings for the Karachi Water and Sewerage Board

(Pakistan)

In the EU, the implementation of the EC Directive on Public

Procurement in the period between 1993 and 2002

generated cost savings of between a little less than EUR 5

billion and almost EUR 25 billion.

25

BID RIGGING – THE COSTS

Japan: Prices across 18 tenders declined by approximately 20%

after competitive bidding as restored to the procurement

process

U.S.: Bid rigging had raised the price paid by the US

Department of Defense by 23.1%

S. Africa: Prices of health care products declined by approximately

27% after antitrust intervention

Clarke and Evenett have shown, the resource saving that can be

generated by only a marginal reduction in bid rigging on government

contracts (e.g. of the order of 1 per cent) is greater than the average

annual operating budget of the competition agency in most countries,

often by a factor of several times over.26

The OECD and Best Practices for

Public Procurement

27

The OECD is a unique forum where the governments of 35 democracies work together to

address the economic, social and environmental challenges of globalisation.

The OECD is also at the forefront of efforts to understand and to help governments respond to

new developments and concerns, such as corporate governance, the information economy and

the challenges of an ageing population.

The OECD provides a setting where governments can compare policy experiences, seek

answers to common problems, identify good practice and work to co-ordinate domestic and

international policies.

THE ROLE OF THE OECD

28

IN PRACTICE WHAT DOES THIS MEAN?

• Coordinated efforts to develop best practices

Procurement Rules

• Education of officials, business, media

• Advocacy to government and legislatorsAdvocacy

• Strong sanctions

• Inter-agency co-operationEnforcement

29

OECD Recommendation on Public Procurement

To promote more effective and competitive procurement

and prevent corruption and enhance integrity

OECD RECOMMENDATION ON

PUBLIC PROCUREMENT (2015)

30

Main Principles:

Transparency

Integrity

Easy access for all competitors

Efficiency & e-procurement

Competent procurement officials

Evaluation

Introduce risk management

Transparent & objective

stakeholder participation

Accountability mechanisms,

complaint and sanction

processes

OECD RECOMMENDATION ON PUBLIC

PROCUREMENT (2015)

Participation

Efficiency

Capacity

Integrity

Access

Balance

E-Procurement

Evaluation

Risk Management

Transparency

Integration

Accountability

OECD WORK ON INTEGRITY

32

http://www.oecd.org/gov/ethics/integrityinpublicproc

urement.htm#Principles

2007

2009

INTEGRITY WORK IN COLOMBIA (2016)

33

Public procurement is a critical element of good governance, as

it is a crucial nexus of interaction between the public and private

sectors. This report examines ongoing public procurement

reforms in Colombia, focusing on issues such as

• the availability of data on public procurement,

• preventing conflicts of interest,

• competition and contracting award methods, and

• legal control and remedy systems.

OECD Recommendation on Fighting Bid Rigging

To promote more effective and competitive procurement and reduce risk of bid rigging in public tenders

Two pillars:

1. Assessment: Call for governments to assess their public procurement laws and practices at all levels of government

2. Right skills: How public procurement officials can prevent, detect and address bid rigging

The OECD runs targeted trainings and reviews of public procurement regimes:

• Trains thousands of officials in, e.g., Romania, Brazil, Chile, Colombia, India, Italy, Greece, Mexico, Poland, Romania, Russia, South Africa (and many other places…);

• Conducts projects following request and funding from the interested country.

More info: http://www.oecd.org/daf/competition/fightingbidrigginginpublicprocurement.htm

34

OECD RECOMMENDATION ON

FIGHTING BID RIGGING (2012)

OECD GUIDELINES - 2009

Best practices in OECD countriesSource

Help procurement officials design public

tenders to reduce bid rigging

(Design Checklist)

Better tender

design

Help procurement officials detect bid rigging

when it occurs (Detection Checklist)

Law

enforcement

35

http://www.oecd.org/daf/competition/guidelinesforfightingbidrigginginpublic

procurement.htm

OECD WORK ON COLLUSION

http://www.oecd.org/daf/competition/fightingbidrigg

inginpublicprocurement.htm

2009

2009 - today

36

FIGHTING BID RIGGING IN COLOMBIA

37

More information at

http://www.oecd.org/fr/pays/colombie/figh

ting-bid-rigging-in-public-procurement-in-

colombia.htm

The report identifies the features

currently present in Colombia’s

cartel enforcement and public

procurement and sets forth advice

and suggestions that can lead to

closer compliance with the

recommendations and guidelines,

more effective procurement and a

reduction in the incidence of bid

rigging in Colombia.

CLEAN.GOV.BIZ

38

The CleanGovBiz Initiative supports

governments to reinforce their fight

against corruption and engage with civil

society and the private sector to promote

real change towards integrity.

http://www.oecd.org/cleangovbiz/

Best Practices for a More Competitive

Public Procurement in Colombia

39

• In response to the SIC’s request, the OECD prepared a report which

reviewed Colombia’s compliance with relevant OECD Recommendations in

October 2013.

• The background report for the accession review process in the Competition

Committee will build on the conclusions of this Report.

• In the report, the OECD puts forth a series of suggestions specific to

Colombia

THE 2013 REPORT ON FIGHTING BID

RIGGING

40

The implementation of the OECD recommendations in this Report, coupled with

the increased awareness among Colombian procurement officials of the

existence, risks and costs of collusion, will enable Colombia to increase the

effectiveness of its public procurement to the benefit of its taxpayers.

The Report and its conclusion will also assist SIC in improving the ongoing

efforts in fighting collusive practices in public tenders in Colombia.

THE ASPIRATION AND PURPOSE OF

THE REPORT

41

The OECD’s suggestions are targeted at the Colombian

government, including:

– Superintendencia Industria y Commercio,

– the National Public Procurement Agency;

– Government purchasing groups; and

– Any other government institution involved with public procurement.

ADDRESSES OF THE REPORT

42

Report deals with procurement policies and practices such as:

– increasing the use of public tenders, consolidated purchases and reverse auctions;

– preparing detailed, useful market studies; and,

– reducing disclosure of competitively sensitive procurement and bidding information.

– Increase information sharing and communications among the SIC, the NPPA and

government purchasing officials

– Increase training activities sponsored by the SIC and NPPA.

RECOMMENDATIONS IN A

NUTSHELL

43

INCREASE THE USE OF PUBLIC

TENDERS

44

Percentages of the total number of Colombian government contracts

Public Tenders Direct Awards or Contracting

Other Procurement Processes

2010 (76,485 contracts) 2.36 68.35 29.29

2011 (161,323 contracts) 1.53 54.70 43.77

2012 (328,925 contracts) 0.35 65.75 33.90

Percentages of the money value of Colombian government contracts

Public Tenders Direct Awards or Contracting

Other Procurement Processes

2010 0.03 71.94 28.03

2011 7.78 28.06 63.16

2012 13.23 53.41 33.46

COMPREHENSIVE MARKET STUDIES

• Market studies are vitally important to help contracting

authorities understand all prevailing market conditions

and potential suppliers.

• The SIC and the NPPA should establish the minimum

acceptable content for market studies through the

creation of a checklist.

• The NPPA should arrange for the best quality market

studies to be shared among Colombian public

procurement agencies.

45

CONSOLIDATION OF PURCHASES

• The consolidation of purchases often causes the

disruption of existing collusion. Also, it enhances buying

power which should lead to better purchase prices.

• Currently, it occurs infrequently and on an ad hoc basis.

• The Colombian government purchasing organisations

should be directed to proactively seek out

opportunities for the consolidation of purchases

within individual procurement groups or through

framework agreements.

46

TRANSPARENCY OR CONFIDENTIALITY?

“The system of sealed bids, publiclyopened with full identification of eachbidder’s price and specifications, isthe ideal instrument for the detectionof price cutting”

George Stigler 196447

“Publicity is justly commended asa remedy for social and industrialdiseases. Sunlight is said to be thebest of disinfectants; electric lightthe most efficient policeman.”

Louis Brandeis, 1914

TRANSPARENCY OR CONFIDENTIALITY?

48

The Colombian government should abolish the legal

requirement for government procurement groups to

disclose the budgets for their procurement procedures.

The Colombian government should eliminate other types of

disclosure. • Exchanges of information with bidders by electronic means

• Eliminating the mandatory requirement for public clarification

meetings

Colombian government should limit disclosures of identity

of competitors

JOINT BIDDING, SUB-CONTRACTING

AND SPLIT AWARDS

• Although joint bidding, sub-contracting and split awards

often fosters competition in public procurement

processes, each of these three activities can also be

used to reduce competition.

• The NPPA should obtain statistics regarding how often

procurement procedures involve these three practices.

• Procurement groups should institute certain disclosure

requirements for suppliers undertaking such practices.

• Procurement groups should only split a single contract

among multiple suppliers in exceptional circumstances.

49

THE SIC SHOULD PARTNER WITH THE NPPA

• The establishment of the NPPA in 2011 would assist

Colombia in aligning with the OECD Recommendations.

• The SIC and the NPPA should develop a formal

partnership with regular and ongoing communications.

• The NPPA should chair a council of government

procurement officials, with the SIC, to be a forum for

identifying the resolving issues for government

procurement in Colombia.

50

51

INFORMATION SHARING AMONG

GOVERNMENT OFFICIALS

Institutional Stakeholders

Contracting authorities

Auditors

Anti-corruption authorities

Public prosecutors

Competition authorities

Policy makers

Competition authorities

Procurement authorities

INFORMATION SHARING AMONG GOVERNMENT

OFFICIALS

52

Report suspicious conducts

Build databases

Provide special knowledge

about procurements

Help procurement

authorities to get compensation

Raise the awareness of procurement

officials

Provide advice on the design on

procurements

OTHER ADVICE AND SUGGESTIONS

53

Colombian government should consider making

Certificates of Independent Bid Determination mandatory

in procurement processes.

Colombian government procurement groups should

abandon the use of lotteries to pre-select bidders.

The SIC, in conjunction with the NPPA, should support

procurement training and bid-rigging education activities

across the Colombian government.

Colombian government procurement groups should

increase their use or reverse auctions.

OTHER ADVICE AND SUGGESTIONS

54

Colombian government and the SIC should implement

procedures for Colombian government procurement staff to

raise concerns relating to bid rigging.

Colombian government procurement groups should retain

relevant procurement records.

Colombian government procurement groups should seek

damages in bid-rigging cases.

Thank you for your attention!

2, rue André Pascal - 75775 Paris Cedex 16

Tel: +33 1 45 24 98 08 – Fax: +33 1 45 24 96 95

antonio.capobianco@oecd.org || www.oecd.org

Antonio Capobianco

Senior Competition Expert

Competition Division, Directorate for Financial and

Enterprise Affairs

55

PROMOTING COMPETITION

IN PUBLIC PROCUREMENT

IN COLOMBIA

The OECD Experience

Antonio Capobianco

Senior Competition Law Expert

Competition Division, OECD

Antonio.Capobianco@oecd.org