SNS Economic Policy Council Report 2022: Public Procurement

A major problem with regard to public procurement is that buyers are not allowed to take previous experiences with suppliers into account when evaluating tenders. In order to remedy this, the SNS Economic Policy Council proposes introducing rating systems for suppliers to the public sector similar to systems used online to rate taxi and hotel services.

In 2019, Swedish public sector procurement amounted to more than SEK 800 billion, corresponding to almost 18 percent of GDP. In the SNS Economic Policy Council Report 2022: Public Procurement, the authors highlight a number of problems related to how public procurement is currently carried out while also suggesting ways of addressing these.

past performance is not taken into account

First, current procurement rules limit the possibility of using information on previous deliveries when carrying out evaluations in a new tender process.

“It is difficult to prevent a supplier that has previously misbehaved from participating in a new tender process. And it is even more difficult to reward a supplier you are satisfied with. Furthermore, it is not possible to include information on other organizations’ experiences with a supplier in the evaluation, other than in the form of references,” says Sofia Lundberg, professor of economics at the Umeå School of Business, Economics and Statistics, Umeå University and chair of the SNS Economic Policy Council 2022.

In order to remedy these problems, the researchers propose introducing rating systems for public sector suppliers that take past deliveries into account, similar to the online services used for rating, for instance, taxi and hotel providers.

weak link between price in tender and price in contract

Second, there may be a weak link between tender price and what is actually paid out, which, according to the researchers, risks ruining the entire tender procedure.

“If the tender price repeatedly differs from what is actually paid, there is no reason for suppliers to submit bids reflecting the actual costs. This increases the risk of dishonest suppliers winning contracts,” says Mats Bergman, professor of economics at Södertörn University.

The researchers believe that government authorities need to get better at designing their procurement processes so that the price in the winning bid more clearly reflects the actual money paid out.

inadequate division of responsibility for cost overruns

Third, uncertainty regarding costs is not handled properly. It is difficult to know in advance how much a complex service such as constructing a building or bridge will ultimately cost. Surprises in the form of, for instance, difficult ground conditions and bad weather affect both costs and quality. That is why contractual terms and follow-up procedures play a crucial role.

“We can offer examples of shortcomings in both contracts and follow-ups. There are cases indicating that somewhere between the call for tenders and the final delivery, the procurement process goes from a fixed-price contract to a cost-plus contract. In some cases, the amount paid out is three or four times higher than the tender price,” says Malin Arve, associate professor of economics at the Norwegian School of Economics.

The researchers recommend that potential cost overruns should be managed in the contract as far as possible in advance (e.g., by cost-sharing contracts). This reduces the risk of unjustifiably high amounts being paid out and increases the level of predictability for the buyer.

authors

Sofia Lundberg (chair), Professor of Economics, Umeå School of Business, Economics and Statistics, Umeå University

Malin Arve, Associate Professor of Economics, Norwegian School of Economics, Bergen

Mats A. Bergman, Professor of Economics, Södertörn University

Lars Henriksson, Professor of Law, Stockholm School of Economics