Dr Pedro Telles of Swansea University has been conducting a series of interviews, the Public Procurement Podcasts (PPP), where he talks to leading academics, researchers and graduates who have an interesting viewpoint on aspects of public sector procurement. He recently spoke with Ignacio Herrera Anchustegui, Ph.D candidate at University of Bergen and member of the Bergen Centre for Competition Law and Economics. His research interests are related to the interaction of public procurement and competition law, in particular buyer power in centralised purchasing.
Ignaciio has been looking at what buyer power means from a general perspective, and, he says, it doesn’t change too much between the public sector and the private sector. But, in his area of interest, public procurement and centralised purchasing, he wanted to discover how public buyer power is created and how it has been integrated or enhanced. In his experience, both issues and benefits that happen in the private sector tend to be replicated in public markets.
He believes that buyer power is the most important similarity between the two markets. By this he means the ability of a buyer to reduce the purchasing price of whatever it is they wish to acquire. The main reason for this in centralised purchasing in public procurement is the ability to generate economies of scale, so very simply, the more you buy, the cheaper the price.
This happens in both sectors where pooling demand, like buying on behalf of all contracting authorities in the public setting, increases the amount of buying ability that they have. By purchasing more, it’s able to obtain a lower final price for each of the units. That logic explains why buyer power is a positive thing in any sector, it is seen as efficiency-enhancing. But there is also a negative side.
An example is in centralised purchasing in public procurement, where centralised purchasing is said to be positive, because you can carry out one procedure instead of many. Instead of 10 municipalities buying their own goods, they entrust that activity to one central purchasing body that carries out a single tender instead of 10. So not only do you obtain a lower purchasing price because you’re pooling the demand, you reduce administrative costs, and that is seen as a positive, especially in terms of the EU directives. But at the same time, that can also be a negative, he says, because you are creating a lot of concentration in the market with only one buyer buying everything for all the others (monopsony). That buyer has a lot of market power and therefore can make it more difficult for small and medium undertakings or enterprises to have access to those contracts, because they probably don’t have the capacity or they cannot compete in pure terms of price with a larger seller.
So, while efficient in the short term, in the long term it means smaller suppliers cannot compete. This is just as likely in the private sector. There is no conclusive evidence, but there are claims that, for example, in the supermarket sector, smaller suppliers, take farmers for instance, are being pushed out of the market. Although in the public sector we have different ways of doing things, like dividing contracts into lots, which mitigates this risk somewhat.
Pedro Telles agrees on the point that centralisation can have a negative effect on the market, but is interested in the problem with lotting in this context. Ignacio explains that lot division, while positive in some respects, is not mandatory. Member states can decide whether they want contracting authorities to do this or not. When you divide into lots, he says, you end up with the problem that the cost saving that you managed to get when it comes to the tender, is gone or reduced because now you are incurring a lot of expense for contract administration, because instead of having one single contract, you have maybe five or six depending on how many lots you have. So tender wise, it may be more cost-effective if you centralise.
But it’s not just about dividing into lots, it’s knowing how to divide into lots. If you divide in a way that facilitates collusion among suppliers, among economic operators, then the lot division is going to have a negative effect. The contracting authority may not get a cheaper price, in fact, it may even get a higher price because the tenders could enter into a bid-rigging agreement.
He believes lot division is positive if done correctly, but there is little direction on this and when it comes to centralising and lot division, what is really important is the introduction of best practices. Central administration and the European Commission in Europe should offer contracting authorities tools to maximise public buyer power in an efficient way. We should be aware that you can exercise buyer power that is exploitative or exclusionary and is anti-competitive, that creates inefficiency in the market. Training is important on what fits well into lots and what doesn’t.
There is much more discussion on the intersection between law and economics, the pros and cons of lotting, the role of the EU directives and understanding the impact on the marketplace. You can read the whole transcript here.