“Some Economic Considerations on Framework Agreements, Electronic Auctions, and Dynamic Purchasing Systems” Gian Luigi Albano, Consip Research Unit - Rome Vienna, 10th Nov 2006

2 Roadmap  Directive 2004/18 EC: Open Economic issues  Any practical guidelines?

3 Framework Agreements

4 Some practical definitions Four categories of Framework Agreements: 1.Framework Agreements that establish all the terms and are concluded with a single operator = single-operator complete FAs. 2.Multiple framework agreements that establish all the terms = multi-operator complete FAs. 3.Framework Agreements that do not establish all the terms are concluded with a single operator = single-operator incomplete FAs. 4.Multiple framework agreements that do not establish all the terms = multi-operator in complete FAs.

5 Open issues of the 2004/18/EC Directive and its implementation in the Italian legislation… Open Issues “rotation” criterion in a multi-operator complete FA. 1 Choice of the appropriate participation requirements in both complete and incomplete FAs. 2 Multi-operator incomplete FAs: What criteria for inviting the selected suppliers when reopening the competition? 3 Awarding criteria before and after the selection of the suppliers in a multi-operator incomplete FA? 4 Potentially not a big problem. By choosing the appropriate FA, the advantages from the flexibility are higher than the disadvantages from possible distortions.

6 The “cascade” method is more suitable. *Example: supply of marbles The introduction of the “rotation” method, in a multi-operator framework contract, has the main purpose of reducing the discretionary power of the awarding authorities (AAs). This method, instead, may… Supply from A = 1 dozen: 1 € Supply from B= 1 dozen: 1,1 € Supply from C= 100 dozens: 1,2 € each Open Issues – “rotation” method 1  …Increase the discretionary power, if quantities from each single operator are not determined ex ante (and it cannot be done);*  …Increase total expenditure since the AA has to purchase also from the more expensive suppliers A= 1 € B= 1,1 € C= 1,2 € Rotation Awarded suppliers Purchases

7 Multi-operator (3) complete FA on order to purchase electric wires for an estimated value of € The second method is suitable. Open Issues – Participation requirements 2 Weakening participation requirements in a multi-operator framework agreement could increase participation (number of submitted tenders), with positive effects on savings and quality. Example: Supply of electric wires ( €/m ) 4 Big Companies Yearly turnover € SMEs Yearly turnover € Efficiency DETERMINATION OF PARTICIPATION REQUIREMENT Average value of the supplyOverall value of the supply A B C A = 1,5 € B = 1,6 € C = 1,8 € € D = 1 € G = 1,3 € A = 1,5 € D G E F €/3= € 12 H

8 The exclusion power needs to be limited to the circumstance in which there is a supplier with a certified (from a third part) low Customer Satisfaction. The AA is able exclude suppliers with weak levels of Customer Satisfaction. Discretion improves quality. Open Issues – Awarded invitation 3 In a multi-operator Incomplete FA the AA can select a subset of admitted supplies for the second stage of competition.

9 Optimal choice Both the Directive and its Explanatory Note describe purposefully loose legal processes. Several economic considerations should be taken into account when “filling the gaps.” (see, for instance, Handbook of Procurement, Cambridge University Press, 2006 ). Type “A”Type “B” Type “C”Type “D” Only 1 At least 3 NoYes Are all the terms established? N. of selected suppliers

10 Target: maximum demand satisfaction. 1.Max Participation (heterogeneity) 2.Max Competition at the entry stage 3.Max Quality Optimal choice - Objectives (C, D) = multi-operator (A,B) = single operator (D) = incomplete multi-operator Specific Demand Kind of suitable FA The appropriate choice is a complex task. The characteristics of the supply market should be taken into account…

11 Expected Participation Dimensional Heterogeneity Fixed Costs Specificity, obsolesce, flexibility of the good/service Incomplete FA Complete FA Relevance of non-contractible qualityIncomplete FAComplete FA HIGHLOW Multi-operatorSingle operator Multi-operatorSingle operator Multi-operator Supply Market: Some Relevant Dimensions … … …… ……

12 High Expected participation High fixed costs Low dimensional heterogeneity Low specification High importance of non contractible quality* A - 1 Oper. complete B - 1 Oper. incomplete C - ≥3 Oper. complete D - ≥3 Oper. incomplete From the example above, it is easy to understand that the optimal choice is: the individual framework contract (type A), corresponding at the type stipulated by Consip. Ranking: A B, C, D Type of FA Market *Low importance of non contractible quality A, B, C “A” optimal choice Basic Model – Market

13 Concluding Remarks  The “rotation” method may turn out to be a harmful criterion;  The participation requirements should be adapted to the number of admitted operators (when ≥ 3);  Limit the use of discretion to those circumstances in which a supplier displays a certified (from a third part) low Customer Satisfaction.

14 Electronic Auction

15 E-Auction Under the EU Directive 2004/18 Main issues: Auction format and information:  closing rule  disclosure policies Scoring rule: ex-ante vs. ex-post announcement Procedures: fully electronic vs. mixed (paper+electronic)

16 Auction format and information 1. Closing rule: 3 ways: fixed deadline; limited number of round, no further bids:  Problems with the first two  Theory points towards the third criterion 2. How much information should be disclosed? Prices/values: collusion vs. learning Number of participants: the procurer may vary its disclosure policy at any moment while the auction runs. Open issues: Under what conditions should the procurer vary her disclosure policy about the number of active bidders? Should the procurer disclose more or less as the auction progresses?

17 Scoring rule Scoring rule of the E-auction: it may be different from the one used in the first phase The procurer may aim at learning something in the first phase in order to adjust the scoring rule in the 2nd phase. This points towards announcing the scoring rule for the EA only later. Learning requires much competition (many points) in the first phase and fewer in the second. However, not much room for fine-tuning in the second phase. If, however, many degrees of freedom are left for the second phase fewer are used in the first one, so learning is seriously undermined. Then it would seem advisable to  announce the scoring rule at the very beginning, and  to stick to the same scoring rule in the two phases.

18 Procedures Two possible options: 1. Mixed procedure: 1st phase paper-based + E-auction 2. Fully electronic procedure However, there might be legal requirements (as in Italy) whereby offers must be disclosed in a public session at the end of the first phase (check integrity of envelopes and regularity of the tendering procedure). Such a procedure would provide a(n) (almost) ideal framework for suppliers to coordinate offers in the second phase. In such circumstances, it would seem advisable to opt for a fully electronic procedure.

19 Dynamic Purchasing System

20 Dynamic Purchasing System and Framework Agreement Could the Dynamic Purchasing System (DPS) be considered as the electronic version of a Framework Agreement? DPSFA Conceived for standardized and commonly used goods/services only Conceived also for complex goods/services Any interested economic operator may submit an indicative bid. Ex ante specification of the number of suppliers Dynamic bidsNo more than two steps of bidding Any interested operator can be admitted to the system at any point in time provided that its indicative bid is compatible with the content of the indicative bid. Entry takes place in one specific moment only.

21 Main Issues 1.Degree of specification of the indicative bid. 2.Relationship between the degree of specification of the indicative tender and awarding criteria adopted for “call offs.” 3.Information production/circulation throughout the life of the system.

22 Phase 1: Admission to the DPS Indicative Bid (IB) Price (p IB )  Binding: bids can only be improved (that is, reduced). Technical specifications:  fully specified q IB  loosely specified q IB

23 IB = (fully specified q IB, p IB ) The admission criteria could be consider as a entry barrier. Only those suppliers able to offer the complete q IB at the maximum price of p IB are admitted. Awarding criteria of specific tenders coherent with the minimum admission requirements. It is possible to use MEAT, but p FB  p IB, and q IB  q FB. A “Very Selective” Indicative Bid (1/2)

24 Potential advantages: 1. Highly informative indicative bid: 2. Limited uncertain about the good/service to purchase. Suitable choice when the authority setting the DPS up is also the contracting authority. A “Very Selective” Indicative Bid (2/2) Potential drawbacks: Very little flexibility; If the authority which sets the DPS up is distinct from the contracting authority which awards the contract, it becomes difficult to meet the need of highly heterogeneous contracting authorities.

25 IB = (loosely specifed q IB, p IB ) Admission criteria is a less effective selection device. The number of admitted suppliers is higher than the one in the previous scenario. The informative value of the economic component is lower. The economic offer expresses (at its very best) the highest price requested by any supplier for the most expensive technical specification that is consistent with q IB. A “Less Selective” Indicative Bid (1/2)

26 Potential advantages: 1. High flexibility, many heterogeneous contracting authorities can meet their needs. 2. High number of admitted suppliers. Potential drawbacks: Potentially high uncertainty about the nature of each call off. Low informative value of the economic component of the indicative bid. A “Less Selective” Indicative Bid (2/2)

27 Wrapping all up…  Loosely specified q IB seems more suitable than a fully specified q IB :  Flexibility.  Max number of contracting authorities that are able to satisfy their specific needs.  p IB induces some degree of selection among operators.  Number and identities of admitted suppliers and economic component of the indicative bid:  Known to the awarding authority, or  Known to all the suppliers with some delay.