THE WORLD BANK World Bank Group Multilateral Investment Guarantee Agency Private Sector Development and Public Procurement May 2, 2012 Giuliana Canè Competition Team Investment Climate Department

THE WORLD BANK World Bank Group Multilateral Investment Guarantee Agency Constraints and triggers to private sector development in public procurement reforms Weak investment climates may discourage private sector participation in public procurement. Foreign direct Investment (FDI) can be affected by public procurement policies. Weight of procurement reforms on GDP/expenditure: firms expected to give gifts to secure a government contract (97% in MENA, 76% in Africa and 62% in South Asia). Demonstrated impact of pp reforms on consumer savings: On the other end competitive tendering for granting benefits to renewable energy projects resulted in consumers’ savings in Peru of 27%. 2

THE WORLD BANK World Bank Group Multilateral Investment Guarantee Agency Analysis of the Investment Climate in light of Public Procurement Inv Climate: set of location-specific factors shaping the opportunities and incentives for firms to invest productively and create jobs (WDR 2005) Business taxation  Streamlining tax systems can lead to increasing formalization of firms, encouraging FDI, widening the tax base, lowering cost of tax compliance. Entry/exit  ex. statutory restrictions that deny eligibility to foreign firms seeking to supply goods and services to federal agencies. Trade logistics  ex. supporting sustainable development by promoting Fair Trade in their procurement procedures. Investment policy  ex. a call for tender with specified functional requirements which allow firms to propose innovative solutions. 3

THE WORLD BANK World Bank Group Multilateral Investment Guarantee Agency 4 CP sets “the rules of the game”CP verifies that market agents play by the rules Level playing field (non-discrimination, neutrality, equal access). Elimination of entry barriers. Firms compete in their merits. Govts. do not impose anti-competitive regulation or unnecessary barriers to entry and expansion. Firms do not cartelize, including bid- rigging in procurement markets. and not abuse. If effective Markets are efficient and firm’s productivity increases. Firms can focus on “how to play the best” (competitiveness). Analysis of the Investment Climate (cont.) Competition Policy

THE WORLD BANK World Bank Group Multilateral Investment Guarantee Agency How to assess the investment climate Tools & Key Indicators 5 Investment Climate Assessment (ICA) Broad diagnostic tool used to identify key constraints to growth: analyze perception of entrepreneurs and firm performance in the country and their link to quantitative data found in investment climate surveys The Doing Business Indicators Published annually by the WB, they benchmark 183 economies at a national and sub-national level. The Report provides quantified, comparable measures of business regulations and their enforcement. Private Participation in Infrastructure (PPI) Project Database The site currently provides information on more than 4,800 infrastructure projects dating from 1984 to It covers over 30 categories per project record, including country, financial closure year, infrastructure services provided, type of private participation, technology, capacity, project location, contract duration, private sponsors, and development bank support. The World Bank Enterprise Surveys Provide the world’s most comprehensive company-level data in emerging markets and developing economies (data on 130,000+ firms in 125 countries) and used to create indicators that benchmark the quality of the business and investment climate across countries.

THE WORLD BANK World Bank Group Multilateral Investment Guarantee Agency Public Procurement reforms: How to increase the private sector participation and ensure the level playing field 6

THE WORLD BANK World Bank Group Multilateral Investment Guarantee Agency Expand private sector participation by 1) lowering cost of bidding Optimized registration procedures (avoid excessive requirements, requests of information already available) E-procurement (more efficient, generate a paper trail, facilitates and reduce cost of submission) can also increase the possibility of suppliers getting access to each other’s bids. Adequate retribution (comparable price of goods and services procured by governments to the private sector) Disclosure of sensitive information (avoid requiring participants to disclose proprietary techniques, cost structure) that may decrease advantage in the future 7

THE WORLD BANK World Bank Group Multilateral Investment Guarantee Agency 2) Remove entry barriers in the procurement process 8 -Prequalification and design of tender: requirements, specifications and scoring criteria can foreclose entry for other suitable providers. -Domestic content requirements: valid purpose of ensuring that benefits of large projects are enjoyed locally. But it can also act to insulate the industry from outside scrutiny and competitive pressure. -Past experience requirements useful to guarantee expertise but can create barriers for new business -Timing - Suppliers must know that the tender is taking place and have sufficient time to prepare a bid. Short timeframes favor existing and domestic contractors. -Publicity: Wide publicity of all public tenders is essential to encourage participation. -Aggregation versus disaggregation: smaller units can allow smaller firms to qualify for the tender based on their own capacity and make corruption less attractive though may increase the number of opportunities for unlawful behavior.

THE WORLD BANK World Bank Group Multilateral Investment Guarantee Agency 3) Pay attention to structural factor Market concentration. Problematic if result of policies and rules that favor a few incumbents. The possibility of cartel agreements also increases if fewer firms participate in the market. Cross ownership and other links among competitors. If a firm has a participation in a competitor, this increases the probability that cartel behavior takes place. Regularity and frequency of orders to identify if competitors are distributing the market among themselves. Characteristics of the product. If products are homogenous and costs among firms are symmetric, it is easier to sustain a cartel agreement.

THE WORLD BANK World Bank Group Multilateral Investment Guarantee Agency 4) Tender design that facilitate competition Information available and exchanged among competitors. focus on how to achieve sufficient transparency to minimize corruption but avoid distribution of the specific categories of information that can support/facilitate cartel agreements. Definition of needs – this can be manipulated so that only the cartel members will be in a position to fulfill the contract. Reference pricing – publication of a reference price or cost estimate prior to bidding may eliminate competitive pressure in the bidding processes as all bids gravitate towards that focal point. The reference price becomes the floor, and estimates are adjusted upwards.

THE WORLD BANK World Bank Group Multilateral Investment Guarantee Agency 4) Tender design that facilitate competition (cont.) Subcontracting –Sub-contracting may increase participation, however, there is also a danger that sub- contracting can be used to support collusion. Predictability – firms may engage in “bid rotation,” whereby they take turns in “winning” the contracts, and publication of a schedule of upcoming bids Open v. Sealed bidding – suppliers may use “complementary” or “cover” bidding to obscure the existence of a cartel Bidder identities and pre-bidding meetings: if information is available before or during the bidding may facilitate cartel behavior.