Sep 11, 2020

On 25 August, the National Economic Prosecutor's Office (FNE in Spanish) published a preliminary report entitled Market Study on Public Procurement.

A brief presentation follows the four improvement areas that the FNE recommended introducing to the public procurement market, in order to achieve a more competitive market with significant savings in public spending and improved supervision. If only some of the FNE's recommendations were adopted, the State could save up to US$850 million each year, according to the study.

  1. Structural recommendations to improve the system

The study criticised the current public procurement system as it is difficult to control due to the absence of reliable records of State procurement.

Beyond this initial weakness, the FNE suggested several structural measures aimed at improving control over procurement processes. These proposals included the following:

  1. Generally, improve regulation and supervision. The FNE proposed giving regulatory authority to the Public Procurement and Contracting Directorate (ChileCompra), and it proposed various supervisory authorities. For example, giving ChileCompra the authority to pursue non-compliance with sectoral regulations before the Public Contracting Tribunal, or to convert ChileCompra into a regulatory body, which would directly pursue, prosecute, and sanction any related non-compliance.
  1. Broaden the authority of the Public Contracting Tribunal, to give it a more significant role within the control system and receive referrals from any proceedings that are currently referred to the ordinary courts.
  1. Oblige municipal corporations to use the public procurement system as any other State agency and eliminate the exceptions that currently apply to them.
  1. Digitally transform the entire public procurement system, which does not mean converting physical documents into digital documents, as this has already been done, but instead making the procurement process entirely digital.
  1. Recommendations regarding procurement planning

The FNE believes that is imperative for planning to be improved, so that the procurement of consumables can be managed at a national level, to obtain better prices for higher volumes and reduce overpricing as a result of emergency purchases. Accordingly, it recommended:

  1. Using tools that analyse the requirements of public agencies, in particular the procurement process should be regulated and executed using the Public Market portal, so that it is not perceived as an extraneous or optional process. Without prejudice to the proposal of an analysis matrix, the FNE referred to and recommended the corresponding templates and guidelines used by New ZealandCanada and Australia.
  1. Generate a system of incentives to ensure effective compliance with annual procurement plans. These may include fines for service managers, or linking their performance to institutional efficiency goals, or other alternatives, in order to follow the lead given by other countries belonging to the Organisation for Economic Cooperation and Development ("OECD").
  1. Recommendations regarding State contracts

3.1. Public tenders

The study identified several competition issues. For example, it found that 25% of the tenders it reviewed had only one bidder, and that 55% of public spending is procured through public tenders. The FNE found that several tenders included unnecessary requirements or highly discretionary criteria, which indicated that the system needs improving.

The study suggested sound proposals to solve these problems, such as analysing needs and markets, standardising tenders and suggesting timing and sizing to increase the number of bidders. Unfortunately, certain limitations inherent to this analysis remain, since in many cases standard solutions cannot be applied to such diverse tenders, otherwise the risk of error increases.

For example, amendments that "simplify" the process, such as encouraging new entrants to participate, may increase contractual non-compliance by unqualified bidders, or increase the number of tenders that do not meet the required purpose.

Ultimately, the Executive will have to weigh these risks against the competitive benefits that could be achieved by following the FNE's recommendations, which appear significant, according to the publicly reported figures.

3.2. Framework agreements

The study emphasised several problems in the public procurement system, while recognising the tremendous opportunity for fiscal savings. The FNE highlighted two problems and proposed two solutions:

  1. The framework agreement has merely filtered bidders. The FNE suggested establishing a true system of full competition (i.e., for the tender process as a whole) during the first contracting phase, so that those wishing to provide services to the State using the framework agreement mechanism participate in a prior competitive process, which would improve the commercial conditions available to the State. 
  2. Currently, there is no true price competition once a supplier joins a framework agreement, as the public official then chooses the best bid based on their own opinion. Accordingly, the FNE suggested a procurement allocation rule that improves efficiency and eliminates any potential discretion.

3.3. Direct negotiation

The main problem with this procurement approach is that it is difficult to supervise and control. The FNE found that public agencies requiring goods and services did not comply with the regulatory standard to justify their use in 58% of the cases it reviewed. Therefore, the study suggested strengthening the control mechanisms as previously mentioned.

3.4. Contract selection

The two principal contracts used in State procurement are (i) fixed order contracts, and (ii) supply contracts. The former describes the goods or services required, the quantity and delivery time. The latter leaves the quantity required and delivery time open, to be determined later. Correctly matching the contract type and the requirement has efficiency consequences and could substantially reduce overall transaction costs.

The FNE recommended establishing guidelines to help public officials select the optimal contract type, and that ChileCompra should be able to select the contract type for certain transactions over the medium term.

  1. Recommendations regarding contract management

Contract management refers to contract execution. The study found that there were no pre-established contract management protocols in 83% of the cases it reviewed. Therefore, it suggested:

  1. Establishing the obligation to register contracts on the Public Market website and assigning a person responsible for each contract, which would ensure that contracts can be adequately monitored by each organization, as this does not always occur at present.
  1. Improving prompt payment of suppliers, in order to encourage new competitors to participate.
  1. Outsourcing contract management in specific situations.

We generally conclude that the study is undoubtedly an important contribution to the discussion regarding the amendments required to the current public procurement system, which is expected to operate efficiently, transparently, competitively and in keeping with current regulations.

The recommendations in the study closely follow international parameters on this subject. The OECD has repeatedly emphasised that competition and corruption problems in public procurement should not only be dealt with afterwards through judicial proceedings and effective sanctions, but a preventive approach is also required to analyse and optimise the institutional design of contracting mechanisms used by the State (see Competition Policy and Procurement Markets, 1998 and Competition and Procurement, key findings, 2011).

This is an important study that was eagerly expected by those involved in public procurement, as every year there are many cases submitted to the FNE and the Antitrust Defence Tribunal (TDLC in Spanish) regarding potential anti-competitive or illicit aspects of public tenders. According to TDLC statistics, 21% of the inquiries received by the Tribunal in 2018-2019 related to tenders and tender terms and conditions, which indicates the importance of this matter to all those involved. The study should provide certainty to all those involved regarding the criteria that ensure compliance with antitrust regulations and the most efficient use of public resources.

Comments on the study can be submitted until 25 September. After processing these suggestions and comments, the final version will be sent to the Executive.