'Home bias' in public procurement 'raises serious efficiency considerations', says EC's chief trade...

Will Green is news editor of Supply Management
27 April 2015

The chief trade economist of the European Commission (EC) has warned that “home bias” policies in public procurement “raise serious efficiency considerations”.

In a chief economist note, reflecting his own opinions, EC chief trade economist Lucian Cernat said policies which favour domestic vendors “distort trade flows and international specialisation”, “may alter international companies’ outsourcing choices” and “significantly affect production decisions along global value chains”.

“Around the world, historically, public procurement contracts have to a large extent benefitted domestic companies, thus ensuring a safe market for local suppliers of goods and services,” said Cernat. “However, at the same time policymakers and academics strive to come up with the best procurement procedure that would maximise the efficiency of this complex process.

“The combination of large share of government expenditures in GDP and the ‘home bias’ characteristics makes public procurement one of the few fields in which liberalisation efforts at international level have substantial untapped potential, and thus an area of growing importance in international negotiations.”

The note, co-written by EC senior economist Zornitsa Kutlina-Dimitrova, said public procurement represented around a third of total public spending in OECD countries. Across the European Union government procurement accounted for an average of almost 14 per cent of EU GDP in 2013 and in the US it represented more than 10 per cent of GDP.

Cernat said this was equivalent to almost €1.8 trillion (£1.3 trillion) of spend in the EU and $1.7 trillion (£1.1 trillion) in the US. “In the EU, policy measures which would help achieve savings on procurement expenditure of 10 per cent would result in an efficiency gain of almost 1.4 per cent of GDP, the equivalent of around €180 billion (£130 billion),” he said.

Cernat said under the World Trade Organization’s Agreement on Government Procurement (GPA), in which countries have agreed to open up government procurement to international competition, “only a small set of countries undertook binding commitments”.

He said: “Despite gradual improvements in the openness level of public procurement markets... it is still fair to say that by and large public procurement markets around the world are yet to become part of future liberalisation rounds."

Cernat called for improved data collection around public procurement, including market size and cross-border share of foreign companies’ participation, to enable better trade negotiations between countries.

“There are many intrinsic and political economy reasons why public procurement (alongside other economic activities) is less prone to internationalisation," he said. "However, unlike other negotiating areas where sometimes progress is difficult, public procurement negotiations are fraught with an additional difficulty: the lack of often basic, comparable information that renders the negotiating process even more complex.”

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