Denmark saved around $80m on a cross-government procurement programme focusing on computer hardware and other office equipment ©123RF
Denmark saved around $80m on a cross-government procurement programme focusing on computer hardware and other office equipment ©123RF

Better government procurement could save $1tn globally

24 April 2017

Smarter procurement could save around 15% of government spending globally and improve outcomes, a report has said.

Productivity improvements overall could save an estimated $3.5tn a year by 2021 on a global public sector spend of $35tn according to consultancy McKinsey. Better procurement could contribute up to $1bn of these savings.

To achieve these procurement savings, governments need to cultivate commercial skills to ensure projects and contracts are better managed for value, it said.

Written by the McKinsey Center for Government, the report on government productivity looked at more than 200 case studies from countries at different stages of development and interviewed a number of ministers and civil servants. These savings are needed because while public spending per capita is growing, expectations are also increasing and the global public sector deficit is close to $4tn a year.

Government spending accounted for 34% of GDP in 2015, the report said, with major contracts including IT defence and infrastructure projects often worth up to 20% of a country’s GDP. 

For major infrastructure projects, it estimated these changes could save up to 40% of costs. The US government saved around $100m on its IT spend in party by eliminating unnecessary software licenses and enforcing existing rules on electronic devices, it said. Denmark also saved around $80m on a cross-government procurement programme focusing on computer hardware and other office equipment.

The report also recommended avoiding “megaprojects” in IT, and said risk of cost overruns can be reduced by breaking projects down into smaller segments. 

Better governance of state-owned enterprises, which often provide services including utilities, can also unlock value. The report recommended establishing government holding companies with professional boards to set clear objectives and targets, pick the management team and monitor performance.

The report highlighted best practice from around the globe, including:

  • Italy aims to achieve $11bn in annual savings by reducing its 30,000 contract authorities to just 30 central procurement authorities, each focusing on standardising specifications and reducing prices for large purchases.
  • The sovereign wealth fund of Malaysia is a good example of a government holding company, the report said. Its 10-year transformation programme for the country’s state-owned enterprises increased profits before tax from $70m in 2004 to more than $800m in 2014.
  • The UK’s Crown Hosting Data Centres, a joint venture between the Cabinet Office and private firm Ark Data Centres, standardised the end-user working environment and consolidated legacy IT systems to achieve significant savings.
  • Governments should avoid buying more than they need. The US navy cancelled an order for state-of-the-art Zumwalt class destroyers, instead choosing to upgrade an earlier model. This allowed them to acquire more ships for the same money.
A further $2.5tn could be saved through improvements in financing, digital technologies and talent management, the report said.

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