Public Procurement, Brazil
Public procurement is one of the most important government economic activities (Thai 2001), considering the values involved in this activity. In 2015, Organisation for Economic Co-operation and Development (or OECD) member countries purchased an average of 13.8% of their gross domestic product.
However, the importance of public procurement is not limited to the amount of resources involved in public contracting, nor to the number of procurement processes performed. Public procurement has fulfilled different roles, from the operationalization of the supply of goods and services to state activities, to the implementation of strategic objectives of governments, which go beyond the economic objectives (value for money) by including social objectives and (public value).
In this way, a multiplicity of arrangements is created in public purchases, with a view to making more efficient purchases. The search for such efficiency is an arduous task, given the challenges the system faces related to the structure of the market and the political and legal environments in which buyers and sellers are involved (Thai 2004; Carpineti et al. 2006).
Broadening the objectives pursued by public procurement systems increases the complexity of the management of these systems since the success of their activities is seen in a multidimensional way. Thus, the decisions involved in this whole system do not rest on the “make it or buy it” debate, which Brown and Potoski (2003) argue focuses on the production or transaction costs involved in the different stages of the system.
The main concern of a public procurement system is to achieve the best possible result. However, considering the multiple objectives to be pursued by governments with government procurement, there are several ways of analyzing the performance of public procurement systems.
The public procurement framework involves several stages and actors that are affected by internal and external factors of the contracting organization. The analysis of public procurement, in general, acknowledges the existence of several tensions involving stakeholders. Analyses of public procurement generally recognize the existence of various tensions involving stakeholders. Tension between public expectations for transparency and accountability on the one hand and the search for effectiveness and efficiency of the system on the other hand is one example (Schapper et al. 2006).
One of the most commonly used ways for government to balance these tensions is a so-called reverse auction: a market institution with pricing rules based on the participants’ proposals (McAfee and McMillan 1987). These auctions have several benefits, and competition is the most important (Tadelis and Bajari 2006). In this environment, competitors approach their prices from actual production costs to achieve bidding. Increased competition can contribute to reducing corruption, as it increases the costs of coordinating potential collusion between suppliers (Lamothe 2015).
These auctions do not guarantee by itself that the public purchase will generate the best result, since, among other factors, the result can be affected by the costs incurred to plan, adapt, monitor, and complete the task. These costs may make the process unattractive from an economic point of view (Tadelis and Bajari 2006). However, the use of information and communication technology tools has contributed to the considerable reduction of these costs.
These costs occur because of the need to minimize opportunistic behavior, specifically of the agents, so the contractor must incur transaction costs and specify performance measures, seeking to write more detailed contracts to allow the monitoring of suppliers (Brown et al. 2006) avoiding so-called agency problems.
This need to create mechanisms and specify contracts arises from a further tension involving the distinct interests between the principal (contracting) and agent (supplier). As both seek to maximize their utility and the rationality of both is limited, such problems may arise and compromise the achievement of the objectives of the principal.
Ignoring the above-mentioned tensions and the prevalence of the presented problems can compromise the strategies presented by the governments to extend value creation, (Erridge and Mcllroy 2002; Reis 2016).
However, the objectives of public procurement are not restricted to obtaining value for money and in some situations seek to obtain public value (Erridge 2007), demonstrating the strategic potential of public procurement to meet state objectives, as well as the supply of goods and services for state action.
Briefly, the analyses that involve public procurement should consider the possibility of multiple objectives, acting as a strategic instrument that contributes to the achievement of the State’s objectives. Thus, systems are not designed for the exclusive purpose of extending the value for Money, seeking in many cases to generate public value. Thus, the debate about the purchases as well as the analysis of it performance cannot be summed up only the economy measures.
The Brazilian Public Procurement System
The Brazilian public procurement system is not immune to the tensions presented in the previous section, despite the strategies of the federal government and subnational governments (26 states, 1 federal district, and more than 5,000 municipalities). The procurement laws are common to all the actors; however, the reality is different. The large number of actors involved and the lack of links between them makes it difficult to present a faithful picture of the Brazilian reality in relation to the three levels of government.
For this reason, most of the analysis presented in the literature refers to the federal executive power. A sample of this difficulty is the lack of consensus regarding the volume of resources spent by the Brazilian state on purchases. Estimates published by OECD (2014) for 2011 showed that public procurement accounted for 26.1% of total government spending in the country. As far as the federal government is concerned, the World Bank has estimated that between 2012 and 2014, this amount was 5% of national expenditures.
Unlike other countries, Brazil sought through laws and decrees to predict almost everything that governs the process of public acquisition. However, in some respects the forecast is still flawed. Thus, the Brazilian system is characterized by excessive free rider problem (see price agreement) and disproportionate formalism that hampered the manager works (Fiuza 2009).
From these characteristics, the actors involved in the purchase process pay more attention to the fulfillment of these formalities than the results of the procurement. In this sense, Motta (2010) argues that unlike the American context where the focus is the result of hiring, in Brazil the focus of the system rests on the fight against corruption. It can then be said that the most common objective among the actors involved in the public procurement system in Brazil is procedural, that is, to faithfully comply with the steps required in the legislation. The tension reported in the previous paragraph in the sense of seeking to guarantee transparency and accountability is generally exercised by the media, and by organs such as the public prosecutors, court of Auditors, and organization of civil society that exercise external control. The internal control, in particular the general controller of the Union, is other source of tension in the search for meeting the system’s standards.
An important monitoring point for these agencies is the control of no-bidding contracts. Although the rule stated in the legal order is the execution of the bidding procedure, the law provides for nonenforceability when there is no possibility of competition and when competition is possible, but the execution of the bidding does not serve the public interest, the possibility of exemption is allowed. Data from the federal government procurement panel show that in 2017, 98,674 procurement processes were performed, out of this total 77,356 was no-bidding contracts. These values indicate that in practice when analyzing the purchases made by the federal government, the nonconducting of the bidding is the most common.
Thus, the public procurement system in Brazil has as its characteristics, the search to minimize the waste of resources, in particular, active waste in particular corruption. In this way, the system is designed to increase the efficiency of acquisition, mainly through the reduction of acquisition cost, considering its traditional orientation as being directed toward the value for money (Reis 2016).
This approach may lead to some distortions, leading, for example, to higher acquisition prices (Costa 2016) and the supply of substandard goods so that the supplier can increase its profit margin and recover potential losses at the bidding stage (Reis 2016). In Brazil, expressions such as coffee from bidding are common, to denote the coffee of low price, but of poor quality. Other modes of opportunistic behavior of suppliers are often recorded, such as ghost bidders and stunts, further distorting the purpose of bidding.
In addition to the problems already described, this approach has led to the realization of notoriously inefficient bids. To prove this, the Office of the Comptroller General conducted a study in 2018 analyzing data from electronic auctions from federal government. The study shows that some of the processes performed have a higher cost than the discount obtained: The average cost of conducting an electronic trading session by federal government agencies is U $ 5,315.00 (Brasil 2018) (Exchange rate 12/17/2018 available www.bc.gov.br).
Because of this inefficiency, efforts have been made to increase the efficiency of public procurement, mainly through the reduction of process costs, for example, using a system of fully digital supplier registration.
Added to these reported efforts is a paradigm shift, leading to new practices being adopted to generate public value in different dimensions. This search is evidenced in Law 8666/1993, the main legal system on the subject, which emphasizes that biddings must look beyond obtaining the most advantageous proposal for public administration to promote sustainable national development.
To ensure compliance with these objectives, the public purchasing system in Brazil has used state purchasing power to induce development in its different nuances. Public procurement can then enable the state to act sustainably, through sustainable procurement. Supporting companies and sectors considered strategic, with emphasis on micro enterprises and small business enterprises, family agriculture, and the development of research and new technologies, giving advantages to companies that apply resources in research and technological development in the country. More recently, mechanisms for the rehabilitation of inmates have also been inserted to allow public purchases to be used as a policy instrument.
This modification adds to several others perceived both in the planning phase of the purchase, as in the performance of supplier selection, and in contract management. Since the enactment of Law 8666/1993, the creation of the ComprasNet portal associated with the institution of the auction modality and the creation of mechanisms of governance such as the national register of the inapt and suspended companies demonstrate that the public procurement system in Brazil has undergone change. More recently, in order to allow greater flexibility against the excessively formalist culture, the differentiated contracting regime was created.
Other initiatives, such as the Procurement and Contracting Center and the price panel created by the federal government, are intended to modify a scenario, where excessive formalism, rigid norms, and lack of harmonization in certain procedures compromise the efficiency of purchases and consequently the achievement of its objectives. In addition, despite the excessive focus on fighting corruption, the need for formal mechanisms to manage reputation is still evident. There is also a need to improve procurement planning, as well as to improve governance mechanisms such as the use of incentives, in order to solve the problems arising from the drive of suppliers to maximize their interests by using corrupt practices.
These attempts to improve the legislation and procurement system are expressed by Fiuza and Medeiros (2013) which presented that until the year of publication of the study (2013), The Law No. 866/1993, the main regulation of public procurement in the country, had already undergone 80 changes and was changed on average 4 times a year. This issue illustrates the need to modify the Brazilian public procurement system to address all previous issues, and particularly red tape problems. Currently, a new legal framework for public procurement in Brazil is underway in the legislature. The device consolidates several standards and instructions dispersed in several documents, and it aims to rationalize and modernize the current legislation, which dates from 1993. Its premises address questions such as the professionalization of purchasing agents, the need to improve contracting governance, stimulation of procurement planning, and incentive to adopt technology resources to facilitate the bidding process and contracts, as well as to ensure transparency of processes and the need to strengthen control in order to avoid future problems.
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