REVIEW PAPER RECEIVED: AUGUST 2019 REVISED: JANUARY 2020 ACCEPTED: FEBRUARY 2020 DOI: 10.2478/ngoe-2020-0005 UDK: 330.322.16 JEL: H57, F13, F23 Citation: Sterbova, L., Halfk, J., & Neumannova, P. (2020). Traditional Procurement versus Public-Private Partnership: A Comparison and Synergies with Focus on Cross-border Contracts. Nase gospodarstvo/Our Economy, 66(1), 52-64. DOI: 10.2478/ ngoe-2020-0005 Traditional Procurement versus Public-Private Partnership: A Comparison and Synergies with Focus on Cross-Border Contracts Ludmila Sterbova University of Economics Prague, Czech Republic ludmila.sterbova@vse.cz Jaroslav Halik University of Economics Prague, Czech Republic jaroslav.halik@vse.cz Pavla Neumannova PhD Student at the University of Economics Prague, Czech Republic pavla.neumannova@vse.cz Abstract Government purchases represent an important part of the world economy. Selling to the public sector is a key business activity for certain industries or service providers. The public procurement segment's attractiveness is also underlined by the security of payment and large extent of supplies. With globalisation as a worldwide phenomenon, businesses do not have to rely only on domestic institutions; they can enter international B2G markets as well. However, the ability of private companies to do business with foreign governments is limited by various national legislations as governments settle the procurement regulation with respect to their national interests. In the following overview article, the authors analyse the two main and typical procurement types - traditional procurement and public-private partnership - with regard to recent development trends, international regulatory framework, opportunities and barriers to entry for European businesses. The main goal of the paper is to define, based on this analysis, the main differences and possible synergies of the traditional procurement and public-private partnership while focusing on cross-border contracts. This paper can be regarded as useful for business, academia as well as the public sector. NG NASE GOSPODARSTVO OUR ECONOMY Vol. . 66 No. 1 2020 pp . 52-64 Keywords: public procurement, public-private partnership, cross-border contracts, cross-border bidding Introduction Government purchases account for a significant share in the world gross domestic product. The government has to decide whether to obtain the desired goods/ services/works externally or internally (Pavel, 2013). When choosing the so-called external production, the government has two main options - traditional procurement and public-private-partnership projects, the two main procurement types. However, each of these has its own specificities and regulation. 52 LudmiLa Sterbova, JarosLav HaLik, PavLa Neumannova: Traditional Procurement versus Public-Private Partnership: A Comparison and Synergies with Focus on Cross-Border Contracts Selling to the public sector is a key business activity also for certain industries or service providers depending on their entrepreneurial activities. However, the public procurement segment's attractiveness is also underlined by the security of payment and large extent of supplies. With globalization as a worldwide phenomenon, businesses do not have to rely only on domestic institutions; they can enter international B2G markets as well. However, the ability of private companies to do business with foreign governments is limited by various national legislations as governments settle the procurement regulation with respect to their national interests. Therefore, in the following overview article, the authors first analyze the traditional procurement and public-private partnership with regard to their specificities, recent development trends, international regulatory framework, opportunities and barriers to entry for European businesses. Secondly, they compare the traditional procurement and PPPs. The main goal of the paper is to define, based on this analysis, the main differences and possible synergies of the traditional procurement and public-private partnership while focusing on cross-border contracts. Cross-Border Public Procurement International public procurement markets Public procurement, or in other words, the purchase of goods, services or construction services by governments, state-owned enterprises or other public entities, is increasingly used by these institutions as a strategic tool to deliver their mandates and achieve broader policy objectives (OECD, 2017). In the past years, governments of OECD members spent on average almost one third of the total general government expenditure on public procurement (OECD, 2015). This level of spending suggests that governments can exert significant influence on the outcomes of markets in their country by means of public procurement (Gourdon & Messent, 2017). Variations in the structure of public procurement spending reflect each country's specific public service portfolio. Health expenditures on average represent the largest share, accounting for almost one third of public procurement spending in OECD countries (29.8%). Economic affairs (17%), education (11.9%), defence (10.1%) and social protection (9.8%) represent significant shares of public procurement spending across OECD countries as well (OECD, 2017). Traditional public procurement processes usually follow four consecutive steps (World Bank, 2004). The first phase of the process is preparation, when a government or a public entity determines and identifies the needs that have to be met and the desired works, goods or services. The results of the first phase are a precise specification of the product, budget and the procurement method. The preparatory phase is followed by the selection process, which means searching for the best-evaluated bid through procurement methods. The methods typically used include tendering (procurement of specialized products with a high economic impact as it involves low volume and high value contracts) and price quotation (procurement of standardized products involving high volume and low value contracts). The second phase concludes with the signing of the contract, in the case of a tendering process, or with the issuance of the purchase order or the delivery of the service, in the case of a price quote (World Bank, 2004). After this, the process of implementation takes place and the supplier delivers ordered goods or services while the purchasing public entity makes the corresponding payment. The whole procurement process is completed with the phase of securities that ends when the guarantee expires. The above-mentioned process is also depicted in Figure 1. The estimations of the size of the international public procurement markets vary depending on the data sources used. Trionfetti (2000) calculates the size of the public procurement market for nine OECD members and arrives at 7-9% of the GDP, when the calculations are based on the data of the United Nations, and at 10-18% of the GDP, when the calculations are based on the data of the International Monetary Fund. The most recent calculations of the OECD say that the size of the public procurement approximately represents 12% of the GDP in OECD members ranging from 5.1% in Mexico to 20.2% in the Netherlands (OECD, 2017). More details are presented in Figure 2, which also reflects the fact that the higher the general government expenditures, the bigger the size of the public procurement market. Pavel (2013), however, points out that this relation is complicated by differences in structure of general government expenditures - e.g. high public investments increase the size of the procurement market, whereas social transfers do not. Government procurement policies are typically made up of procedures and rules that government entities must follow in order to meet the objectives of their procurement while minimizing the costs of taxpayers (Gourdon & Messent, 2017). Pavel (2013) states that there are also goals other than economic goals referring to the so-called Green Public Procurement or Social Public Procurement. One of the important goals may also be favouring domestic businesses, which can be the reason for the low level of cross-border procurement or cross-border bidding. Direct cross-border procurement represents a relation of a government or a public entity with a foreign contractor. Indirect cross-border procurement, on the other hand, represents a relation with a 53 NAŠE GOSPODARSTVO / OUR ECONOMY Vol. 66 No. 1 / March 2020 Figure 1. Government procurement processes cd O on S "S Ö g (-H O c/î 12 £ l-H CÖ O o CM O öp tS Ö tO ■SP g 00 o 3 1 'S «S § ® ex a, « O Ö o 2 g > 2 W So Low Volume, High Value Tendering Preparation Selection Execution Securities Purchasing High Volume, Low Value ï Contract Management D LO O S3 £ "S PU o Source: World Bank, 2004, author's drawing. domestic contractor who, however, has a foreign partner or subcontractor, supplies goods or services from abroad, or the contractor itself is a foreign subsidiary (Kommerskollegium, 2011). According to Kubatova et al (2013), who analysed the public procurement market in Slovakia, the participation of foreign businesses decreases the costs in case of construction services (the same was not proven for goods and services). Despite this, the share of cross-border procurement remains limited. The share of direct cross-border procurement in the EU in its member states usually accounts for 0-6% in the total number of contracts (European Commission, 2011). Therefore, the authors further analyse, in the following chapters, the international regulatory framework, opportunities and barriers to entry. International regulatory framework National regulation on governmental procurement belongs to an area that in developed countries complies with the international trade agreement which became a part of the multilateral trading system under the World Trade Organization. The Governmental Procurement Agreement (GPA), however, is not signed by all WTO members as are other agreements of the system. The reason lies in the history and in the complexity of the topic. Developing low-income countries found it difficult to be committed to procurement rules effected by central and sub-central government entities and they do not see reciprocal concessions from GPA members as a valuable outcome of the membership (Hoekman & Kostecki, 2009). GPA is currently implemented in 47 countries, including the EU Member States, and other ten countries are in process of acceding to it. Nevertheless, it is the most extended international framework that provides compulsory rules for governmental procurement policies and, according to the WTO (2019), it opens a procurement market of 17 trio USD annually to international competition. The GPA has been re-negotiated several times and the most recent revision comes from 2006. It simplified the rules, reflects advances in information technology and expands coverage of the agreement while opening additional government procurement to international competition. The GPA imposes non-discrimination while applying the National Treatment and the Most Favoured Nation Clause upon member governments. Those have to provide the same treatment under governmental procurement to the products, services and suppliers of the other signatory party that is accorded to goods, services and subjects coming from other signatories or procured domestically. For procurement, any measure, including the electronic one, and any contractual means can be used, but it has to be conducted transparently. Contractual option includes purchase, leasing, rental and hire purchase. The provisions of the GPA are applied only if the value of the contract exceeds a certain threshold level (Wouters & DeMeester, 2007). GPA states that the 54 LudmiLa Sterbova, JarosLav HaLik, PavLa Neumannova: Traditional Procurement versus Public-Private Partnership: A Comparison and Synergies with Focus on Cross-Border Contracts Figure 2. General government procurement spending as a percentage of GDP and total government expenditures, 2007, 2009 and 2015 Source: OECD, 2017. technical specification of the procurement should not become an obstacle to international trade, it means that the characteristics of the products or services to be procured must not discriminate or favour any supplier in the process of preparation, adoption or application of the procurement. The transparency principle should be applied to tendering procedures, qualification of suppliers, invitation to tender, selection procedures, time limits, documentation requirements, procedures for the award of contracts and negotiations with tenderers. Moreover, the GPA also rules specific procedural obligations. The rules stated by the GPA text are accompanied by the schedule of commitments of all signatories. In the schedule, they specify how their market is open for foreign supplies of goods, services and construction services under the governmental procurement in a form of a positive list. For practical use, the most important role is devoted to the commitments of individual countries, as they state in their schedule the coverage related to the procurement activities and entities, and also list the goods, services and construction services suitable for procurement (WTO, 2019). 55 NASE GOSPODARSTVO / OUR ECONOMY Vol. 66 No. 1 / March 2020 In countries non-signatories of the GPA, discriminatory practices in the area of governmental procurement are used, among them bans on participation by foreign bidders or local content and offset requirements. Less distortive effect than above mentioned practices have price preferences that are also more transparent. Those preferences are allowed by multilateral development banks under certain conditions and limits, and the UNCITRAL Model Law on Procurement provides rules for their use (Hoekman & Kostecki, 2009). Opportunities and barriers to entry for EU businesses As the authors mention in chapter on International public procurement markets, public procurement can be a way of favouring domestic industries. Despite the existing international legislative framework, home bias in public procurement is a persisting phenomenon. However, measuring domestic bias is complicated as it is usually not explicit. The home bias is not directly observable for it is usually the result of tacit discriminatory behaviour not codified in written rules, or it can be the result of procurement procedures that unintentionally impede foreign firms from applying or winning contract awards (Gourdon & Messent, 2017). What is more, calculations of these authors indicate that the home bias effect even increases throughout the years. As Figure 3 shows, the home bias is more pronounced in developed economies with a coefficient of approximately -1 (-97%), implying that the government discriminates completely, while the home bias is significantly less in developing countries (-66%). Results also indicate that discrimination is becoming more severe in both regions, by 6.6% and 6% respectively. Besides the trend of domestic bias, businesses have to face many other barriers when entering international procurement markets. Some of them are identical with barriers present in standard international B2C (business-to-consumer) or B2B (business-to-business) relations, including language barriers, exchange rate volatility or high level of competition. Some of the barriers are specific to B2G (business-to-government) relations. The European Commission (2011) conducted a survey among 250 businesses to find their views of different potential obstacles to cross-border bidding based on their experience. The following barriers were assessed, starting with the one that proved to be the most relevant: 1. Lack of experience in doing business abroad; 2. Language barriers; 3. High competition with national bidders; 4. Legal requirements leading to market entry barriers in the awarding country; 5. Cost level in general higher at home than abroad; 6. Resources necessary for participating in cross-border tender procedures higher compared to procedures in home country; 7. Unfamiliar formal requirements; 8. Risks imposed by possible currency exchange rate fluctuations; 9. Additional costs due to geographic distance, i.e. implementation of contract more costly compared to delivery close to own location; 10. Different kinds of required technical specifications, compared to the experience in their own member state (*the survey was conducted among EU member states); 11. Tax or social insurance differences leading to cost disadvantages. Figure 3. Trend of home bias in government procurement over years - Home bias in Government Procurement --- Home bias in Developing — • Home bias in Developed 1.0 - -1.5 • « "--• -2.0 - 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: Gourdon & Messent, 2017. ~56~ LudmiLa Sterbova, JarosLav HaLik, PavLa Neumannova: Traditional Procurement versus Public-Private Partnership: A Comparison and Synergies with Focus on Cross-Border Contracts The same survey also shows that, compared to SMEs, large entities (>250 employees) participate more often in both public procurement tenders in general and direct cross-border public procurement in particular. What is more, high competition leads to lower success rates in public procurement tenders in general, and to lower participation and success in direct cross-border public procurement. In other words, businesses with fewer competitors bid more often cross-border. This is in line with the assumption that cross-border procurement is especially relevant for specialised goods/ services/works, where there are only a limited number of potential suppliers, and is less relevant for commodities. Bearing these facts in mind, barriers to entry can be even higher for small- and medium sized enterprises. This also corresponds with the analysis of the European Bank for Reconstruction and Development (EBRD, 2017) that comes with additional challenges SMEs have to face. The analysis is based on the examination of the public procurement market in Chile. The EBRD (2017) states the following challenges: 1. Very large contracts; *As mentioned in chapter 2.2, international regulatory framework covers only procurement above certain financial thresholds, procurement below these thresholds are not regulated in this respect. 2. Insufficient access to information on business opportunities in public procurement; information asymmetry can be also one of the reasons why the chances of SMEs on public procurement markets are lower. According to Neumannova & Sterbova (2018a), there are not always single points of access for procurement notices, which also goes hand in hand with the fact that the notices are not always translated to one of the commonly used languages. 3. Lack of knowledge regarding public procurement procedures; 4. Excessive bureaucracy; 5. Limited experience in bidding; 6. Expensive standards and certification requirements; 7. Disproportionate levels of technical qualification; 8. Disproportionate levels of financial qualifications and incompatible payment terms; 9. Unclear tender requirements; 10. Lack of time to prepare bids; 11. Preference for lowest price tenders; 12. Centralization of public procurement contracts; 13. Lack of feedback from public buyers. In other words, there are four categories of barriers - legal, complexity, access and capacity. According to Neumannova and Sterbova (2018b), one of the opportunities for SMEs consists in future work programs of the World Trade Organization with regard to the Government Procurement Agreement. This would, however, also be conditioned by increasing the number of the GPA parties. Another opportunity can as well consist in creating synergies with regional trade agreements that usually deepen the commitments of their partner countries with regard to financial thresholds, covered entities and covered goods/services/works. Besides the commitments themselves, the RTAs often establish free online access through a single point to public procurement notices. Cross-Border PPP Projects International markets of PPP projects In a country with sustained underinvestment in infrastructure, economic competitiveness can suffer. The global "infrastructure gap" is so wide that closing it by 2030 will require an estimated US$40 trillion to US$50 trillion worldwide (E&Y, 2015). Therefore, it is very important to run infrastructure procurement right. One of the ways is a good combination of public procurement project with public-private partnerships (PPPs). Figure 4 shows the geographic spread of the PPP projects in the world. The UK has long tradition in PPPs, the market is always adjusting to the new methods, and government actively supports its development. In continental Europe, beside the banks, the institutional investors are getting more initiatives that include government-sponsored credit enhancements toward longer-term debt solutions. Canada has an active financial market with government support at all levels, including efficient collaborative procurement. Australia belongs to the world's pioneers in using the PPP model, the commercial banks, however, still over helm other forms of institutional investment. New Zealand is a small market, but PPPs are playing a constantly growing role with the full support of the government. In Latin America, some countries have been running the PPP programs for more than two decades, however, poor management and unsophisticated legislation is a major challenge. The US has much potential, but it is resistant to using PPP for social infrastructure projects, as most benefits are seen rather in tax concessions and business-oriented projects, like transportation. Asia is expected to be one of the largest markets for infrastructure development over the next decade, and PPPs seem to be widely accepted concept. In Africa, PPPs face significant constraints, as limited financial markets, inadequate legal and regulatory frameworks, an absence of technical skills, and political and national risks. 57 NAŠE GOSPODARSTVO / OUR ECONOMY Vol. 66 No. 1 / March 2020 Typical examples of implementation through PPP are projects in the fields of transport infrastructure (highways, tunnels, bridges, high-speed), administrative possibly (accommodation capacities like offices, courts, dormitories, administrative facilities, prisons), healthcare (hospital, supply facilities), education (university complexes, dormitories, schools), defence (equipment, special infrastructure) and utilities (water supply). Figure 5 shows the sectoral spread of the PPP projects in the Continental Europe. Figure 4. Number of PPP projects by regions - global 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Years H UK 0 Continental Europe H Canada SUSA Latin America H Australia and NewZealand fa Other Source: E&Y, 2015. Figure 5. Number of PPP projects by sectors - Continental Europe ?no4 j if,)', ?nos ?no7 ?îï)k hïï\ ?oio ?on 701? ?{]13 7014 ?ms N&evosy El Transport 0 Social infrastructure 0 Power ElRenewabies Environment 0 Telecommunications s Other Source: E&Y, 2015. 58 LudmiLa Sterbova, JarosLav HaLik, PavLa Neumannova: Traditional Procurement versus Public-Private Partnership: A Comparison and Synergies with Focus on Cross-Border Contracts In terms of the number of PPP projects and their monetary From territorial point of view, the United Kingdom exceeds value, there was an increasing growth from 1990s to 2007, all other European countries extensively, followed by followed by a decreasing trend that lasted until 2016. France, Spain, Portugal and Germany. The smallest number Figure 6 shows the year-by-year development within this of PPP projects can be seen in Central Europe, Balkan Coun- period. tries and the Baltic States. Figure 7 shows the overview of the number of projects in Europe in 1990-2016. Figure 6. The European Union PPP market development from 1990 to 2016 Source: European Court of Auditors, 2018. Figure 7. The European Union PPP market per countries from 1990 to 2016 I w rd 100 -S /v 7/ ^ y ^