The Promise of E-Procurement

COPENHAGEN – Corruption is a huge problem across the globe. In Africa, it is estimated that one-quarter of the continent’s GDP is “lost to corruption each year.” In Latin America, the Inter-American Development Bank believes that corruption may cost 10% of GDP every year. In the only comprehensive overview based on surveys of businesses and households, the World Bank puts the total direct cost of corruption at $1 trillion annually.

The international community has time and again reaffirmed its intent to stamp out corruption, most recently last year, when the United Nations adopted the Sustainable Development Goals. Yet, as the Copenhagen Consensus, the think tank I head, has documented, for all the well-intentioned policies, there have been few successes.

One study examined the 145 countries that introduced institutional reforms with the support of the World Bank or other donor agencies from 1998 to 2008. Comfortingly, government effectiveness improved in half the countries. Unfortunately, effectiveness actually worsened in the other half, suggesting no overall effect.

But now we may have some unambiguously good news in tackling corruption: an intervention that can make a large impact for a surprisingly low cost.

In Bangladesh, the world’s eighth-most populous country, the Copenhagen Consensus worked with the world’s biggest NGO, the renowned BRAC, and dozens of Bangladeshi and international expert economists to analyze the most effective solutions to the country’s many challenges. These include better brick kilns to tackle air pollution in Dhaka, micronutrients to combat pervasive stunting, planting mangrove to protect against flooding, more effective tuberculosis treatment, and improved services for the half-million people migrating overseas every year.

Our economists estimate the costs of each policy, along with their social, environmental, and economic benefits, in order to show which investments deliver the highest return. International development organizations spend $3 billion each year in Bangladesh, so knowing how much good each investment does is essential to prioritizing projects.

Moreover, though Bangladesh has made spectacular progress in recent years, with the economy growing by about 6% per year, on average, and poverty reduced by half since 2000, its target of achieving lower-middle-income status by 2021 is highly ambitious. To meet it, Bangladesh will have to fix the problems that continue to frustrate development, and that requires a razor-sharp focus on the most effective solutions.

Each year, Bangladesh spends $9 billion (6% of GDP) on government procurement – everything from highways and bridges to desks and pencils – which amounts to about one-third of the entire public budget. And procurement is notoriously vulnerable to corruption. Burdensome procedures exclude most competitors. As one contractor, Ashraful Alam, put it: “Purchasing reams of tender documents and physically submitting them to government procurement entities was difficult for me, let alone winning any contracts. I lost interest in bidding after such a lengthy exercise.” And sometimes contractors’ political connections enable them to win bids or block others. The result is higher costs for taxpayers and donors.

But new research by Wahid Abdallah, a research fellow at the BRAC Institute of Governance and Development in Dhaka, shows that electronic government procurement holds enormous potential. An ongoing project started in 2008 by the national government and the World Bank documents the promise.

By 2011, four Bangladeshi agencies that represent about 10% of all public procurement had implemented e-procurement. Online submissions would drive up the number of bids – and thus drive down prices. With the new process, Alam is now bidding again: “Now I can submit tenders online, even from home without any hassle and undue influence or obstruction.” Who won, and at what price, is also placed online, reducing favoritism.

Analyzing data from one of the four agencies that have implemented e-procurement reveals that prices have indeed gone down, typically by 11.9%. The effects of expanding e-procurement across the rest of the government would be enormous. The costs would include a one-time investment of about $13 million to purchase computers and software, $4 million to train 114,000 more staff across Bangladesh, and expenses for operations and maintenance. Total costs in the coming years are estimated at about $18 million.

The benefits, however, would dwarf these outlays. Online procurement in all government sectors would produce annual benefits – cheaper goods and services – worth $700-900 million. Given that the costs are paid once, but the benefits are annual, the total cost of $18 million should be compared to a total present value of all future benefits of at least $12 billion, with each dollar producing $663 of social benefits.

E-procurement turns out to be a phenomenally good way to tackle corruption. Many other smart solutions will be needed to eliminate the problem, and many other solutions are needed for the myriad challenges that still confront Bangladesh. But when economic research can help highlight the smartest solutions, it can help everyone spend better.

Copyright: Project Syndicate, 2016.
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