Government procurement or public procurement is the purchase of goods, works (construction), or services by the state, such as by a government agency or a state-owned enterprise. In 2019, public procurement accounted for approximately 12% of GDP in OECD countries. In 2021, the World Bank Group estimated that public procurement made up about 15% of global GDP. Therefore, government procurement accounts for a substantial part of the global economy. Public procurement is based on the idea that governments should direct their society while giving the private sector the freedom to decide the best practices to produce the desired goods and services. One benefit of public procurement is its ability to cultivate innovation and economic growth. The public sector picks the most capable nonprofit or for-profit organizations available to issue the desired good or service to the taxpayers. This produces competition within the private sector to gain these contracts that then reward the organizations that can supply more cost-effective and quality goods and services. Some contracts also have specific clauses to promote working with minority-led, women-owned businesses and/or state-owned enterprises. Competition is a key component of public procurement which affects the outcomes of the whole process. There is a great amount of competition over public procurements because of the massive amount of money that flows through these systems; It is estimated that approximately eleven trillion USD is spent on public procurement worldwide every year. To prevent fraud, waste, corruption, or local protectionism, the laws of most countries regulate government procurement to some extent. Laws usually require the procuring authority to issue public tenders if the value of the procurement exceeds a certain threshold. Government procurement is also the subject of the Agreement on Government Procurement (GPA), a plurilateral international treaty under the auspices of the World Trade Organization.
History Public procurement occurred in Europe in various forms since at least the 18th century, even if it lacked regulations and strict procedures. Nonetheless, the need to regulate public procurement procedures and to constrain the powers of heads of administrative departments began to be deemed necessary as early as the French Revolution (1789). Noteworthy in Italy is the first regulation on public procurements, dating back to the time of the Kingdom of Italy of Napoleon Bonaparte and dated May 1, 1807. This regulation contains many terms and principles typical of modern codes on public procurement.
Overview
Need for government procurement Government procurement is necessary because governments cannot produce all the inputs for the goods they provide themselves. Governments usually provide public goods, e.g. national defense or public infrastructure. Public goods are non-rival and non-excludable, which means that one individual's consumption does not diminish the quantity or quality of the commodity available to others, and individuals cannot be prevented from freely consuming the commodity, or "free-riding". Consequently, private markets cannot provide public goods. Instead the government provides those goods and finances them by raising taxes from all citizens. In addition to public goods, governments often also provide merit goods, such as education or health care. Merit goods are private goods which are rival and excludable and are therefore provided by private markets. Nevertheless, governments also provide merit goods because of reasons of equity and fairness and because they have positive externalities for society as a whole. In order to provide public and merit goods, the government has to buy input factors from private companies, e.g. police cars, school buildings, uniforms etc. This process is called government or public procurement.
Scope and impact Government procurement practice impacts on all public works, services and supply contracts entered into by a public authority, and the markets from which these are purchased. Public procurement regulations normally cover all works, services and supply contracts but there may be exceptions. These most notably cover military acquisitions, which account for large parts of government expenditure, some aspects of health care, and low value procurement.
The GPA and EU procurement law allow for exceptions where public tendering would violate a country's essential security interests. Additionally, certain politically or economically sensitive sectors, such as public health, energy supply or public transport, may also be treated differently. Government procurement is linked to economic growth, protection and enhancement of competitive market conditions, policy achievement, and innovation promotion. The United Kingdom's Office of Fair Trading, as it then was, commissioned a review addressing the impact of public sector procurement on competition, which reported in 2004. The review found thatCompetition effects from procurement can be both positive and negative. The public sector, by virtue of its overall demand in certain markets, may be in a position to protect and promote competition, for example by maintaining a competitive market structure through deliberately sourcing its requirements from a range of suppliers, by providing incentives to suppliers to invest and innovate, or by helping firms to overcome barriers to entry. It may, however, also restrict and distort competition, e.g. by adopting procurement practices that have the effect of restricting participation in public tenders and that might even discriminate against particular types of firms. Last but not least, the public sector may fail to contribute towards an improvement of competitive conditions where it could in principle do so. Contract types used in government procurement include fixed-price contracts, cost-plus contracts, time-and-materials contracts and indefinite-quantity contracts.
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