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Why Finance Ministers should care about open contracting

24 Jun 2015

By Georg Neumann

Finance Ministers are never happy. It is probably the most unthankful job in the government. You have to distribute money that generally doesn’t exist.

Take education. How much of your country’s budget is dedicated to education? It likely will be too little considering the needs of our increasingly knowledge-driven societies. Getting the best value for the money allocated becomes ever more important.  

Opening up the last mile of public spending through public contracting could make life a bit easier for hard-pressed finance ministries. Here are 3 reasons why they should care about open contracting, based on discussions that I had at the recent APEC roundtable in spectacular Bagac, Philippines.

  1. Open contracting saves money. Taxpayers’ money. Finance ministers should know not only how much they collect, but also how it is being spent. In OECD countries, public procurement typically makes up 13% of a country’s GDP. In many developing countries, it may reach up to 30%.

    If less public money is misspent, more remains on government accounts. For example, integration of reverse auctions in e-procurement platforms in Ukraine and Paraguay brought down costs by 12%.

  2. Open contracting makes tracking money easier. The OECD recently established a new global standard for an Automatic Exchange of Information, allowing the fiscal authorities to track earnings of their respective citizens worldwide. In Australia, this data standard rapidly turned into a success story of tracking offshore earnings.

    What is good for tracking tax monies, and filling the country’s coffers, is good for contracting as well. A global standard and data are at the heart of open contracting. The global Open Contracting Data Standard that we manage at the Open Contracting Partnership builds trust among government, business, and citizen, and unlocks new business opportunities. Better data also helps to know exactly how much remains on the country’s balance sheet. Open contracting allows for planning ahead, and tracking your government spending on goods and services at a click of your mouse.

  3. Open contracting is key to specific sectors, for example extractive industries, as well. Especially in developing countries revenue from natural resources make up a big part of overall government incomes. Rents from oil, gas and mining amount to nearly 5% of global GDP. Most of these rents are distributed on the basis of contracts between governments and extractive industries. There is a strong public demand to know what happens with this US$ 5 trillion, especially if local communities that bear disproportionate impacts but don’t see the benefits. The contract is the centrepiece in capturing the value and the fairness of the deal.

    Currently, a total of 31 countries are compliant with the Extractives Industry Transparency Initiative (EITI) which requires companies and countries to disclose revenues and encourages disclosure of related contracts. While the publishing of earnings is an important step, the devil is hidden in the details of what is not published. Publishing and analysing contracts is essential for understanding the overall benefits and earnings from extracting natural resources.

At the APEC meeting I made the case for opening up public contracting and using our Open Contracting Data Standard. Korea and the Philippines joined me during the session to present their extensive and well established e-procurement systems.

Early examples show how finance ministers and citizen can benefit from opening making public procurement more transparent.  

In Slovakia, teachers reviewed contracts by the Ministry of Education and found that flowers were purchased for an amount of € 9,900. Another contract listed 36 bottles of alcohol for € 132 each. These tips led to an audit of the Ministry of Education’s procurement activity by the Ministry of Finance. While no lasting recourse resulted, the example illustrates how lower barriers to accessing information can stimulate citizen oversight.

On the other hand, open contracting impacts on both the cost and actual delivery of goods and services: Since the Philippines introduced its national e-procurement platform, schoolbooks, a traditionally controversial issue in the country, have been finally tracked to arrive at their schools. And costs for each book have come down. Instead of US$ 2, each book costs the state only US$ 1.

With more money to distribute and better service delivery to the electorate, you might even see your Finance Minister smile.

Image: Family photo of happy Senior Finance Officials at the event.