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02/10/2012

Greeks waste money in public purchasing

The budget deficit could drop by one fifth with a modern procurement system

The Greek state could save at least EUR 4.6 billion through the modernization of its backward public procurement system; and the budget deficit could be reduced by 20 percent without any limitations in services. That's the result arrived at by the Düsseldorf-based consultancy Kerkhoff and by Erik Hofmann from the University of Sankt Gallen in a study on the savings potential if Greece were to use purchasing procedures similar to those in other EU states. In so doing, Kerkhoff and Hofmann draw attention to an aspect regarding the reduction of Greece's high national deficit which had not been taken into account so far. Last year, Greece's budget deficit amounted to 9.3 percent of the gross domestic product.

Any company in a crisis would reduce its costs by cutbacks in personnel and by auditing purchasing structures, says Gerd Kerkhoff, Managing Director of Kerkhoff Consulting. But that does not happen in Greece, he says. Its troika and its government primarily discuss measures such as tax increases and performance reductions. In this respect, little scope is left for maneuvering room. The EU states should therefore push for concrete measures to modernize the public procurement system in Greece, suggests Kerkhoff who has specialized in streamlining purchasing methods.

Greece is wasting resources in purchasing. According to Greek construction-law regulations, construction contracts can be declared as work "of a special type" – which allows awards without invitations to tender. "But that gives free reign to corruption", says Kerkhoff. In other sectors of the industry as well, there are frequently no tender invitations. And in health care, suppliers offer medical devices and equipment at prices many times higher than the prices in other EU countries because, in their calculations of offer prices, companies already allow for Greek payment delays of several years.

Kerkhoff and Hofmann propose two steps towards the modernization of procurement. On the one hand, they calculated that EUR 2.9 billion can be saved with the professionalization of purchasing –- 1.3 percent of the gross domestic product. Actually, the degree of centralization in procurements is high so that a lot is ordered with a disregard for any effective demand. On the other hand, Greece does not bundle its purchases in a central authority such as the German "procurement office by the Federal Ministry of the Interior" (Beschaffungsamt des Bundesministeriums des Innern). Moreover, Hofmann ascertained a low percentage in tender invitations as well as a lack of concepts regarding cost reductions, such as public/private partnerships and performance-oriented contract awards.

Such measures could reduce procurement costs by 10 percent, reckon Kerkhoff and Hofmann. In this respect, they rely not only on experiences in private enterprises and internationally standard orientation values, but also on three methodical processes. The experts in business administration also include the possibilities of corruption or the necessity that, for political reasons, a company or a state must preferably use regional suppliers. For companies facing insolvency, the corruption of purchasing managers will thus increase: Should they lose their jobs, bribery will ensure their future.

Secondly, Kerkhoff and Hofmann provide the diagnosis that unexhausted savings potentials exist due to the low procurement rate in Greece. Because the Greek state itself produces many services at a high price instead of purchasing them cheaper. In Greece, the percentage of public procurements accordingly comes to 12.6 percent of the gross domestic product; in contrast, the EU average is 16.3 percent, and it's even 21.5 percent in the Netherlands. Would Greece reach that value, it could save EUR 4 billion annually; with the EU average value, it would still be EUR 1.7 billon, Hofmann calculated. This would require the outsourcing of administrative processes, IT services and personnel services.

The EU directives which are differently implemented by the individual parliaments did not result in Greece having modernized its public procurement system. Kerkhoff accordingly pleads that other EU governments bring pressure to bear on Athens to introduce three concrete measures. Firstly, Greece should amend its laws so that purchases take place in a normal market environment and under competitive conditions. Major contracts no longer would be awarded without tender invitations. Secondly, Greece should establish a centralized procurement agency whose award processes would be externally controlled. Thirdly, it should be ensured that foreign enterprises can also bid in an open competitive process.