Maximizing social impact through the power of the public purse

Inclusive Economy27 Jun 2013Evert-jan Quak

Public procurement can be used to maximize social and environmental impact. But there can be a bottleneck when sustainability and inclusiveness do not converge.

The purchasing power of governments can spur an economic transition that is inclusive and sustainable. In developing and emerging countries public procurement accounts for a significant percentage of total GDP. While in OECD countries this figure is 12% on average, developing and emerging economies often spend about 25 to 30% of GDP on public purchasing. The question is, how can governments maximize their purchasing power to generate impact?

This was the main message of Oshani Perera’s recent lecture for the Society for International Development in the Netherlands. Perera is programme leader for public procurement and public-private-partnerships at the International Institute for Sustainable Development (IISD). She noted that the power of the public purse is even bigger and its ability to influence markets more evident when governments procure infrastructure and services through hybrid financing models such as public–private partnerships or private finance initiatives. ‘If governments make a concerted effort to purchase environmentally and socially preferable products and services, their substantial buying power and long-term, high-volume demand will stimulate markets for sustainable products and services,’ Perera said.

However, the size and the diversity of public spending is often overlooked by policy-makers and economists. The good news is that if governments insisted that all public purchases were sustainable and inclusive, the market would have to respond in providing these goods and services. Companies would then take the risk of producing them in a sustainable and inclusive way because they know they have a major customer with a long-term vision.

To secure higher standards, Perera calls for a different mindset. It is more effective to include sustainability in rewards than in specifications, as it then spreads faster. That means if the public sector goes directly to the market instead of to suppliers and demands green products, companies will together come up with integral long-term solutions to satisfy that demand.

Governments have three ways to satisfy their demands and meet these higher standards. First there is what Perera calls ’procurement of innovation’. This entails public sector investment in the research and development of new technologies to meet its own demand. Secondly, there is ’pre-commercial procurement’, which means that governments are willing to buy goods that are not yet ready for the market. Finally, there is ‘first commercial procurement’ to guarantee that the public sector will be the first consumer of goods or services when they are ready for the market. This will encourage producers to take risks in investing in research and development, as they know that the government will help them to meet the standards or will guarantee a purchase.

It looks too good to be true. However, the reality of sustainable public procurement is more complex. Take China, for example, where there are so many rules and regulations that no one actually understands them or how to implement sustainability criteria. Or Brazil, which was the frontrunner in sustainable public procurement. Now they are choosing to stimulate domestic industry and services and be more inclusive on their own markets rather than purchase ‘green’ products that have to be imported. By doing so, Brazil is breaching the free trade rules of the World Trade Organization. What Perera did not mention but which is a possibility, is that Brazil may again be the frontrunner in a new approach that is more protective of its own smaller producers, as more and more countries prove to follow its example.

This is a consequence of the way in which the United States and the European Union have scaled up their green attempts step-by-step, by imposing higher environmental and social standards on all their public purchases. In other countries, however, this trend has been seen as exclusive. In free trade agreements with the US and the EU, countries have to open their public procurement processes for foreign competitors that will exclude their own producers as standards are set too high. The US and the EU know they have a competitive advantage and use it in their favour. Public procurement is transparent and as such has tho potential to include others that would otherwise be excluded, but on a global level with free trade rules it can work counterproductively.

This is one of the bottlenecks that need to be solved: no matter how transparent and open public procurement is, it should not only boost environmental and sustainable standards, but also needs to be inclusive and accessible to smaller local producers who can benefit from it.