Procurement in the Public and Private Sectors: Is There Really Much Difference?
The short answer to that question is yes, there are big differences. The more nuanced answer is yes, there are differences, but in many respects, they are narrowing, and in any case, the things they have in common are far greater.
One of the reasons that the answer has become so nuanced is that the border between private and public has become blurred, with some public sector organizations being privatized or part-privatized and others adopting private sector methods in areas such as procurement. While for a number of reasons some private organizations have been taken, temporarily or permanently, into full or partial state ownership and have thus become subject to public sector rules on stewardship.
In this series of articles we will introduce some of the challenges in public sector that are discussed in our free white paper, which you can download here.
Broadly speaking, public sector procurement is planned and executed by government departments and agencies. These are typically not-for-profit organizations operating at local, regional, national or even supranational levels. We need to say “typically” because there are many large and highly profitable state-owned enterprises (SOEs) around the world. SOEs can have a strong impact on public sector finances, and although they are essentially operating in other sectors, such as utilities, oil & gas and aviation, they are generally bound to a regulatory framework that is specific to the public sector.
The role of SOEs varies widely between countries, even within the European Union. In Italy, for example, there are still more than 7,000 SOEs owned by regional, provincial and municipal governments. A good example is SEA, which manages the Milan Linate and Malpensa airports and must adhere strictly to public sector procurement rules. By contrast in the United Kingdom, following significant privatization efforts in the 1980s and 1990s, formal state ownership of enterprises has become more limited.
On the other hand, regulation in areas such as procurement has grown in importance as a way for the state to exercise control. The private finance initiative (PFI) is a procurement method that uses private sector investment in order to deliver public sector infrastructure and services according to a specification defined by the public sector. It has been widely used by the UK’s National Health Service (NHS) and for similar purposes in other countries, notably Australia and Spain.
With all that said, the main difference is this: whereas private procurement has a centralized focus on driving revenue and profitability, the public sector is managing funds on behalf of an entire national or local community, so there is an expectation that procurement will address several issues that are no less real but often less tangible, such as the “public good” or the “public interest”.
Digital Transformation of Public Sector Procurement
Spend Matters has consistently identified four ways in which this basic difference manifests itself in public sector procurement.
- Public sector organizations, being entrusted with taxpayers’ money, are constrained by publicly mandated regulations (at Federal/EU, national and local levels).
- Closely related to this, because they manage large sums of money, they must be open to greater scrutiny, hence they must be more transparent in their procurement processes.
- The public sector has more complex motivations and objectives. In the UK, for example, public sector organizations are now obliged to take social responsibility into account in any procurement project. A private sector company may take corporate social responsibility seriously and therefore consider the interests of employees, the local community etc., but ultimately its only stakeholders are its shareholders, whose principal interest is the company’s ability to drive profits now and in the future.
- And again, closely related to this, a public sector organization has millions of direct stakeholders – they are spending our money – all citizens of the nation, region or municipality have a “stake” in the organization spending their money, the “public purse” wisely. This also applies to SOEs in their pursuit of profitability.
The important point here is that these differences impose additional challenges on public sector organizations, which make digital transformation more difficult, without the help of partners who understand these challenges and have experience in overcoming them.
— JAGGAER USA (@JaggaerUSA) May 26, 2020
To move forward, procurement professionals in public authorities can and must learn from their colleagues in the private sector. In particular, they need to focus more on their back-end processes, develop solid digital skills and master the tools with which they can collaborate with supplier companies. But at the same time, they must establish clear rules and tools for public procurement, which are quite different from those that apply in private sector organizations. In adopting new technologies, public sector organizations must change their business models and offer interoperable solutions that can adequately enhance public assets. It is no easy task, but the technology for achieving this is in place and public sector authorities and agencies that embark on digital transformation will see quick wins.