Challenges of Software Sector Promotion with Public Procurement: Is it just raising the bar for foreign firms?
In Bangladesh, likely many developing and emerging economies with a nascent software industry, providing services for the local market is often the natural entry point for new enterprises. Entry into international markets requires additional capabilities. In addition, the government could grow as the largest buyer of software innovations to implement its development programs. Many studies suggest that public procurement in the USA not only caused demand for software, but also created capability of software development to meet high value requirement of the society.
SME intensive software development sector of Bangladesh has the potential to grow as the heart of the Bangladesh’s economy—through spillover effects to local economy and export earnings. This sector could grow as source of high paying jobs to a portion of 40 million students. Software firms are not only potential large-scale job generators, but they’re also at the heart of the Dream of New Generation Bangladeshis.
One potentially useful policy tool to spur these SMEs' growth and thereby increase competitiveness of local economy, create high paying jobs and promoting entrepreneurial opportunity in innovation industry to 40 million students is the proactive use of government procurement. The use of SME procurement preference schemes need to be objective, targeted and with an exit strategy to ensure that they do not become a mechanism to subsidize inefficient and/or corrupt SMEs. It’s to be noted that in an era of increasing globalization, domestic SME procurement preference schemes that do not promote longer-term comparative advantage at an international level ultimately become mechanisms for local market capture and rent-seeking. This aggravates, rather than reduces, economic inefficiency and competitiveness gap between local and foreign software firms. In the context of trade liberalization, constructive and flexible dialogue on ways to promote growth of local software firms, including the use of carefully targeted procurement preferences schemes, is essential.
Challenge of Reconciling Software Sector Promotion with Value for Money in Public Procurement: The primary aim of public procurement is to obtain value for money. Procurement entities are tasked with procuring systems that fulfill the technical specifications at the lowest total cost of ownership. This is best served by having a reasonably large number of firms--local and international--with experience and relevant products and services competing in the tendering process. Procurement entities are generally not entrusted with ensuring that local SMEs submit bids and are given a chance to deliver. Giving preference to local firms may result in fewer qualified firms, mostly local, competing for the tender. Moreover, reliance on foreign firms with limited or no local support may also negatively affect total cost and value of ownership of delivered software assets. Reducing the competition among bidders by setting up artificial barriers will likely reduce local firms’ incentive to innovate and to become competitive, reducing their chances to compete in international markets in the future. On the other hand, without giving the opportunity to small software firms to compete and learn, nation will likely lose an opportunity to create an industry for the purpose of not only to create jobs, but also to create a window of opportunity of high value entrepreneurships, which may lead to path breaking economic growth. It’s therefore vital to acknowledge such conflicts of interest to develop strategies and procedures suitable for the specific circumstances faced by Bangladesh. It’s recommended that thorough review of past public procurements having significant software components should be reviewed; lessons should be drawn and effective solutions to be derived.
Most of the advanced countries, and also emerging as well as developing nations, have been intelligently crafting strategies to use public procurement as a tool to create local capacity for not only import substitute, but also for creating domestic market as springboard to enable local firms to enter in the international market[1].
The European Parliament has recently adopted a resolution in recognition of the European’s review of the Public Procurement Directives to address pressing issues including to simplify the rules and allow more flexible procedures to improve access for SMEs[2].
By their very nature, software firms in Bangladesh like SMEs of many other countries lack the resources and management expertise to plan, draft, and complete tender applications. These SMEs also often have a limited commercial history, which makes them unattractive and appear risky to public tenders. To address such reality, one of the notable major changes of law which took place in Mexico. In April 2009, the Mexican Federal Congress approved the modifications to the law on the Acquisition of Goods, Leasing’s and Rendering of Services for the Public Sector and the Public Works and Related Services law, which regulate the basic principles of government procurement established in Article 134 of the Mexican constitution[3]. These amendments are intended to streamline public procurement procedures to achieve greater participation of SMEs in public procurement.
A study conducted by UNCTAD reported the existence of many problems in developing and transition countries that keep local suppliers from taking advantage of the government marketplace[4]. It has been reported that participation of SMEs in public procurement can lead to greater competitiveness and export readiness. Improved public procurement aligned towards the capability development of SMEs through participation in public procurement may lead to establishing a “launch market” base for small and medium enterprises (SMEs). Such observations appear to be very relevant to the potential scope of enabling local software firms, most of which are SMEs, to participate in public procurement to improve their delivery competitiveness—which will likely led to export growth.
In a recent study conducted by European Commission has identified ‘Public Procurement as a Driver of Innovation in SMEs and Public Services’[5]. It has been reported that purchasing innovative solutions allows public bodies on regional and local level a more efficient delivery of public services, lower energy consumption, lower life-cycle costs, and many other advantages from having solutions that meet exactly their needs. At the same time, procurement of innovation offers opportunities for innovative SMEs that are agile and flexible enough to meet the specific needs of the public procurers. Such observations appear to be very much in line with the opportunities of engaging local software firms to deliver innovative solutions to address development agenda of the Government of Bangladesh.
In another study, it has been reported that by ensuring open and fair competition for public sector contracts, while minimizing burdens on potential and successful bidders, government can help SMEs directly but also save money for the taxpayer. SMEs play a vital role in supplying goods and services and the increased competition and innovation they bring helps to ensure that the public sector can deliver world-class public services that are value for money[6].
In a study conducted by The Institution of Engineering and Technology[7], a global organization with over 150,000 members representing a vast range of Engineering and Technology fields, the inclusion of SMEs in public procurement has many benefits, including:
- Can be an effective mechanism to promote SME growth through the use of public procurement.
- Can foster the culture of close working relationships reducing transaction costs and helping the public sector to understand the needs and constraints of SMEs.
- Can help to develop innovative, high tech solution to rebalance the economy.
So inclusion of competence development of local software firms by tuning public procurement practices towards the participation of local firms will serve multiple purposes, including strengthening the sector to create new development opportunity for the nation. The use of simple instrument likely raising the bar for foreign firms will neither ensure value for money in public procurement of software solutions nor support the growth of competence of local firms.
Ref:
[1] Michel Porter, Theory of Competitiveness, Simon and Schuster, June 2008.
[2] Guidelines for Public Procurement of ICT Goods and Services SMART 2011/0044, European Union, 2012
[3] Eight Big Ideas From Mexico, Leveraging Public Procurement to Encourage Economic Growth and Access to Finance for Small and Medium- Sized Enterprises (SMEs), International Institute for Sustainable Development, 2015
[4] Wayne A. Wittig, Public Procurement and the Development Agenda, UNCTAD
[5] European Commission, How to support SME Policy from Structural Funds, 2014
[6] HM Government, CONSULTATION DOCUMENT: Making public sector procurement more accessible to SMEs, 2014
[7] IET, Managing Risk, Driving innovation, and Growing SMEs through public procurement, 2011.