Why open contracting is good business

The post has been crossposted from CIPE’s Corporate Compliance Trends blog.

Last week at the UK Anti-Corruption Summit, 40 countries committed to making public contracting open by default. This signals a major shift in the way governments spend money to procure works, goods, and services from the private sector. The use of open contracting will not only make government deals more transparent, but also help boost competition by creating a fairer, level playing field for businesses, and providing opportunities for smaller companies to profit from government deals.

A total of 14 countries announced plans to implement the Open Contracting Data Standard, a global and non-proprietary open data standard that structures and discloses information on government contracting.

The pledges were not limited to the developed world: Argentina will focus on the health sector; and Ghana and Nigeria will look at extractives and beyond. Colombia, France, Mexico, Ukraine and the UK – a leading group of open contracting implementers known as the Contracting 5 – formed an innovation and learning partnership.

After a decade of progress in wider government transparency, the vast sums spent on public contracts every year – more than $9.5 trillion – have the potential to be transformed through the power of open data and better public engagement.

Let’s have a more detailed look at how business will benefit from more openness.

1) Fair play

Government contracts with private companies play a vital role in the economic development  of a country and in the lives of its citizens by delivering essential goods, works, and services. Nepotism and corruption are major obstacles to ensuring this money flows back into local economies.

Data on prosecutions tracked by the OECD Anti-Bribery Convention shows that roughly 60% of bribes were paid to win public contracts. In most cases, those bribes were worth at least 5% of a deal’s total value. According to a 2013 Eurobarometer survey, more than 30% of companies participating in EU public procurement say corruption prevented them from winning a contract.

An open bidding process and open data along all stages of the contracting process are vital to restoring trust in the private sector’s relationship with government and creating a level playing field for companies. This renewed engagement will help grow new markets and create opportunities for new, often marginalized businesses.

In Slovakia and Ukraine, implementing open contracting spurred an increase in bids for public projects of 50-100%, often from smaller firms who had been unable to compete with incumbent contractors. The changes also led to a 14% saving in government spending.

In New York, an initiative to overhaul the city’s paper-based public expenditure and contract reporting system resulted in “better deals from better qualified companies,” according to former New York City Mayor, Michael Bloomberg.

2) Better analytics

Open data on contracts can provide powerful analytics to shape more informed decisions and help choose the best solution for a given job.

Businesses can better access and track contracting opportunities including details about what, when and where opportunities might be, and how decisions to award contracts will be made. Information on past contracts also lowers the barriers to entry for smaller businesses.

Comparable data and the availability of unit prices are particularly important in the preparation of bids. Analysis of trends, prices and supplier performance can be incredibly valuable in developing a sustainable business.

Some of the greatest potential beneficiaries of open contracting are aspiring government contractors who can take advantage of the data to identify opportunities, and the improved contracting process to win new business.

Empowering the private sector and citizens and engage meaningfully in the contracting process will result in higher quality goods, services and infrastructure.

3) Less bureaucracy and costs

The value of giving potential bidders access to past contracts is underscored by the huge number of Freedom of Information requests filed by business in countries like the United States to see government contracts. There are even companies dedicated to processing such requests as part of an effort to help their clients win more public contracting work.

Bid preparation can cost up to 1% of the total value of large construction contracts, and often considerably more on smaller consulting contracts. This means more information on similar, existing contracts can be of significant benefit. A more streamlined and structured contracting process also makes sense for a company’s controlling department: on average, poor contracting costs a firm 9% of its annual revenue, according to a 2012 survey of the International Association for Contract & Commercial Management’s members.

Finally, some incumbent contractors protest that contracting information is commercially confidential. But, once the default shifts to open, it seems that lingering concerns about confidentiality can be addressed. As philanthropist and former senior deal maker, Mo Ibrahim, noted in a recent Open Government Partnership meeting, “there are no trade secrets in public contracts.” It is not as if Coca Cola will reveal its secret formula in a public bid.

Open contracting delivers fair play for business through transparent processes and clear rules that help to eliminate fraud and corruption. This is how the global shift from closed to open will help governments gain value for money for high-quality works, goods and services, and lay the foundations for more sustainable business. The best business is when everyone wins.