The Investment Case for E-Government Procurement: A Cost–Benefit Analysis

Abstract

AbstractIn almost every country, government is the largest buyer of works, goods, and services from the private sector. Through the laws and practice of public procurement, governments create competition among firms, thus optimizing public expenditure. However, public procurement is often associated with inefficient allocation of resources and corruption. One method to reduce inefficiencies and abuse in public procurement is the use of e-government procurement (e-GP) platforms. Yet nearly 40% of countries—mostly low- and lower-middle income countries—do not have functioning e-GP platforms. Cost–benefit analysis is used to make the investment case for the development and integration of e-procurement systems in low- and lower middle-income countries. The costs of setting up an e- GP system include an initial investment of $9.03 million, on average, for the planning, design, and build phases spread over a 5-year period. Annual operating and maintenance expenses during pilot and deployment phases are estimated at $1.1 million annually. In total, it is estimated that the net present value of costs to design, build, test, deploy, and operate a robust e-GP system is $16.7 million for a typical low- and middle-income country (at an 8% discount rate). While there are many tangible benefits of e-GP, the benefit assessed here is the reduction in the prices of goods, works, and services paid by government buyers. Using the average percentage reduction in procurement prices of 6.75%, the savings from an e-procurement system are valued at $637.9 million and $5.2 billion for low- and lower middle-income countries, respectively. The benefit–cost ratio of implementing an e-GP system in the average low-income country ranges from 8 to 58 and is 142 to 473 for a lower middle-income country. The size of the procurement market, the reduction in procurement prices, the duration of the implementation process, and the penetration rate of e-GP throughout government are principal determinants in the return on investment.