Millions for Self, a Bill for the Taxpayer

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Milton Friedman, a Nobel Prize winner, accurately noted how people spend money:

You can spend your own money on yourself. When you do that, why then you really watch out what you’re doing, and you try to get the most for your money. (…) Then, I can spend somebody else’s money on myself. And if I spend somebody else’s money on myself, then I’m sure going to have a good lunch! Finally, I can spend somebody else’s money on somebody else. And if I spend somebody else’s money on somebody else, I’m not concerned about how much it is, and I’m not concerned about what I get”.

This logic is beneficial in understanding how politicians spend taxpayers’ money.

Why do government agencies purchase “golden spoons” or “golden hammers”? One simple explanation is that politicians don’t care. Another explanation would be that politicians are benefiting from it.

The public procurement system is designed to fight these problems. If an institution intends to purchase goods or services using taxpayers’ money, a purchase has to be done through the public procurement procedure based on objective criteria rather than a subjective judgment of a politician or a bureaucrat. Thus, even if bureaucrats really liked golden spoons, they could not get them, because stainless steel ones are cheaper. The public procurement mechanism is also instrumental in the fight against corruption, e.g. attempts to bribe politicians to purchase golden spoons instead of cheaper ones.

Of course, the system is not perfect. The lowest price criterion is not always the best. After all, Lithuania is not unique – many government institutions all over the globe have purchased golden spoons, hammers or cars.

Regardless, public tenders are beneficial to the taxpayers who actually pay for them. According to the Public Procurement Office of Lithuania, in 2015, over 300 million euro were spent without a competitive procurement procedure. This means that taxpayers have most likely overpaid in the majority of cases.

In order to combat this, recently, the Lithuanian government proposed an amendment to abolish this kind of transactions (so-called “internal deals”). According to this amendment, government bodies (e.g. municipalities) would be prohibited from procuring goods and services from government-owned enterprises without an open competitive tender.

This amendment, however, attracted vocal critics. One of the arguments voiced against public procurement is that organizing transparent public tenders is… too complicated. Sure, it is easier for a municipality to purchase street cleaning services from a municipality-owned company than to announce a public tender and set clear and unambiguous rules (e.g. what constitutes a “clean street”, what would happen if a hired company failed to clean the streets, etc.) In contrast, purchasing from your own, municipality-owned company, seems easy, familiar and similar to how it was done in the Soviet times: one city – one (government-owned) cleaning company.

Nevertheless, this similarity to the Soviet times is enough of a reason to abolish internal transactions. If Lithuania is serious about getting rid of old habits and corruption in its municipalities, tenders should be transparent and open to the market.

Take away the right to decide how to distribute taxpayer’s money from bureaucrats and corruption will disappear. If each purchase is done following a clearly defined set of rules and transparent procedures, why bribe a politician or a bureaucrat? If market mechanism rather than politicians determine the winners, what is corruption good for?

Another argument suggests that some municipalities are too small for open tenders. The opponents of open tenders argue that there is no market for private suppliers in some municipalities. But that is either untrue or irrelevant.

  • Firstly, municipalities in Lithuania are not that far away from each other. Most probably, companies from different towns and areas will be interested in competing for the provision of cleaning services to any municipality.

  • Secondly, sometimes the terms and requirements for participation in public tenders might need to be revised to suit small local businesses. It may be true that small local companies or individuals cannot enter public procurement because the orders placed by municipalities are too large. To put it simply, a local company may not have enough people or equipment to mow grass all around the town. Maybe we need separate (smaller) tenders for separate (smaller) areas so that local small and medium-sized businesses could take part.

  • Thirdly, there is no evidence that smaller municipalities have difficulties in placing open tenders in public procurement. In 2015, 7 out of 10 tenders in large municipalities were open in Lithuania; however, 8 out of 10 tenders in small municipalities were open. This amounted to 86 and 87 percent in terms of the overall value of public tenders, respectively.

An analysis of the street maintenance tenders shows a similar result. A median of “internal deals” equaled to 22 percent in large municipalities and 26 percent in the small ones. In waste disposal, half of the municipalities relied on “internal deals”, while the other half – did not. This suggests that municipalities are capable of organizing transparent tenders irrespective of their size.

So, maybe the issue is not the physical size of a municipality, but rather the size of ambition to develop state-owned enterprises? Ambition, of course, is a good thing. But personal ambitions should be paid for with personal, not the taxpayers’ money. An open and transparent procedure of public procurement is more efficient than “internal deals”.

Open tenders and transparent public procurement are no less important than transparent elections. Elections are also difficult to hold, but nobody complains about it. Yes, we should improve the public procurement system, make it leaner and less complicated. But this is a completely different path than to allow “internal deals” between government officials and government-owned enterprises.