Jillian Lilico: 'Local procurement' could help maximise the effectiveness of UK aid spending

Jillian Lilico is Managing Director of Demeter Development.

Using Local Procurement Programmes to Maximise the Impact of Overseas Development Assistance

The Department for International Development is scheduled to allocate 0.7% of UK GNP to development assistance by 2013.  Achieving and proving maximum impact for this expenditure, especially given the challenge of justifying expenditure abroad at a time when spending is being cut at home, is an important political imperative.

DiFID identifies the promotion of economic growth and the private sector as being amongst the key issues that it seeks to address.  Its goals in this area are, by 2015, to

• Provide more than 50 million people with the means to help work their way out of poverty
• Help up to half of the countries in Africa benefit from freer trade
• Secure the right to land and property for more than six million people

Traditional economic development policies involve strengthening of property rights, enhancing the civil service and the judiciary, reducing corruption, developing infrastructure, and promoting private sector development. An important challenge is how to achieve this without either (a) undermining free trade by being protectionist or biased in procurement decisions; or (b) seeing large amounts of development assistance leak outside the target area to well-established international businesses. Another issue is that donor nations have often sought politically to justify the provision of assistance by claiming that it promotes trade, with the obverse of this policy being a tendency for aid assistance to be criticised as simply a subsidy for engineering firms and consultancies from donor nations.

A new international development tool, growing out of local economic development policies within developed and emerging economies, is called “local procurement”.  Used according to best practice, this could address economic development goals, achieving maximum impact from development assistance and promoting trade opportunities, but without distortion competition or international trade.  Examples of the use of local procurement within the UK include a GLA programme for London as a whole, programmes from the Corporation of London.  At the international level, the Economic Community of West African States (ECOWAS) has adopted a Directive promoting local procurement in the mining sector, which Member States have until 1 July 2014 to implement, and once implemented it is likely that the approach will be generalised to other sectors.  DFID is scheduled to spend around £1.6bn in ECOWAS members (specifically Ghana – which has already adopted the mining directive - Nigeria, and Sierra Leone) by 2015, and thus there is a clear significance to the UK of the implications of this approach.

In the UK, best practice in local procurement is important to distinguish from older “buying local” policies.  Buying local implies a form of protectionism, as procurement procedures are biased in favour of local suppliers.  UK best practice local procurement is different.  Instead of biasing procurement decisions, local procurement focuses upon two areas:

a)      Understanding capacity: enhancing the understanding of procurers of the local capacity, so as to maximise the relevance of tenders to the local supply chain

b)      Building capacity: enhancing the quality of bids and delivery capacity by local suppliers, through targeting supplier development programmes

Such an approach could be applied to DFID’s overseas development assistance as follows.  One could refer to this as the “donor-recipient supply chain enhancement model”.

Understanding capacity: Mapping the required supply chain

To illustrate how understanding capacity would work in practice, suppose that the donor assistance programme in question related to a major infrastructure project (e.g. building a Wind Power project). Infrastructure projects go through some basic phases (pre-concession activities, exploration, site preparation, construction, handover, operation, and ultimately decommissioning). The core supply chain activities of these programmes can be mapped so that there is a taxomony of supply chain contract packages which are most likely to create jobs and skills. For example in the plant construction phase, the typical contract packages include plastic product manufacturing, fabricated structural metal manufacturing and electrical equipment manufacture, all job and skills creating packages. Contrast this to a hoarding package in the same construction phase which could provide a valuable contract for a local hoarding firm however while creating revenue for the firm at a micro level it is less  likely to create a significant impact on jobs and skills might be less.  The first step in the donor-recipient supply chain enhancement model would be to understand both what types of firms would be relevant and to identify specific local and donor examples of such firms.

Understanding capacity: Early engagement

Let us illustrate the importance of early engagement with the example of the allocation of a mining concession (as envisaged in the ECOWAS mining directive), with a requirement for the mining company to have a local procurement policy.  Companies owning mining rights tend to be international or state-owned. They then issue tenders for the design and construction of the mine which attract bids from global oil services companies.  These main contractors will be contractually bound to deliver on time and within budget to the right quality and safety standards and usually look for comfort from their established supply chain.  Having used the mapping described above to identify local firms in those sectors, they can then be introduced to the procurers prior to project opportunities arising, so as maximise mutual understanding.

Building local capacity

Procurement will be partnered with programmes that advise potential local and donor bidders of upcoming tendering opportunities, assist with their interpretation, and train them in how to provide high-quality and relevant tenders in response.  A prior assessment of the local enterprise capacity of the country should be done so that an optimal (though not mandated) target for local procurement is agreed, so that opportunities for joint ventures and technology transfer can be identified up front , and so the scope for supplier development capacity building programmes can analysed (assistance with tendering, plus advice on developing quality management, health and safety etc) . This exercise is important (a) to create a jointly agreed local procurement target and programme that all parties agree to; (b) so that supplier development is targeted at real capacity issues; and (c) so that impact measurement can be built and measures from the start.  This last point should be emphasized because prior assessment of potential programme impacts has been an important weakness of many past programmes. 

Creating / Leveraging a donor (e.g. UK) Core Capability

As a secondary objective, the procurement element of donor -funded programmes can be (and already sometimes is) designed based on an awareness of the prior tendering capacity and available skills of both the recipient area and the donor country’s businesses (the latter so as to maximise trade-promotion opportunities).

Evaluation

The partnership with local and donor businesses intrinsic in the bidding support programmes will allow ex post evaluation of impacts in terms of new jobs and investment created.

Procurement decision / allocation

Government procurement decisions are then to be made on an objective basis.  Supply offerings from outside the donor or recipient targets that are superior (cheaper / higher quality), and that meet other relevant criteria (such as creating local employment/supply chain opportunities) should still be successful.  The aim of local procurement policies is to make local and donor businesses worthy winners of supply and service contracts, not to bias the assessment process in their favour.

Conclusion

Local procurement has been an incrementally useful tool in promoting local economic development within the UK.  With vision, local procurement policies could also serve as a useful tool of economic development internationally, helping DFID to achieve maximum impact for the billions it spends.