Public procurement share on total purchases

Public procurement as a share of total purchases is one of the indicators used to calculate the zIndex score for evaluating contracting authorities.

This indicator measures the ratio between all purchases the contracting authority makes and the purchases it makes through public procurement. It is used to identify deliberate splitting of contracts (in order to push contracts below the value at which certain procedures have to be followed and the details of the contract published in the Journal) and excessive misuse of legal exceptions. The indicator compares the value of contracts published in the Journal or on the individual buyer's profile with the total volume of controllable operating costs, which is calculated as the sum of selective investment and non-investment expenses according to the State Treasury.

If a large volume of expenses falls outside the scope of the law (and the public procurement information system), this implies a less transparent environment and more room for the contracting authority to make arbitrary decisions. A low value for this indicator implies that both the public and statutory provisions exercise less control over the contracting authorities' purchases. Best practice guides collectively agree that transparency and traceability are essential instruments in fighting corruption, not only in public procurement, but also in institutional budget management more generally.

The indicator is calculated as the value of contracts published in the Journal in the reference period, together with the contracts published on the buyer's profile, measured against the total volume of controllable operating costs (as defined in the Ministry of Finance's methodology, presented here (in Czech))) in the same reference period.

$$z_1 = \sqrt{\frac{value\:of\:public\:procurement\:contracts}{value\:of\:controllable\:operating\:costs}}$$

Controllable operating costs are defined as the sum of selected cost items that are dependent on the contracting authority's management decisions (these include consumption of energy and materials, repairs and maintenance, other services, etc.), which are obtained from the profit and loss account of the respective institution, together with expenditures on acquisition of capital assets from the cash flow statement. Both documents are available on the State Treasury web. In case of institution without direct control by State Treasury, the Controllable operating costs are identified from the financial statements as sum of non-personnel opex and investments. In case of missing particular data points in the treasury web, it's calculated from indirect numbers or gathered from annual report or, in few extraordinary cases, linearly extrapolated.

Smaller contracting authorities may be put at a disadvantage here, as they typically have a relatively bigger share of small-scale contracts. This is one of the reasons why scores should only be compared for authorities of similar size and type. According to a financial audit summary (in Czech) conducted by the Ministry of Finance, the most frequent reasons for purchases outside the scope of Public Procurement Act (and not published in the Journal) are the following:

1. The associated contract is either small-scale, outside the scope of Public Procurement Act, or classified. Comparable contracting authorities should however have a comparable share of such contracts.
2. The purchase is for additional work beyond the value of an original contract. Extra work of this sort is considered by best practice guides to be a major public procurement issue.
3. The associated contract was concluded before the observed reference period. As long as the contracting authority annually tenders a similar volume of contracts, then the volume of historic contracts for which controllable operating costs are carried over into the reporting period should be equal to the volume of contracts awarded in the reporting period whose costs are carried over into the following period. A contracting authority will, however, be at a disadvantage if it awarded an unusually large volume of contracts (with a value of over 50% of its controllable operating costs) prior to the reference period in question and the costs of those contracts are thus not counterbalanced in the manner described.

• Do not split contracts. Review the legality of your conduct with every supplier to whom annual payments surpass the threshold applicable for small-scale contracts, and consider launching a tender invitation for those purchases.

• Reduce the amount of extra work. Strictly permit only well-justified extra work, and make the conditions for such extra work clear in the contract wording (see the Competitive contracting indicator). Avoid using supplementary agreements if not economically necessary, and do not exceed the contractual price set in the original contract.

• Avoid taking advantage of legal exceptions if not strictly necessary.

• Re-tender historic contracts wherever economically appropriate - typically this includes mobile operator services, ICT and energy supplies. The most questionable contracts are those that were concluded in 1990s, before substantially stricter statutory regulations were introduced.