reverse Auction in Brazil & UK

Electronic auctioning has been increasingly used in recent years to identify the best price possible in an online competition, for instance in Brazil and the United Kingdom. This method is generally used for homogenous products, where the decision on purchasing is mostly based on the price factor.

E-auctioning in the Federal Government of Brazil

In Brazil, the electronic reverse bidding is regulated by the Law of July 2002. The complete

procurement documentation is published on the Procurement Portal of the Federal Government – Comprasnet (http://www.comprasnet.gov.br), in the government’s Official Gazette and is also broadly disseminated in newspapers, in 2004, BRL 8 billion (Brazil reals) was spent on consumer goods and services – contracted through reverse bidding, according to studies of the Ministry of Planning, Budget and Management of the Federal Government of Brazil. Considering that the total amount used in this area was BRL 15 billion, the share of reverse bidding accounts for over 50% of total spending.

Electronic reverse bidding reduced the cost of participation in competitions, as bidders are not

physically required and only need to be connected to the Internet. One of the consequences is the higher number of suppliers. In the past four years there has been an increase of suppliers from 150 000 to 214 000, that is a 42% increase. Last year alone, 20 000 new companies became suppliers of the largest buyer in the country, the Federal Government. Electronic reverse bidding has also helped increase the transparency of negotiations. Contacts between suppliers and between the government and the administration have been avoided while citizens have monitored the procurement on line.

Applying e-auctions in the National Health Service in the United Kingdom

In 2005, the OGCbuying.Solutions, the Executive Agency of the UK Office of Government Commerce, used the key sector of national health as one of the pilots for e-auctions. It enabled specialists in the National Health Service (NHS) to source health framework agreements. In 2006, the NHS Purchasing and Supply Agency completed an e-auction transaction of a GBP ₤1.2 billion worth of temporary agency staff cost. Following a five month bidding and evaluation process, 176 employment agencies were identified as being successful at the evaluation stage and were invited to participate in the e-auction. These suppliers were given the opportunity to participate and bid in a fully transparent environment, with multiple opportunities to revise their pricing, while gaining an insight into the current level of market pricing. 70,000 bids were placed during the event which ran over three days and resulted in significant savings for the NHS. The e-auction contributed to an additional 10.3 percent saving in addition to the savings provided under the Best and Final Offer in the initial bid.

Even if reverse e-auctions speed up the price-discovery process and improve market transparency, they require an important initial investment to set up the technological infrastructure and supporting legal environment.

Sources: 

- Brazil, response to the OECD Questionnaire.

- Case study provided by the United Kingdom for the OECD Symposium: Mapping out Good

Practices for Integrity and Corruption Resistance in Procurement, November 2006.

Reverse auctions in Public Sectors-India

Among public sectors in India, BPCL,SAIL & BHEL are the first adopters of online reverse auctions as a procurement negotiation tool. The online events were conducted during end 2002 & beginning of 2003. While SAIL & BHEL have internalised the tool, BPCL has chosen their service provider through an open tendering process couple of months back. Indian oil, Mazagaon Dock, Coal India,Balmer Lawrie, Hindustan Copper, ONGC and most of the PSU banks are also using this tool.

In this article I would like to write about the pain points the PSUs' are facing on adoption of this tool.

1. Lack of CVC guidelines: While CVC has issued a circular (47/9/03 dated 11th sept'03) giving blanket permission for conducting reverse auctions, the modalities, process checks have not been deliberated as of now. So procurement professional are not sure which process or what kind of documentation to be followed. Mostly the process and documentation requirements are driven by service providers and service providers prepare these documents to suit the functionalities of their respective softwares.
2. New supplier addition: As per practices, adding a new supplier to any PSU vendor base is a time consuming activity. Most of them follow a due diligence process to take a new supplier on Board. This lack of adding a new vendor to the auction platform has effected the outcome of the auctions in many tenders. I have observed BHEL conducts events between two vendors for lot many items.
3. How to fix start bid price or initial auction price: Right Start bid price is one of key success factors for any reverse auction. It should be close to market price. However in many cases the internal estimates are either very high or low than the market price, thereby resulting into either not getting bids or ending the event at relatively high price. I have seen extreme case wherein the start bid price and auction result were 1:3 and 3:1.
4. Following a parallel process : Few clients follow a parallel practice i.e the vendors are also asked to submit sealed price bids before participating in an auction and lowest between two is declared as winning price. While one school of thought advocates for this to neutralise the effects of wrong start bid price, the other school of thought argues this as a wrong practice as it does not motivate a bidder to bid during auction till it reaches to his offline bid. 
5. Auto extension :Most of the auction software has a functionality to automatically extend the auction closing time if a bid comes during last few minutes of the closing time by a pre-determined time. The practice of allowing indefinite auto extension or auto extension for a fixed time has not been standardised. Both the practices have their own flaws.
6. Audit : While most of the PSUs' enter into an agreement with the service providers  to make the events available on line for a specific no. of years, this may not be a correct practice as due to low entry barrier few of these fly by night service providers may close their shop.
7. Manual process : Most of these auctions are carried on as a stand alone basis, without any integration to existing ERP, thereby limiting the scalabilty of the tool.

At the end, I would request the readers to share their experiences how to address the above pain points.