Governments worldwide could reduce their current purchasing bill by 15%, or a combined $1-trillion, if they were to adopt best-practice procurement disciplines, a new study by the McKinsey Center for Government (MCG) claims.
The study, titled ‘Government Productivity: Unlocking the $3.5-trillion Opportunity’, has been compiled using 200 case studies, as well as interviews with more than 50 current and former Heads of State, Ministers, mayors and civil servants.
It analyses government productivity in 42 countries, representing 80% of global gross domestic product (GDP) and concludes that, by seizing the opportunity to improve productivity, the world’s governments could potentially save $3.5-trillion a year by 2021.
Using an MCG-developed tool for benchmarking the efficiency and effectiveness of government expenditure, the analysis reveals “pockets of excellence”, including in the area of procurement by government departments and State-owned enterprises (SoEs).
The report notes that public spending stands at 34% of world GDP and that, in many countries, governments and SoEs are the single-largest purchasers of goods and services and are responsible for delivering complex capital projects.
“Governments are massive purchasers of a remarkably diverse range of goods and services, from paper clips to nuclear submarines and from facilities management to complex healthcare provision,” the report states.
It highlights, too, an Organisation for Economic Cooperation and Development estimate that public-sector procurement totals more than $9-trillion annually, equivalent to around 30% of all government expenditure.
“In any effort to improve government productivity, initiatives to strengthen procurement practices should therefore be front and centre.”
MCG argued that “smarter procurement” could save governments around 15% of addressable spending while boosting outcomes, by strengthening supply management, demand control and processes.
“For instance, a US agency achieved savings of about $100-million in information technology (IT) spending, partly by eliminating unnecessary software licenses and enforcing existing rules on the allocation of electronic devices. Denmark’s cross-government procurement programme saved about $80-million in annual expenditure in the first wave alone, which focused on computer hardware, office supplies, equipment and furniture.”
Better procurement, MCG argues, can release many millions of dollars to finance priority societal programmes or to reduce taxes. “Worldwide, we estimate that governments could reduce their current purchasing bill by 15%, or a combined $1-trillion, if they were to adopt best-practice procurement disciplines.”
Improved SoE governance is also held up as a way of unlocking value, with
MCG favouring the creation of government holding companies, with professional boards, to set clear objectives and targets for SoEs, select their top management and monitor performance.
The report also argued that improved management of major projects could save up to $1-trillion a year across governments. “Major IT, defence and infrastructure project pipelines are often worth up to 20% of a country’s GDP. In general, public-sector institutions can reduce project costs and increase returns by requiring that all projects have a clear business case, ensuring enough time is spent on up-front design to reduce cost overruns later, streamlining project delivery and making the most of existing assets.”
Besides bolstering the commercial capabilities of governments, the study argues that government productivity can be improved through strengthening finance, digital technologies and data analytics and talent management.
Focusing on healthcare, education, public safety, road transport and tax collection, the report concludes that, if all countries improved their government productivity at the rate of the top-performing nations in their peer group, the governments worldwide could potentially save as much as $3.5-trillion a year by 2021.
Such savings would amount to 9% of government expenditure worldwide and would be equivalent to the global fiscal gap projected by the International Monetary Fund.
Alternatively, governments could use the productivity improvements to deliver better outcomes for citizens in healthcare, education and public safety.
By adopting best practice, MCG argues that medium- and low-income countries have the potential to “leapfrog” ahead in productivity, which will enable them to increase service coverage, while maximising cost effectiveness. High-income countries could use these examples to break out of a cycle of “diminishing returns from increased spending”.
“Higher productivity is not an end in itself; it is a way to enable governments to deliver a better experience for citizens, do a better job of tackling the greatest societal challenges and remain within their fiscal constraints,” MCG concludes.