Smart Public Procurement for Better Public Spending in Latin America and the Caribbean

Given the increasing fiscal constraints facing Latin America and Caribbean (LAC), it is imperative to adopt smarter, more strategic procurement approaches that reduce waste and enhance the efficiency of public funds, particularly with a focus on mid- and long-term developmental outcomes.Such a strategy could go a long way in helping bridge the financing gap for development.

Public procurement spending accounted for an average of 30% of total public spending across the region[1] and as much as 74% of that spending is wasted due to inefficiencies[2], according to data from FISLAC, an analytics platform developed by the IDB’s Fiscal Management Division (FMM).

To start the conversation about how to better address these challenges, FMM organized the first Regional Policy Dialogue aimed at developing an innovative agenda to transform public expenditure management through smarter procurement practices.

In the following paragraphs, we will explore the key elements of this transformative agenda and the opportunities for action available to governments in the region.

What is Smart Public Procurement?

Smart public procurement refers to making optimal decisions to minimize waste and enhance the quality, efficiency and sustainability of public spending when purchasing and contracting goods, works and services.

This approach seeks to maximize value for money by increasing outputs such as quality, innovation, and policy objectives’ results while minimizing inputs, such as the total costs, time and capital needed to produce those works, goods and services. In other words, smart procurement also considers the potential social and developmental impacts of public spending, rather than solely focusing on rule compliance or the cost of resources.

At its core, it advocates for the implementation of regulatory reforms, digital transformation, and strategic planning to create a procurement system that responds effectively to complex societal needs. Thus, smart public procurement can be defined as the strategic process of making the best decisions that minimize waste while enhancing the quality and efficiency of public spending.

Smart Public Procurement Can Contribute to Macrofiscal Stability

Smart public procurement spending can be a critical area for improving fiscal balances because it can improve the effectiveness of public expenditure by reducing waste. Better contracts and processes, for example, could reduce the risk of delays, quality problems or unexpected costs. This would result in large monetary and transactional savings for governments because, for example, approximately 25% of public contracts in the region require time extensions averaging nearly double their original terms, while around 13% experience budget increases of up to 50%.

Better fiscal balances will contribute to greater macroeconomic stability. Improved procurement strategies could reduce public debt by as much as 1.8% of GDP, according to FISLAC calculations.

This reduction would not only lead to lower interest expenses but also stimulate GDP growth by fostering a more efficient economy. Furthermore, governments that reduce wasteful spending can alleviate the pressure for new tax reforms aimed at addressing fiscal deficits, thereby freeing up fiscal space for essential investments in public services and infrastructure.

Where is the Biggest Opportunity to Reduce Waste?

Waste broadly refers to suboptimal decision-making in the allocation of public resources. In instances of active waste, such suboptimal decisions are motivated by personal gain, as exemplified by corruption. Conversely, passive waste arises from a lack of adequate skills, knowledge, or tools, leading to poor decision-making in the management of resources.

Reducing waste in procurement requires a balanced focus on both active and passive waste. While active waste has long been a priority for reform in many LAC countries, passive waste deserves equal urgency because it is estimated to reach up to 83% of the total waste arising from skill deficits and operational inefficiencies[4].

As a result, addressing passive waste through capacity-building measures can generate large savings for governments. By neglecting passive waste, countries miss opportunities to fully leverage public spending, as inefficiencies in execution can render otherwise well-intentioned procurement efforts ineffective.

Holistic Integration of Procurement and Public Finance Management Goals

To effectively address both active and passive waste, it is crucial for LAC countries to shift towards smarter spending practices. This involves a holistic integration of procurement, financial management, and tax administration systems and processes, whereby procurement decisions are not only governed by cost-saving motives, but are also aligned with broader fiscal and public policy objectives.

Integrating procurement within the broader budgetary framework enables countries to synchronize procurement activities with policy priorities, thus ensuring that public funds are utilized in ways that maximize their impact. This holistic strategy—anchored in transparency, accountability, and technological integration—fosters a robust fiscal environment conducive to sustainable economic growth and enhanced public trust.

Rethinking Contract Management is Key for Smart Procurement

Achieving smarter procurement requires a delicate balance of incentives and oversight. To achieve this, governments need to rethink how they do and manage contracts, meaning that contract designs should align with the complexity of transactions. This implies using simple processes for straightforward transactions and more sophisticated processes for complex ones, such as relational contracts introduced by Nobel Laureate Oliver Hart during the event. In our region and within multilateral developing banks, it is a common practice to rely exclusively on monetary thresholds to decide on selection methods, which can be problematic as it is not the optimal solution for all cases.

Relational contracts are “informal agreements and unwritten expectations between parties, often based on trust, shared goals, and mutual understanding. Unlike traditional contracts, which specify detailed terms and conditions in a formal written document, relational contracts are flexible and evolve as the relationship and circumstances change over time,” according to the University of Oxford’s Government Outcomes Lab.

This new way of managing contracts can fundamentally change the relationship of parties involved in public procurement. Traditional public procurement is often adversarial between public buyers and suppliers, with each side aiming to maximize its own benefit through strict rules for protection. In contrast, relational contracting emphasizes cooperation for mutual benefit. These contracts are particularly valuable in complex, long-term collaborations—such as strategic business partnerships or government contracts with service providers—where rigid terms may be impractical. Instead of strictly enforcing terms, relational contracts rely on open communication, trust, and ongoing cooperation to align the interests of both parties.[5]

This approach promotes adaptability and trust, valuable qualities in complex procurement scenarios. Hart’s insights strongly resonated with participants from the LAC region, where traditional contracts are often strained by rigid rules.

Using Guiding Principles

Hart outlined six guiding principles for good contracts: loyalty, equity, honesty, integrity, autonomy, and reciprocity. These guiding principles offer a robust framework for navigating these challenges by emphasizing mutual understanding and cooperation.

Transitioning to smart public procurement involves more than just capacity building; it requires a fundamental shift in approach. Rather than relying on extensive training or rigid methods, this model advocates moving beyond conventional practices that have failed to deliver optimal outcomes. The guiding principles extend well beyond a basic notion of “good faith,” embodying a comprehensive commitment to mutual understanding.

Professor Hart’s proposal to use guiding principles as an innovative solution to complex situations reflects a principal aspect of smart public procurement: the need for tailored solutions. In public procurement, universal solutions are inadequate due to the diverse range of challenges public buyers face. Therefore, solutions must be designed and implemented to suit both straightforward transactions, such as off-the-shelf product purchases, and more complex transactions, such as large-scale public works projects and technology services.

The Importance of Digital Transformation for Smart Procurement

Granting procurement officers increased autonomy can provide contract management flexibility and reduce costs by as much as 9% while maintaining quality standards[6]. The challenge lies in designing frameworks that promote accountability yet provide the necessary flexibility for officers to make informed and effective decisions. Striking this balance is essential for fostering a procurement environment that encourages responsible innovation and efficiency.

For LAC countries, digital technologies can be an important ally in achieving this balance. They can improve tracking of procurement spending and support reforms to build resilient procurement systems that facilitate the adoption of data-driven practices and enhance transparency and accountability.

Digital technologies allow the seamless connection between procurement and finance platforms for real-time data flow, strengthening decision-making and allowing governments to track expenditures with greater precision.

Successful digital transformation requires concurrent legal reforms, sustained budgetary support, and robust interagency coordination to cultivate an ecosystem where these systems can fully thrive. Legal frameworks must adapt to accommodate new digital processes, while dedicated budget allocations ensure the long-term viability of these initiatives. Cross-agency collaboration is essential to foster a unified approach to procurement, wherein digital tools and policies align harmoniously.

Embracing data-driven decision-making allows governments to rigorously monitor procurement performance, swiftly identify inefficiencies, and make evidence-based adjustments. This approach not only fosters a culture of continuous improvement but also ensures that procurement practices remain responsive to public finance data, leading to a more efficient allocation of public funds and improved service delivery throughout the LAC region.

Three Opportunities to Advance Smart Procurement Practices

During the event, participants discussed three opportunities to spearhead the transformation towards smart public procurement.

• Implement targeted reforms to boost efficiency and reduce waste. Governments can start tackling passive waste and better leverage procurement for development by using the IDB´s Public Procurement Toolkit Module,  presented during the event. The tool assists governments in identifying the causes of inefficiencies and developing targeted reforms that align public procurement with broader developmental objectives. This tool helps governments in their broader effort to improve efficiency of public spending.

• Leverage strategic planning and adaptive governance to manage uncertainty in procurement spending. Actively facilitating strategic planning and adaptive governance can help governments deal with unforeseen events that affect public procurement contracts. By considering Hart’s guiding principles for contracts, governments can navigate complex environments more effectively, mitigating costs associated with frequent renegotiations. Strategic planning is particularly advantageous for developing economies where resource constraints and unpredictable challenges are prevalent. By anticipating needs and implementing timely adjustments, governments can ensure continuity in delivery service, fostering resilience and sustainability in alignment with overarching developmental goals.

• Use digital technologies to enhance transparency and strengthen public trust: Digital transformation significantly bolsters transparency within smart procurement frameworks. The integration of procurement and financial systems enables real-time expenditure tracking, which in turn enhances accountability and supports evidence-based decision-making processes. This continuous data flow strengthens public trust by minimizing corruption risks and reaffirming a commitment to transparency. As citizens gain insights into how governments manage public funds, they are more likely to engage with and support governance efforts. Such engagement fosters an environment of trust, equity, and accountability, which is essential for sustainable economic development.

Conclusion: Unlocking the Full Potential of Public Spending through Smarter Procurement

Smart public procurement is more than a fiscal strategy: it is a pathway to achieving sustainable development, resilience, and public trust. By reducing both active and passive waste, fostering transparency through digital tools, and emphasizing strategic planning, LAC countries can ensure that every dollar spent delivers greater value to their citizens.

With continued support from organizations like the IDB and the collective commitment of regional leaders, smart procurement can fundamentally reshape public spending. It is an investment in a more efficient, equitable, and prosperous future for Latin America and the Caribbean. This is the time to collaborate in optimizing public expenditure, paving the way for a thriving region that enhances the quality of life for all.

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[1] Calculations from FISLAC-FMM-IDB with data from IMF-WEO. The LAC sample includes Argentina, Barbados, Belize, Bolivia, Brazil, Chile, Colombia, Costa Rica, the Dominican Republic, Ecuador, Guatemala, Guyana, Haiti, Honduras, Jamaica, Mexico, Nicaragua, Panama, Peru, Suriname, The Bahamas, and Uruguay. Range refers to the interquartile range from the 25th to the 75th percentile. Public procurement spending is defined as the sum of spending on goods and services and capital expenditures.

[2] Calculations from FISLAC-FMM-IDB with data from IMF-GFS. Input is the 5-year average change in percentage points of GDP in public procurement spending. Output is the index of social and infrastructure indicators. Inefficiency includes passive and active waste.

[3] Countries that participated in the event: Bahamas, Barbados, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Panama, Paraguay, Peru, Trinidad y Tobago, Mexico.

[4] Bandiera, O., Prat, A., & Valletti, T. (2008). Active and Passive Waste in Government Spending: Evidence from a Policy Experiment.  American Economic Review, 99 (4): 1278–1308

[5]  Ball and Gibso (2022). Partnerships with principles: putting relationships at the heart of public contracts for better social outcomes. The Government Outcomes lab. Oxford University.   https://golab.bsg.ox.ac.uk/the-basics/relational-contracting/#introducing-relational-contracting

[6] Bandiera, Best, Khan & Prat (2021). The Allocation of Authority in Organizations: A Field Experiment with Bureaucrats,” The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 136(4), pages 2195-2242.