Remarks by Angel Gurría,
11 January 2017
Mexico City, Mexico
(as prepared for delivery)
Dear Secretary Coldwell, Director General González Anaya, Ladies and Gentlemen,
It is a great pleasure to be here with you to present the results of our two studies on the procurement practices of PEMEX. I would like to thank the Secretary of Energy and the Director General of Petróleos Mexicanos for their leadership and commitment in carrying out these studies. The first study focuses on the management and integrity of public procurement, while the second examines how to promote conditions of competition that will avoid collusion in public procurement.
In the wake of the energy reform, PEMEX is making a number of changes to maximise value creation and to achieve the efficiency targets that have been set in its 2017-2021 business plan. Procurement is a strategic lever for achieving those objectives, and for this reason the OECD and PEMEX have decided to work together in this area.
Public procurement is an activity that has a high budgetary impact and that entails a high risk of corruption. Such procurement represents on average 29% of total government spending in OECD countries, and more than 20% in the case of Mexico. The purchases that PEMEX makes from small and medium-sized enterprises represent 20% of government spending under this heading. These amounts are considerable, and accordingly bid-rigging can have very negative consequences.
OECD experience has shown that when firms engage in collusion, this can drive up the cost of goods and services by at least 20%. That percentage can in fact be much greater. For example, in Mexico the price per unit of insulin purchased by the IMSS dropped by 57.6% after the IMSS and COFECE authorities detected and punished bid-rigging practices.
For this reason, steps to improve the competitiveness, efficiency and integrity of public procurement have the potential to generate significant savings, which are particularly welcome at times of tight budgets and low oil prices.
PEMEX has adopted some very significant reforms in this area. For example, it has developed a system of internal control to detect and mitigate risks of fraud and corruption. Specific measures include the preparation of codes of ethics and conduct, as well as special guidelines on conflicts of interest. In addition, in February 2016 PEMEX launched the Corporate Programme of Ethics and Integrity.
We are very pleased to note that PEMEX has taken on board many of the recommendations that we have made. In addition to the measures mentioned, our collaboration and the commitment of PEMEX have made it possible to conduct market analyses with a greater number of information sources. Moreover, the new procurement regime provides for a more thorough knowledge of suppliers through electronic tools. PEMEX has also completed the design of an electronic procurement platform and it has set a transition period running to November of this year, by which time all procurement processes will have to be conducted using the PEMEX Electronic Procurement System (SISCEP).
This move will yield various benefits, from simplifying the process to eliminating contacts both between officials and suppliers, in order to prevent bribery, and among potential suppliers, in order to prevent risks of bid-rigging.
Another major advance has been in the way procurement resources are used. The fact is that in 2015, 81% of the funds spent on procurement were awarded through direct contracting, and only 12% through open competition. By contrast, in the period April-August 2016 PEMEX reported that direct contracting represented 23% of the funds spent on procurement, and the proportion awarded through open competition rose to 50%. Moreover, the average number of participants in open competitive bidding increased by 40%. It is very important that PEMEX should continue moving in this direction.
The two reports that we are presenting today offer a series of recommendations designed to consolidate many of these measures, to step up the pace of transformation, and to allow PEMEX to strengthen its procurement processes further. Allow me to highlight some of the ones that we consider of key importance:
1. In the first place, PEMEX needs to pursue reform of its corporate governance to bring it up to par with best international practices. To this end, our report suggests standardising and reinforcing procurement information systems with a view to producing reports that will be useful to decision-makers, as well as evaluating the outcomes and boosting the professionalism of human resources in the procurement area.
2. In the second place, there must be a clear awareness of the risks of bid-rigging. In this respect, it is essential to ensure close cooperation between PEMEX, as a major public purchasing agent, and the competition authorities. PEMEX must continue to promote competition in bidding processes, confining direct contracting to exceptional cases and establishing a department that has sufficient resources to conduct market analyses and that can collect exhaustive and reliable information on the supplier market.
3. Thirdly, PEMEX must also open its markets to the greatest possible number of suppliers, including SMEs and foreign firms.
4. When it comes to integrity, PEMEX needs to work on the creation of a coherent and effective framework for integrity that will induce all its employees to adopt the values contained in its codes and to react appropriately in the face of ethical conflicts. In addition, PEMEX should require its suppliers to align themselves with these values and to develop their own standards of conduct. Supplier companies should also report acts of corruption and collusion, through a policy that protects whistle-blowers and that allows for anonymous reporting.
5. In its relations with suppliers, PEMEX would benefit from completing the framework for evaluating them in order to increase competition and promote innovation, developing performance indicators for suppliers and a framework for evaluating risks and offering incentives.
Ladies and Gentlemen, PEMEX is the eighth-largest oil producer in the world. It is one of Mexico's most important sources of revenues. Reforming its procurement system has the potential to position the company strategically, making it more efficient and more transparent and helping it to create value for the benefit of all Mexicans.
Today PEMEX counts itself among other institutions, including the IMSS, the ISSSTE, the CFE and the New International Airport of Mexico City, with which the OECD is working to optimise their procurement practices. I want to reiterate that the OECD stands ready to help PEMEX become stronger and more competitive. Thank you very much.