24(34)
Optimal Threshold Value
A basic requirement is that the expected gain from formal procurement
covers the costs. Given that the expected gain is 25 percent in central
government and 16.9 percent in the municipal sector, this is directly
translated into the following threshold values:
In central government, formal procurement is justified when 25
percent exceeds 1 000 EUR, that is, when the contract value
exceeds about 4 000 EUR.
In local government, formal procurement is justified when 16.9
percent exceeds 1 000 EUR, that is, when the contract value
exceeds about 6 000 EUR.
A reasonable common threshold value for central and local
governments is of the order of 5 000 EUR.
In practice, this threshold value can be considered to be too low. Given that
the threshold imposes an administrative burden on the agencies concerned,
we would normally require the regulatory framework to yield a value added
in a larger proportion of procurements. The adequate threshold can be
computed based on the distribution of the relative gains in the population
under study. This distribution is shown in Figure 2. As expected, a
lognormal approximation also works well here.
Figure 2
. Distribution of the Relative Gain from Procurement (EX–
EX
min
)/EX for Procurement Operations where at least Two
Tenders have been Submitted (actual values plus lognormal
approximation; the distribution contains a point mass of 0.167
at the origin, corresponding to the operations where only one
tender was submitted).
0
0,1
0,2
0,3
0,4
0,5
0,6
0,7
0,8
0,9
1
0
0,2
0,4
0,6
0,8
1
