The upcoming bundling of procurement in the EU

“Gentlemen, there’s only two ways I know of to make money: bundling and unbundling.” - Marc Andreesen

Over the last decade I have become increasingly concerned with the move to bolt on ever more objectives to be pursued by public procurement, from the compliance requirements of exclusion grounds to 'strategic' objectives. What I have struggled with is encapsulating the whole approach in a neat way that makes immediate sense, beyond saying the road to hell is paved with good intentions and that we're replicating the defence offset mistakes.

Now, thanks to an Ezra Klein article in the NYT about industrial policy, an incidental topic only loosely connected with public procurement, I think it is possible to encapsulate the idea. In that article Klein presents a critique on the idea of adding absolutely disconnected objectives to the Inflation Reduction Act (IRA) main intervention planks on green energy and semiconductor manufacturing, calling it 'bundling'. When is a factory not a factory? When bundled with a bunch of unrelated stuff that looks ‘good’.

Noah Smith doubled down on this angle in his (paid) Substack last week as well, by recognising industrial policy does not have to deliver everything all at once. I'm glad to see progressives recognising the elephant in the room that all those nice to haves cost money and reduce the effectiveness of the main objective.

Where the US leads, often the EU follows as could be seen with the RePower EU approach that appears to mimic the IRA and the overall talks of 'industrial strategy'. It is obvious where the conversation is headed in the EU and how procurement will be called upon to assist those grand designs.

As such, we are clearly in the 'bundling' phase of public procurement where more and more stuff is added into the process of buying something.

The problem with bundling is summed up with the aphorism at the top of this post. There are indeed two ways to make money in business. You either bundle or unbundle in your business model. In the case of procurement, however, there is more money to be made by bundling. Why? Because bundling increases complexity, uncertainty and the number of disconnected moving parts that are now part of a single contract. This means the number of potential suppliers is reduced and the overheads of managing a more complex contract are higher. In addition to that, one just has to think about the agent/principal problem that adding disparaged objectives to a contract create. We can already see these at play with the oxymoron of discretionary exclusion grounds: which contracting authority would ever use them at face value? The objective that is being pursued by said exclusions is of no value for the contracting authority so the marginal incentive of them using said exclusions is effectively zero.

Circling back to the point made above of the EU following the US, perhaps one should look into what adding 'strategic' objectives to procurement has led to. This article from the WSJ hits the nail on the head with clear examples of said objectives leading to fraud. I would add that corruption is not far behind.

I am under no illusion of not having lost the argument in this cycle, but perhaps I will still be around to watch the pendulum circle back to the unbundling phase of procurement in the EU as well.