III.1.c Public Procurement

Public procurement sits at the core of the “fundamentals first” logic because it represents the primary interface where public money meets the market. In practice, procurement serves as a critical gateway—if contracts are not awarded based on merit, the state overpays, service quality diminishes, and public trust in institutions erodes.

These failures quickly become economic, not merely rule-of-law, problems. Distorted procurement:

Undermines competition
Discourages private investment
Systematically disadvantages firms that lack privileged access to decision-makers

Small and medium-sized enterprises are particularly affected, as they rely on predictable rules and open competition rather than insider networks. Over time, weak procurement practices erode productivity growth and inhibit the development of a resilient domestic private sector, reinforcing concentration and dependence on a narrow set of favored suppliers rather than fostering broad-based market participation.

Procurement and EU Integration

In the context of Serbia’s EU integration, aligning public procurement with the EU acquis is not merely a box-ticking exercise—it directly supports the fulfillment of the economic criteria. EU-aligned procurement strengthens:

Transparency
Non-discrimination
Competitive tendering
Effective remedies

All of which improve value for money and enhance the credibility of the business environment.

This is why procurement appears in the Reform Agenda as a cross-cutting enabler rather than a narrowly technical issue. Better procurement systems allow the state to implement public investment more effectively and absorb EU-related funding with fewer delays and distortions.

Strategic Use of Procurement

At the same time, procurement can be used strategically. When designed well, it can:

Support greening through life-cycle costing and environmental criteria
Encourage innovation through performance-based specifications
Widen fair access for SMEs

In this sense, procurement is not only a compliance tool, but a lever for structural economic transformation.

Reform Agenda Commitments

In Serbia’s Reform Agenda, public procurement is framed primarily as an anti-corruption priority, reflecting the view that it remains a key channel for favoritism.

Under Reform 1.2.1, the state commits to publishing procurement information for projects under intergovernmental agreements by June 2025. However, the current formulation of this commitment is insufficiently precise.

While the Agenda initially suggests that all contracts under these agreements will be published, it later qualifies this by listing only limited data points, such as project names and basic contractor info. This ambiguity leaves significant room for divergent interpretations regarding the actual depth of disclosure, potentially weakening the transparency objective.

Without a clear and exhaustive standard for what constitutes “disclosure,” the measure risks becoming a formalistic exercise that fails to provide the level of oversight necessary to curb the misuse of public funds in high-level projects.

Sequencing Challenges

The current sequencing of reforms in Serbia limits the practical anti-corruption impact during the most sensitive periods of public investment.

Authorities have already published partial information for some intergovernmental contracts, claiming the measure is “preliminarily fulfilled,” yet such assessments have limited substantive value. Transparency in procurement is binary—it is either fulfilled according to clear standards or it is not.

Selective disclosure does not allow for meaningful public scrutiny or accountability for high-risk projects. Furthermore, the Reform Agenda postpones structural “clean-ups”—such as repealing special laws that allow deviations from standard procurement rules—until June 2027.

Since many flagship investments, including those related to EXPO 2027, will be contracted well before this date, the most significant spending remains exposed to the very risks the reform seeks to mitigate.

Competition as a Missing Priority

While the Reform Agenda rightly prioritizes transparency, it pays far less attention to competition as a deliberate outcome of procurement design.

Transparency is a necessary condition for integrity, but it is not sufficient on its own to ensure efficient and inclusive markets. Without effective competition, a procurement process can remain formally transparent yet economically distorted, resulting in:

Fewer bids
Inflated prices
Stifled innovation

Competition is central to economic health because it directly affects the productivity and scaling capacity of domestic firms, particularly SMEs. In this context, the design choices that dictate who can realistically compete—and under what conditions—are just as vital as reporting requirements.

However, these factors currently remain outside the primary focus of the Reform Agenda, leaving a gap between the goal of legal compliance and the goal of economic efficiency.

Lotting as a Competition Policy Tool

One of the most consequential design choices in procurement is whether to divide large contracts into smaller, more manageable lots. Although often treated as a technical detail, lotting functions in practice as a structural competition policy instrument.

By reducing contract size and scope, lotting:

Lowers entry barriers
Broadens participation
Creates opportunities for SMEs to compete

Conversely, unjustified aggregation into large, all-encompassing contracts creates artificial barriers that exclude domestic firms and SMEs, often leaving the field to a small number of large or international players regardless of value for money.

Serbian procurement law already reflects this logic. For contracts at or above EU thresholds, contracting authorities must consider dividing contracts into lots and justify any decision not to do so. The issue, therefore, lies not in the legal framework, but in its effective application.

Data Gaps

In practice, it is difficult to assess whether lotting obligations translate into more competitive procurement outcomes. Systematic statistics on the use of lots are not publicly available. Because each lot is recorded as a separate contract, it is impossible to observe:

How frequently procedures are structured into multiple lots
Whether several lots are routinely awarded to the same bidder

This data gap prevents an evidence-based assessment of whether procurement design systematically favors large, aggregated contracts.

SME Participation: Beyond Headlines

Limitations in monitoring extend beyond lotting and are also evident in how SME participation is measured. Official monitoring focuses on SMEs’ share of the number and total value of awarded contracts.

Metric (2024)	Value
SME share of awarded contracts	>75%
SME share of total awarded value	~73%

While these figures suggest strong overall participation, they provide limited analytical insight. They do not reveal:

How SME participation is distributed across contract sizes, sectors, or procurement design choices
Concentration in the largest and most strategic tenders

As a result, headline indicators may appear reassuring while masking structural weaknesses in competition, market access, and the allocation of high-value contracts.

Award Criteria: Price vs. Quality

Award criteria offer another example of the gap between formal rules and meaningful analytical insight. Serbian law allows awards based on:

Price alone
Cost-effectiveness including life-cycle costing
A price-quality ratio (with non-price criteria mandated for certain services)

Monitoring shows an increase in the use of criteria beyond price, exceeding annual targets. However, the aggregate indicator does not distinguish between:

Categories where non-price criteria are legally required
Categories where price-only awards are fully compliant

Therefore, it does not allow assessment of whether contracting authorities apply qualitative criteria where mandated, or whether their use is expanding in areas where quality differentiation could significantly improve value for money.

The Croatian Case Study

The Croatian case highlights the weak relationship between award criteria and SME participation. Despite reporting one of the lowest shares of price-only awards in the EU, Croatian law allows price or cost to account for up to 90 percent of the evaluation score.

As a result, many procedures formally classified as price-quality awards may still be overwhelmingly price-driven—a nuance that current Scoreboard indicators cannot capture.

Despite the low reported share of price-only awards, SMEs submitted fewer than 40 percent of bids in Croatia in 2023 and participated in under half of awarded contracts, well below the EU average.

This reinforces the broader point that headline indicators offer limited insight into actual competitive dynamics.

Reform Priorities

Serbia already has most of the necessary procurement instruments formally in place. The Public Procurement Law permits awards based on price, cost including life-cycle costing, or a price-quality ratio, allows pre-tender market research, and provides modern rules on technical specifications.

However, evidence from practice shows that market research remains a persistent weakness. This is critical, because inadequate market research directly limits the ability of contracting authorities to:

Design competitive tenders
Make informed lotting decisions
Apply quality-based criteria in a credible manner

The binding constraint is therefore not legal permission, but implementation capacity, incentives, and practical usability.

A Usability-Focused Approach

Reform priorities should shift from introducing new concepts toward improving the usability of existing tools. The goal should be to reduce complexity and make current instruments easier to apply, particularly for smaller contracting authorities with limited administrative capacity.

Price-only evaluation remains appropriate for standardized goods and services, while more complex procurements depend primarily on better preparatory work rather than additional ex post justification.

Priority Actions

Effective reform requires a selective and enabling approach focused on practical support rather than additional controls:

Model documents: Expanding and actively promoting centrally developed model tender documents and evaluation frameworks
Guidance: Strengthening guidance on transparent and competition-neutral market consultations
Training: Investing in targeted professional training to help contracting authorities translate functional needs into clear specifications and defensible award criteria

These operational improvements, rather than new formal obligations, are what distinguish procurement systems that successfully use quality-based tools from those that remain predominantly price-driven in everyday practice.

Proposed Indicator: PMCI

A useful new indicator to complement the Reform Agenda’s transparency focus would be a Procurement Market Contestability Index (PMCI)—a value-weighted measure designed to capture whether procurement is actually competitive and accessible in practice, not just formally compliant.

The PMCI would track the share of total awarded procurement value that meets three “contestability” conditions:

Condition	Description
Effective competition	Procedures with at least two valid bids
Competition-enabling design	Use of lots or a published, evidence-based justification for non-lotting in larger contracts
Market access at the top end	SME participation specifically in the highest-value tenders (e.g., top decile by value), rather than only in headline totals

Built from e-procurement data, the PMCI would link procurement design choices directly to market access, concentration, and economic efficiency.