ISE14/14-15

Background

• In his Policy Address 2015, the Chief Executive announced that the Government would further expand its green procurement by enlarging the existing green products and services lists, and exploring further opportunities in applying environmental friendly materials in public works projects. The initiative is a stepped-up effort after the Government rolled out an enhanced green public procurement policy in 2011. In 2014, green procurement by the Government's central purchasing agency amounted to at least $1.1 billion.
• Worldwide, green procurement is increasingly used by governments as a leverage to promote various policy objectives like environmental protection and support of innovation. However, higher costs, lack of monitoring mechanism and absence of incentives are often cited as the biggest obstacles of green procurement^{1Legend symbol denoting The barriers were cited in a 2011 survey commissioned by Organisation for Economic Co-operation and Development.}. This issue of Essentials examines briefly what green procurement is from a life-cycle perspective, assesses its status in Hong Kong, and looks at some overseas lessons.

Green procurement from a life-cycle perspective

• While there is no authoritative definition of green procurement, life cycle often appears as a central concept of it. In general, it can be summarized as the purchase of products or services which have less impacts on the environment and human health throughout their life cycle. Given other parameters being equal, a product is most desirable among other similar products serving the same purposes if it causes the least impacts from the beginning until the end of the life cycle, such as using less energy and water, containing less toxics but more recycled contents, and emitting less air emissions.
• To identify products with the least impacts, a life-cycle assessment tool^{2Legend symbol denoting One of the internationally recognized standards for such assessment is provided by International Organization for Standardization (ISO 14040 and 14044).} can be employed. It helps quantify the cumulative environmental impacts in all stages of a product's life cycle – from design, materials acquisition, manufacturing, distribution, operation, and disposal. Under this approach, a product, while embodying many green features, may prove to be more environmentally damaging if it involves heavy pollution footprints in its supply chain.
• Another related tool is the life-cycle costing analysis. It seeks to identify the product with the least total cost – incurred throughout a product's life cycle – among different choices of products. Some green products might incur higher upfront costs but they might be more economical when the total costs throughout the life cycle are considered.
• In general, the analysis covers: (a) the purchasing costs and all associated costs such as delivery, packaging, installation, and insurances; (b) operating costs, including costs of energy and water use and maintenance; (c) end-of-life costs such as removal, recycling and de-commissioning; and (d) life span and warranty time frame of the asset. In some cases, the costs of the environmental impacts translated into monetary values can be included in the analysis.
• However, there are also concerns that such analysis may require a lot of assumptions and the availability of suitable data can possibly affect the accuracy of cost projections. The analysis may also be in conflict with the conventional thinking of government budget which tends to focus more on the acquisition and operating costs of products and services.

How green is the Government procurement?

• The Government's procurement is mainly governed by the Stores and Procurement Regulations which require environmental factors be considered in procurement. Yet, whether the procurement is green is separately defined by an administrative list of products with specifications covering a range of environmental impacts. So far, the list has covered 17 categories or 103 common-user items, ranging from stationery to cleansing products.
• As a centralized procurement agency, the Government Logistics Department ("GLD") applies these specifications as minimum and mandatory requirements, whereas individual departments are encouraged to apply as far as possible. In most cases, the lowest conforming offer that also meets the minimum green requirements is recommended. For products with green features exceeding the minimum requirements or new to the market, they can be considered if their supplies in the market are sufficient. All extra costs incurred from procuring green are to be absorbed by the purchasing party's own budget.
• In 2014, about 40% of the total of 247 contracts^{3Legend symbol denoting After the autonomous spending limits of individual departments was lifted in 2013 to HK$5 million for products, the number of contracts handled by GLD significantly decreased in 2014, which may affect comparison of the green procurement efforts of GLD in the previous years.} handled by GLD incorporated green specifications in the tenders. This percentage was almost double what it had been in 2011 when 22% of the total 449 contracts embodied green specifications in the tenders. The percentage of awarded contracts which met the green specifications was slightly lower. In 2011, the percentage was 18% but that rose to 31% in 2014^{4Legend symbol denoting The Government adopts two parameters to measure its procurement efforts. One is the number or the percentage of tenders incorporating green specifications. The other is the number and value or percentage of the awarded contracts meeting these specifications.}.
• The total value of these green contracts also grew from $630 million in 2011 to $1.13 billion in 2014, which accounted for 22% of the total $5 billion procurement contract value of GLD or 1.4% of the $79.7 billion total other operating expenses of the Government in the same year^{5Legend symbol denoting In 2014, the total operating expenses of the government amounted to HK$331.3 billion. Excluding salaries, pensions, recurrent subventions, social security and depreciation, the other operating expenses was HK$79.7 billion.}.
• Under the Government's procurement rules, individual bureaux and departments could also purchase goods and services on their own. They are also invited by the Environmental Protection Department to report their annual green procurement efforts by submitting a report before March of each calendar year.

Overseas lessons and practices

• Green procurement may be increasingly popular among public authorities. Yet, there are implementation difficulties that may hamper its development. Among the most cited difficulties are extra costs of green procurement, the lack of incentives and knowledge among those responsible for procurement, and the absence of proper monitoring mechanism.

Use of life-cycle costing

• While some green products and services may be more expensive, there are some other green products and services such as transport, construction and cleansing services which may offer financial savings of between 3% and 10%, based on a life-cycle costing study in Europe. Despite this, the life-cycle costing tool is yet to become a mainstream practice to identify the least costly procurement options for decision makers.
• In Europe, Norway has specified that life-cycle analysis must be adopted in procurement while Germany has made it mandatory by law for some products. However, in a 2010 survey, it was found that as little as 6% of the polled procuring authorities across the 27 members in the European Union routinely used life-cycle costing while 64% still relied on purchasing costs, and 30% used a mixed method.
• To further promote life-cycle costing, the European Commission is developing a new tool to be completed by 2016 for products and services related to office IT equipment, indoor lighting, electrical appliances, and medical electrical appliances. Online seminars are also held to familiarize procurers with the concept and tools.

Price preference

• Price preference or premium is another possible means to address the issue of higher procurement cost. Taiwan's green procurement law allows up to 10% price preference for products carrying recognized green labels or products satisfying government's green requirements. The policy gives pricing edge to emerging but more expensive green products and at the same time caps the extra expenditure so incurred.
• Similar policies are also adopted in some local authorities in the United States. For instance, the city government of Seattle in State of Washington has specified in its laws an allowance of 10% price preference to products meeting prescribed standard of recycled content. However, a 2010 research report for the United States Congress noted that such policy may not be desirable for healthy competition among green products.

Other financial incentives

• To encourage implementation of green procurement among officials, the French authority has adopted a carrot and stick approach. Under this approach, a small part of the annual departmental procurement budget is withheld in a designated fund. Only those who perform satisfactorily in green procurement based on a set of a dozen indicators will not only get back their frozen sum but also share the remaining pool of the fund. In South Korea, extra financial bonus can also be allocated to public organizations with outstanding performance in green procurement.

Monitoring mechanism

• A proper monitoring mechanism can help assess and review the effectiveness of green procurement measures adopted. In South Korea, the government has put in place a monitoring mechanism based on a centralized electronic-procurement system covering a majority of the government's purchases. With this system, procurement data can be collected in a more organized and reliable manner.
• While there is no legally binding procurement target in South Korea, public agencies need to set voluntary targets and implementation plans at the start of each financial year, and report their results at year-end as required by the Act on Encouragement of the Purchase of Green Products. The South Korea authorities also gauge the carbon emission avoided and the number of jobs created from their procurement.
• Green public procurement is a global trend. Yet, different places have adopted different implementation measures – mandatory or voluntary, financial or administrative – to green their purchase. Their choices vary, depending on their own policy needs and preferences, fiscal priorities and availability of expertise in performing life-cycle analysis of products and services.

Prepared by CHEUNG Chi-fai
Research Office
Information Services Division
Legislative Council Secretariat
22 June 2015