Globally, it is estimated that countries spend around 13% of their GDP on public procurement (Bosio et al., 2020), suggesting opportunities to create fiscal space by improving efficiency, effectiveness, integrity and sustainability of public procurement. But how can these opportunities be realized in practice? And, is there a trade-off between achieving efficiency (and therefore creating fiscal space) and pursuing other public procurement objectives? This blog reviews the growing body of economic literature on public procurement.
Inclusiveness in public tendering processes
Public procurement can stimulate business growth. Ferraz et al (2015) show that in Brazil, obtaining a government contract increases the growth in the workforce of firms by 2.2 percentage points in this quarter, and these effects persist in the long run, as winning companies participate and win more future auctions and expand their business into new markets. .
As national and local governments increasingly use their public procurement system to target growth in specific market segments, the evidence for these reservation rules is mixed. For example, there is mixed evidence on the impact of preferential treatment programs, and two studies of the same program for small businesses in California draw opposite conclusions. While Marion (2007) found that procurement costs are 3.8% higher on auctions using preferential treatment, Krasnokutskaya and Seim (2011) found that these distorting effects are not huge compared to the benefits for business growth.
Access via e-procurement
The digitization of procurement processes has the potential to induce radical transformations in public procurement. In India and Indonesia, research shows that e-procurement has encouraged entry of better quality entrepreneurs and led to quality improvements. [Lewis-Faupel et al., 2016]. An impact assessment of e-public procurement adoption in Bangladesh shows e-public procurement reduces integrity risks, increases business participation and lowers prices offered by businesses in the process tender.
However, e-procurement is not a panacea for solving inefficiencies in spending and reducing integrity risks. Lewis-Faupel et al. (2016) find no evidence that electronic public procurement has reduced the final prices paid by the government in India and Indonesia. In Bangladesh, e-procurement did not affect the final cost of investment projects, time overruns, or the quality of contract implementation, indicating that inefficiencies and corruption risks could simply be be moved to other phases of the process.
Corruption and transparency
Corruption, collusion and other non-competitive practices lead to misallocation of public funds. A growing economic literature studies how purchasing decisions are distorted by political ties. In Italy, an additional mandate of the mayor decreases the number of bidders and the winning rebate, while increasing the probability of local winners or of several contracts awarded to the same company [Coviello & Gagliarducci, 2010]. Baltrunaite (2020) provides evidence that in Lithuania, corporate money buys preferential treatment in procurement auctions and this is curtailed by laws that prohibit corporate donations to political parties and campaigns.
Tenders can inform companies about tender opportunities, and therefore broaden the pool of participants and reduce prices, as shown by Coviello & Mariniello (2008) in the context of Italy and by Gonzalez -Lira et al. (2020) in the context of the United States, Department of Defense. Bauhr et al. (2020) further demonstrate that the openness and integrity of competitive markets is improved by ex ante transparency (i.e. information in tenders), but less by ex post transparency ( i.e. information about attribution after publication).
Discretion and skills
There can be trade-offs between rules and discretion. For example, stricter regulations can reduce integrity risks while discretion can allow buyers to personalize the procurement process. The founding article by Bandiera et al. (2009) introduced the concept of passive waste in public procurement, linked to constraints such as lack of skills, lack of incentives or excessive regulatory burden. The authors find that in Italy, passive waste represents 83% of the total estimated waste, motivating a vast literature on rules and discretion in public procurement. A recent experience by Bandiera et al. (2020) shows that in Pakistan, inefficiencies in the procurement process are created by the stringency of requests from the Accountant General to approve payments, and the transfer of decision-making rights from controllers to purchasing managers reduces prices by 9% without reducing the quality.
Finding the right balance between rules and discretion may depend on the skills of purchasing managers. In Russia, preferences for domestic suppliers improve performance, but only when implemented by inefficient bureaucrats (Best et al., 2017). In Italy, less efficient contracting entities benefit from greater efficiency gains through centralized procurement (Bucciol et al., 2020), and in fact use this option more widely, when available (Bandiera et al., 2009). Globally, Bosio et al. (2020) find that better practices lead to better outcomes, but stricter rules only improve outcomes in countries with low public sector capacity.
The legislative framework shapes the decisions of procurement officers and other stakeholders. For example, the bundling of contracts just below or above contractual thresholds that allow greater procedural flexibility is observed in many public procurement systems, and Palguta & Pertold (2017) illustrate this phenomenon in the context of the Czech Republic.
The incentives of actors involved in public procurement are influenced by several factors. In Chile, by the design of the audit protocol, open auctions undergo more than twice as many controls as direct procurement, and therefore procurement managers are more likely to resort to direct procurement afterwards. have had experience of audits and familiarized with this program [Gerardino et al., 2017]. When courts are inefficient, procuring entities might be more likely to avoid the litigation process of applying a penalty for late deliveries, and indeed, in Italy, inefficient courts lead to delays in the delivery of public works and reduction in the use of advance payments [Coviello et al., 2017]. On the business side, reputation mechanisms could help align the incentives of buyers and suppliers, as demonstrated by the introduction of a supplier rating system by a large utility company in Italy, which has improved the audited parameters and the quality of the services without significantly increasing the prices [Decarolis et al., 2016].
Areas of future research
The design of public procurement policies could benefit from more evidence on the impact of inclusive policies on SMEs and other under-represented businesses, the impact of reputation mechanisms and on how to increase the capacity of entities adjudicators. Linking existing data on government procurement, company data, complaints and contract implementation data can foster new research opportunities by exploring the entire procurement cycle and improving existing metrics efficiency, impact and sustainability of public procurement, in particular for green public procurement.