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Issues and incentives for efficient public procurement and innovations

Priority areas of development: economics, state and public administration
2017
The project has been carried out as part of the HSE Program of Fundamental Studies.

Objective: Studying determinants of incentives for efficient public procurement and innovations at the level of Russian regions.

Methods: The analysis of general trends in the public procurement system and procurement efficiency analysis are based on the institutional economic theory and concepts formulated in contracts theory. The analysis of motivational incentives at the company level is based on the endogenous growth theory, the agency theory and the theory of heterogeneous reaction of firms to competitive incentives. The analysis of empirical data is conducted using standard statistical and econometric methods.

Empirical basis of the survey: The electronic survey of customers and suppliers on problems of operating under regulation of 44-FL was conducted on the basis of emails collected from official website. All customers’ e-mails were collected from announcements of tenders and suppliers’ emails were collected from contract information during January 2014 – March 2016. The survey resulted in collection of a database of customers’ (over 1,400 responses) and suppliers’ (over 850 responses) responses.

The second line of research focused on the analysis of the impact of regional corruption level on tenders’ efficiency in a situation of possible procurement centralization was based on two data sets. The first data set included over 40,000 observations on contracts concluded by customers of regional subordination level through e-auctions in 2011. The second set of contracts included contracts on granulated sugar procurement in 2011-2013.

The data for the third line of research was collected from the official public procurement website (zakupki.gov.ru). It included bidding and contract information on road repair and construction in 2011-2015.Thus, a database in a format acceptable for econometric analysis was assembled. The collected data were used for analysis of the factors affecting road contracts distribution among suppliers and the differences in execution of contracts for federal, regional and municipal customers.

The results of the 2014 Russian manufacturing enterprises survey were used as the empirical basis of the fourth line of research evaluating the effects of corporate governance on innovation by Russian firms when competition grows.

Results:

The research project “issues and incentives for efficient public procurement and innovations” produced the following results.

With respect to the electronic survey of customers and suppliers on problems of operation under regulation of 44-FL:

  • A questionnaire for polling customers and suppliers has been elaborated and tested in order to evaluate incentives and barriers to efficient public procurement under 44-FL.
  • The obtained data revealed considerable differences in customers and suppliers assessments of regulatory efficiency and procurement key problems. The responses of the survey participants showed that customers were more concerned about excessive regulation (especially regarding small procurement amounts) while the main problems noted by suppliers included price dumping and informal engagements between customers and some suppliers.

The analysis of impact of regional corruption level on the tenders’ efficiency with the possibility of procurement centralization produced the following results:

  • The impact of the regional corruption level on the tenders’ efficiency is different for customers and authorized agencies. In more corruption-prone regions auctions conducted by authorized agencies have higher probability to be void than auctions conducted by customers. Nevertheless, the probability of the small price decrease for valid auctions positively correlates with the regional corruption level for customers and does not correlate with it for authorized agencies.
  • The impact of the regional corruption level on relative procurement prices of granulated sugar shows that a more corrupt environment has no influence on the efficiency of procurement via authorized agencies but results in an increase in relative prices of customers’ contracts. Therefore, procurement centralization can lower direct customers’ inefficiency, but in a strongly corrupt environment centralization does not solve the problem of low competition.

The analysis of road repair and construction contracts’ distribution and execution of these contracts produced the following results:

  • The governor’s tenure in office and the number of bidders have a nonlinear correlation. During first two governor’s terms competition in auctions tends to increase, but afterwards the situation turns for the worse. This nonlinear effect is especially prominent for governors- “outsiders”: decrease in procurement competition by the end of the third term reaches 22% in comparison to the peak. There is no such effect for governors- “insiders” who have demonstrated better performance in terms of procurement competition in general. Competitiveness for them was 8% higher than for governors – “outsiders.”
  • The nonlinear effect of “outsiders” tenure in office cannot be explained by the enhanced contract execution quality. The annual increase in execution delays for them makes up to 20% of the overall contract duration. In addition, unlike for “insiders” the probability of contract termination for “outsiders” does not decrease with the tenures’ increase.
  • The best performance in terms of relative delays was demonstrated by the regional customers. Relative delays of federal customers were 0.7 points higher and municipal 0.5 higher than of the regional ones. Exceeding of federal customers’ delay compared to regional ones is largely explained by higher contract sizes.
  • The probability of contract termination for federal customers is 5.9% lower than for regional ones. Municipal customers are the least efficient ones in this respect: the probability of contract termination is 8.7% higher for them than for regional customers. This can be used as the evidence of the relative comparativeness of contract execution by federal and regional customers and their inefficient execution by municipal customers.

The research of the effects of corporate governance on innovation by Russian firms when competition grows produced the following substantial results:

  • Agency costs in Russia, like in many other transitional economies, have a negative impact on innovation and R&D.
  • The structure of corporate governance envisaging the management of firms by the largest controlling owner is more efficient as an incentive for R&D and risky product innovations compared to work of a hired manager: the managerial ownership increases the likelihood of R&D by 4.9% and the product innovation by 6.6%.
  • The outcome of the interaction between competition and agency costs depends on the degree of competitive pressure and severity of associated risks. Managerial ownership complements competition in motivating risky product innovation and R&D, while incentive payment does not change the innovation-competition link.
  • Managerial prudence may prevent innovation, especially if competitive pressure is high. Moreover, controlling owners are more inclined toward the risks of unpredictable and expensive innovations than hired managers if competition is high, although there is no difference in the manifestation of such effects between those groups of enterprises in the event of regression of the probability of less risky innovative solutions.

Recommendations for R&D results application:

The findings from the project can be valuable both in terms of further development of public procurement regulation and in terms of understanding the factors behind different efficiency of application of this regulation. The results of comparing the incentives for customers of different subordination levels and analysis of contract execution costs obtained in this project can be used for working out recommendations for modifying the procurement system. The findings in the sphere of corporate governance can help identify additional determinants of incentives for innovative activity.

Publications:


Есаулов Д. М., Ткаченко А. В. Влияние Российских Губернаторов на Распределение Государственных Контрактов // Вопросы государственного и муниципального управления. 2017. № 4. С. 103-138.
Detkova P., Podkolzina E., Tkachenko A. Corruption, Centralization and Competition: Evidence from Russian Public Procurement // International Journal of Public Administration. 2018. P. 414-434. doi